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Commercial paper is the collective term for a variety of instruments—including checks, certificates of deposit, and notes—that are used to pay for goods; commercial paper is basically a contract to pay money. The key to the central role of commercial paper is negotiability, the means by which a person is empowered to transfer to another more than what the transferor himself possesses. The law regulating negotiability is Article 3 of the Universal Commercial Code.
Commercial paper can be divided into two basic types: the draft and the note. A draft is a document prepared by a drawer ordering the drawee to remit a stated sum of money to the payee. Drafts can be subdivided into two categories: sight drafts and time drafts. A note is a written promise to pay a specified sum of money on demand or at a definite time.
A special form of draft is the common bank check, a draft drawn on a bank and payable on demand. A special form of note is the certificate of deposit, a written acknowledgment by a bank that it has received money and agrees to repay it at a time specified in the certificate.
In addition to drawers, makers, drawees, and payees, one can deal with commercial paper in five other capacities: as indorsers, indorsees, holders, holders in due course, and accommodation parties.
A holder of a negotiable instrument must be able to ascertain all essential terms from its face. These terms are that the instrument (1) be in writing, (2) be signed by the maker or drawer, (3) contain an unconditional promise or order to pay (4) a sum certain in money, (5) be payable on demand or at a definite time, and (6) be payable to order or to bearer. If one of these terms is missing, the document is not negotiable, unless it is filled in before being negotiated according to authority given.
Exercises
1. Golf Inc. manufactures golf balls. Jack orders 1,000 balls from Golf and promises to pay \$4,000 two weeks after delivery. Golf Inc. delivers the balls and assigns its contract rights to First Bank for \$3,500. Golf Inc. then declares bankruptcy. May First Bank collect \$3,500 from Jack? Explain.
2. Assume in problem 1 that Jack gives Golf Inc. a nonnegotiable note for \$3,500 and Golf sells the note to the bank shortly after delivering the balls. May the bank collect the \$3,500? Would the result be different if the note were negotiable? Explain.
3. George decides to purchase a new stereo system on credit. He signs two documents—a contract and a note. The note states that it is given “in payment for the stereo” and “if stereo is not delivered by July 2, the note is cancelled.” Is the note negotiable? Explain.
4. Is the following instrument a note, check, or draft? Explain.
Figure 19.7
5. State whether the following provisions in an instrument otherwise in the proper form make the instrument nonnegotiable and explain why:
1. A note stating, “This note is secured by a mortgage of the same date on property located at 1436 Dayton Street, Jameson, New York”
2. A note for \$25,000 payable in twenty installments of \$1,250 each that provides, “In the event the maker dies all unpaid installments are cancelled”
3. An instrument reading, “I.O.U., Rachel Donaldson, \$3,000”
4. A note reading, “I promise to pay Rachel Donaldson \$3,000”
5. A note stating, “In accordance with our telephone conversation of January 7th, I promise to pay Sally Wilkenson or order \$1,500”
6. An undated note for \$1,500 “payable one year after date”
7. A note for \$1,500 “payable to the order of Marty Dooley, six months after Nick Solster’s death”
8. A note for \$18,000 payable in regular installments also stating, “In the event any installment is not made as provided here, the entire amount remaining unpaid may become due immediately”
6. Lou enters into a contract to buy Alan’s car and gives Alan an instrument that states, “This acknowledges my debt to Alan in the amount of \$10,000 that I owe on my purchase of the 2008 Saturn automobile I bought from him today.” Alan assigns the note to Judy for \$8,000. Alan had represented to Lou that the car had 20,000 miles on it, but when Lou discovered the car had 120,000 miles he refused to make further payments on the note. Can Judy successfully collect from Lou? Explain.
7. The same facts as above are true, but the instrument Lou delivered to Alan reads, “I promise to pay to Alan or order \$10,000 that I owe on my purchase of the 2008 automobile I bought from him today.” Can Judy successfully collect from Lou? Explain.
8. Joe Mallen, of Sequim, Washington, was angry after being cited by a US Fish and Wildlife Service for walking his dog without a leash in a federal bird refuge. He was also aggravated with his local bank because it held an out-of-state check made out to Mallen for ten days before honoring it. To vent his anger at both, Mallen spray painted a twenty-five-pound rock from his front yard with three coats of white paint, and with red paint, spelled out his account number, the bank’s name, the payee, his leash law citation number, and his signature. Should the US District Court in Seattle—the payee—attempt to cash the rock, would it be good? Explain.Joel Schwarz, “Taking Things for Granite,” Student Lawyer, December 1981.
9. Raul Castana purchased a new stereo system from Eddington Electronics Store. He wrote a check on his account at Silver Bank in the amount of \$1,200 and gave it to Electronics’ clerk. David Eddington, the store owner, stamped the back of the check with his rubber indorsement stamp, and then wrote, “Pay to the order of City Water,” and he mailed it to City Water to pay the utility bill. Designate the parties to this instrument using the vocabulary discussed in this chapter.
10. Would Castana’s signed note made out to Eddington Electronics Store be negotiable if it read, “I promise to pay Eddington’s or order \$1,200 on or before May 1, 2012, but only if the stereo I bought from them works to my satisfaction”? Explain. And—disregarding negotiability for a moment—designate the parties to this instrument using the vocabulary discussed in this chapter.
self-test questions
1. A negotiable instrument must
1. be signed by the payee
2. contain a promise to pay, which may be conditional
3. include a sum certain
4. be written on paper or electronically
2. The law governing negotiability is found in
1. Article 3 of the UCC
2. Article 9 of the UCC
3. the Uniform Negotiability Act
4. state common law
3. A sight draft
1. calls for payment on a certain date
2. calls for payment when presented
3. is not negotiable
4. is the same as a certificate of deposit
4. A note reads, “Interest hereon is 2% above the prime rate as determined by First National Bank in New York City.” Under the UCC,
1. the interest rate provision is not a “sum certain” so negotiability is destroyed
2. the note is not negotiable because the holder must look to some extrinsic source to determine the interest rate
3. the note isn’t negotiable because the prime rate can vary before the note comes due
4. variable interest rates are OK
5. A “maker” in negotiable instrument law does what?
1. writes a check
2. becomes obligated to pay on a draft
3. is the primary obligor on a note
4. buys commercial paper of dubious value for collection
Answer
1. 3
2. 1
3. 2
4. 4
5. 3 | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/19%3A_Nature_and_Form_of_Commercial_Paper/19.06%3A_Section_6-.txt |
Learning Objectives
After reading this chapter, you should understand the following:
1. The distinction between transfer and negotiation of commercial paper
2. The liability of a person who transfers paper
3. The types of indorsements and their effects
4. Special problems that arise with forged indorsements
In the previous chapter, we took up the requirements for paper to be negotiable. Here we take up negotiation.
20: Negotiation of Commercial Paper
Learning Objectives
1. Understand what a transfer of commercial paper is.
2. Recognize the rights and liabilities of transferees and the liabilities of transferors.
3. Know how a transfer becomes a negotiation payable to order or to bearer.
Definitions, Rights, and Liabilities
Transfer means physical delivery of any instrument—negotiable or not—intending to pass title. Section 3-203(a) of the Uniform Commercial Code (UCC) provides that “an instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.”
Negotiation and Holder
Section 3-201(a) of the UCC defines negotiation as “a transfer of possession, whether voluntary or involuntary, of an instrument to a person who thereby becomes its holder if possession is obtained from a person other than the issuer of the instrument.” A holder is defined in Section 1-201(2) as “a person who is in possession of an instrument drawn, issued, or indorsed to him or his order or to bearer or in blank” (“in blank” means that no indorsement is required for negotiation). The original issuing or making of an instrument is not negotiation, though a holder can be the beneficiary of either a transfer or a negotiation. The Official Comment to 3-201(a) is helpful:
A person can become holder of an instrument when the instrument is issued to that person, or the status of holder can arise as the result of an event that occurs after issuance. “Negotiation” is the term used in article 3 to describe this post-issuance event. Normally, negotiation occurs as the result of a voluntary transfer of possession of an instrument by a holder to another person who becomes the holder as a result of the transfer. Negotiation always requires a change in possession of the instrument because nobody can be a holder without possessing the instrument, either directly or through an agent. But in some cases the transfer of possession is involuntary and in some cases the person transferring possession is not a holder.…[S]ubsection (a) states that negotiation can occur by an involuntary transfer of possession. For example, if an instrument is payable to bearer and it is stolen by Thief or is found by Finder, Thief or Finder becomes the holder of the instrument when possession is obtained. In this case there is an involuntary transfer of possession that results in negotiation to Thief or Finder.Uniform Commercial Code, Section 3-201, Official Comment.
In other words, to qualify as a holder, a person must possess an instrument that runs to her. An instrument “runs” to a person if (1) it has been issued to her or (2) it has been transferred to her by negotiation (negotiation is the “post-issuance event” cited in the comment). Commercially speaking, the status of the immediate person to whom the instrument was issued (the payee) is not very interesting; the thing of interest is whether the instrument is passed on by the payee after possession, through negotiation. Yes, the payee of an instrument is a holder, and can be a holder in due course, but the crux of negotiable instruments involves taking an instrument free of defenses that might be claimed by anybody against paying on the instrument; the payee would know of defenses, usually, so—as the comment puts it—“use of the holder-in-due-course doctrine by the payee of an instrument is not the normal situation.…[r]ather, the holder in due course is an immediate or remote transferee of the payee.”Uniform Commercial Code, Section 3-302, Comment 4.
Liability of Transferors
We discuss liability in Chapter 22 "Liability and Discharge". However, a brief introduction to liability will help in understanding the types of indorsements discussed in this chapter. There are two types of liability affecting transferors: contract liability and warranty liability.
Contract Liability
Persons who sign the instrument—that is, makers, acceptors, drawers, indorsers—have signed a contract and are subject to contract liabilities. Drafts (checks) and notes are, after all, contracts. Makers and acceptors are primary parties and are unconditionally liable to pay the instrument. Drawers and indorsers are secondary parties and are conditionally liable. The conditions creating liability—that is, presentment, dishonor, and notice—are discussed in Chapter 22 "Liability and Discharge".
Warranty Liability
The transferor’s contract liability is limited. It applies only to those who sign and only if certain additional conditions are met and, as will be discussed, can even be disclaimed. Consequently, a holder who has not been paid often must resort to a suit based on one of five warranties. These warranties are implied by law; UCC, Section 3-416, details them:
(A) A person who transfers an instrument for consideration warrants all of the following to the transferee and, if the transfer is by indorsement, to any subsequent transferee:
(1) The warrantor is a person entitled to enforce the instrument.
(2) All signatures on the instrument are authentic and authorized.
(3) The instrument has not been altered.
(4) The instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor.
(5) The warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer.
Breach of one of these warranties must be proven at trial if there is no general contract liability.
Liability of Transferees
The transferee takes by assignment; as an assignee, the new owner of the instrument has only those rights held by the assignor. Claims that could be asserted by third parties against the assignor can be asserted against the assignee. A negotiable instrument can be transferred in this sense without being negotiated. A payee, for example, might fail to meet all the requirements of negotiation; in that event, the instrument might wind up being merely transferred (assigned). When all requirements of negotiability and negotiation have been met, the buyer is a holder and may (if a holder in due course—see Chapter 21 "Holder in Due Course and Defenses") collect on the instrument without having to prove anything more. But if the instrument was not properly negotiated, the purchaser is at most a transferee and cannot collect if defenses are available, even if the paper itself is negotiable.
How Negotiation Is Accomplished
Negotiation can occur with either bearer paper or order paper.
Negotiation of Instrument Payable to Bearer
An instrument payable to bearer—bearer paper—can be negotiated simply by delivering it to the transferee (see Figure 20.1 "Negotiation of Bearer Paper"; recall that “Lorna Love” is the proprietor of a tennis club introduced in Chapter 19 "Nature and Form of Commercial Paper"): bearer paper runs to whoever is in possession of it, even a thief. Despite this simple rule, the purchaser of the instrument may require an indorsement on some bearer paper anyway. You may have noticed that sometimes you are requested to indorse your own check when you make it out to cash. That is because the indorsement increases the liability of the indorser if the holder is unable to collect. Chung v. New York Racing Association (Section 20.4 "Cases") deals with issues involving bearer paper.
Figure 20.1 Negotiation of Bearer Paper
Negotiation of Instrument Payable to Order
Negotiation is usually voluntary, and the issuer usually directs payment “to order”—that is, to someone’s order, originally the payee. Order paper is this negotiable instrument that by its term is payable to a specified person or his assignee. If it is to continue its course through the channels of commerce, it must be indorsed—signed, usually on the back—by the payee and passed on to the transferee. Continuing with the example used in Chapter 19 "Nature and Form of Commercial Paper", Rackets, Inc. (the payee) negotiates Lorna Love’s check (Lorna is the issuer or drawer) drawn to the order of Rackets when an agent of Rackets “signs” the company’s name on the reverse of the check and passes it to the indorsee, such as the bank or someone to whom Rackets owed money. (A company’s signature is usually a rubber stamp for mere deposit, but an agent can sign the company name and direct the instrument elsewhere.) The transferee is a holder (see Figure 20.2 "Negotiation of Order Paper"). Had Rackets neglected to indorse the check, the transferee, though in physical possession, would not be a holder. Issues regarding indorsement are discussed in Section 20.2 "Indorsements".
Figure 20.2 Negotiation of Order Paper
Key Takeaway
A transfer is the physical delivery of an instrument with the intention to pass title—the right to enforce it. A mere transferee stands in the transferor’s shoes and takes the instrument subject to all the claims and defenses against paying it that burdened it when the transferor delivered it. Negotiation is a special type of transfer—voluntary or involuntary—to a holder. A holder is a person who has an instrument drawn, issued, or indorsed to him or his order or to bearer or in blank. If the instrument is order paper, negotiation is accomplished by indorsement and delivery to the next holder; if it is bearer paper or blank paper, delivery alone accomplishes negotiation. Transferors incur two types of liability: those who sign the instrument are contractually liable; those who sign or those who do not sign are liable to the transferee in warranty.
Exercises
1. What is a transfer of commercial paper, and what rights and liabilities has the transferee?
2. What is a negotiation of commercial paper?
3. What is a holder?
4. How is bearer paper negotiated?
5. How is order paper negotiated? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/20%3A_Negotiation_of_Commercial_Paper/20.02%3A_Section_2-.txt |
Learning Objectives
1. Understand the meaning of indorsement and its formal requirements.
2. Know the effects of various types of indorsements: no indorsement, partial, blank, special, restrictive, conditional, qualified.
Definition
Most commonly, paper is transferred by indorsement. The indorsement is evidence that the indorser intended the instrument to move along in the channels of commerce. An indorsement is defined by UCC Section 3-204(a) as
a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser’s liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicated that the signature was made for a purpose other than indorsement.
Placement of Indorsement
Indorse (or endorse) literally means “on the back of,” as fish, say, have dorsal fins—fins on their backs. Usually indorsements are on the back of the instrument, but an indorsement could be on a piece of paper affixed to the instrument. Such an attachment is called an allonge—it comes along with the instrument (UCC, Section 3-204(a)).
There are rules about where indorsements are placed. The Expedited Funds Availability Act was enacted in 1987 by Congress to standardize holding periods on deposits made to commercial banks and to regulate institutions’ use of deposit holds—that is, how soon customers can access the money after they have deposited a check in the bank. The Federal Reserve Board subsequently adopted “Regulation CC, Check Endorsement Standards” to improve funds availability and expedite the return of checks. See Figure 20.3 "Indorsement Standard".
Figure 20.3 Indorsement Standard
From UC Irvine Administrative Policies & Procedures, Business and Financial Affairs, Financial Services, Sec. 704-13: Check Endorsement Procedures, at www.policies.uci.edu/adm/procs/700/704-13.html.
As shown in Figure 20.3 "Indorsement Standard", specific implementing guidelines define criteria for the placement, content, and ink color of endorsement areas on the back of checks for the depositary bank (bank of first deposit), subsequent indorsers (paying banks), and corporate or payee indorsers. Indorsements must be made within 1½ inches of the trailing (left) edge of the back of the check; remaining space is for bank indorsements. There is no penalty for violating the standard—it is a guideline. The abbreviation “MICR” stands for magnetic ink character recognition. The “clear band” is a section of the back of the check that is not supposed to be intruded upon with any magnetic (machine-readable) printing that would interfere with machine reading on the front side (the bank routing numbers).
Sometimes an indorser adds words intended to strengthen the indorsement; for example, “I hereby assign all my right, title, and interest in this note to Carl Carpenter.” Words of assignment such as these and also words of condition, waiver, guaranty, limitation, or disclaimer of liability do not negate the effect of an indorsement.
Misspelled or Incorrect Indorsements
When the instrument is made payable to a person under a misspelled name (or in a name other than his own), he may indorse in the wrong name or the right one or both. It is safer to sign in both names, and the purchaser of the instrument may demand a signature in both names (UCC, Section 3-204(d)).
Various Indorsements and Their Effects
A holder can indorse in a variety of ways; indorsements are not identical and have different effects.
No Indorsement
If the instrument requires a signature, transfer without indorsement is an assignment only. Bearer paper does not require indorsement, so it can be negotiated simply by delivering it to the transferee, who becomes a holder. The transferor has no contract liability on the instrument, however, because he has not signed it. He does remain liable on the warranties, but only to the person who receives the paper, not to subsequent transferees.
Because it is common practice for a depository bank (the bank into which a person makes a deposit) to receive unindorsed checks under so-called lockbox agreements from customers who receive a high volume of checks, a customer who is a holder can deposit a check or other instrument for credit to his account without indorsement. Section 4-205(1) of the UCC provides that a “depositary bank becomes a holder…at the time it receives the item for collection if the customer at the time of delivery was a holder, whether or not the customer indorses the item.”
Partial Indorsement
To be effective as negotiation, an indorsement must convey the entire instrument. An indorsement that purports to convey only a portion of the sum still due amounts to a partial assignment. If Rackets’ agent signs the check “Rackets, Inc.” together with the words “Pay half to City Water, /s/ Agent” and delivers the check to City Water, that does not operate as an indorsement, and City Water becomes an assignee, not a holder.
Blank Indorsement
A blank indorsement consists of the indorser’s signature alone (see Figure 20.4 "Forms of Endorsement", left). A blank indorsement converts the instrument into paper closely akin to cash. Since the indorsement does not specify to whom the instrument is to be paid, it is treated like bearer paper—assuming, of course, that the first indorser is the person to whom the instrument was payable originally. A paper with blank indorsement may be negotiated by delivery alone, until such time as a holder converts it into a special indorsement (discussed next) by writing over the signature any terms consistent with the indorsement. For example, a check indorsed by the payee (signed on the back) may be passed from one person to another and cashed in by any of them.
Figure 20.4 Forms of Endorsement
A blank indorsement creates conditional contract liability in the indorser: he is liable to pay if the paper is dishonored. The blank indorser also has warranty liability toward subsequent holders.
Special Indorsement
A special indorsement, sometimes known as an “indorsement in full,” names the transferee-holder. The payee of a check can indorse it over to a third party by writing “Pay to the order of [name of the third party]” and then signing his name (see Figure 20.4 "Forms of Endorsement", center). Once specially indorsed, the check (or other instrument) can be negotiated further only when the special indorsee adds his own signature. A holder may convert a blank indorsement into a special indorsement by writing above the signature of the indorser words of a contractual nature consistent with the character of the instrument.
So, for example, Lorna Love’s check to Rackets, Inc., indorsed in blank (signed by its agent or stamped with Rackets’ indorsement stamp—its name alone) and handed to City Water, is not very safe: it is bearer paper. If the check fell onto the floor, anybody could be a holder and cash it. It can easily be converted into a check with special indorsement: City Water’s clerk need only add the words “Pay City Water” above Rackets’ indorsement. (The magic words of negotiability—“pay to order of bearer”—are not required in an indorsement.) Before doing so, City Water could have negotiated it simply by giving it to someone (again, a blank indorsement acts as bearer paper). After converting it to a special indorsement, City Water must indorse it in order to transfer it by negotiation to someone else. The liabilities of a special indorser are the same as those of a blank indorser.
The dichotomy here of indorsement in blank or special indorsement is the indorser’s way of indicating how the instrument can be subsequently negotiated: with or without further indorsing.
Restrictive Indorsement
A restrictive indorsement attempts to limit payment to a particular person or otherwise prohibit further transfer or negotiation. We say “attempts to limit” because a restrictive indorsement is generally invalid. Section 3-206(a) of the UCC provides that an attempt to limit payment to a particular person or prohibit further transfer “is not effective.” Nor is “[a]n indorsement stating a condition to the right of the indorsee to receive payment”; the restriction may be disregarded. However, two legitimate restrictive indorsements are valid: collection indorsements and trust indorsements. Wisner Elevator Company, Inc. v. Richland State Bank (Section 20.4 "Cases") deals with conditional and restrictive indorsements.
Collection Indorsement
It is very common for people and businesses to mail checks to their bank for deposit to their accounts. Sometimes mail goes astray or gets stolen. Surely it must be permissible for the customer to safeguard the check by restricting its use to depositing it in her account. A collection indorsement, such as “For deposit” or “For collection,” is effective. Section 3-206(c) of the UCC provides that anybody other than a bank who purchases the instrument with such an indorsement converts the instrument—effectively steals it. A depositary bank that takes it must deposit it as directed, or the bank has converted it. A payor bank that is also the depositary bank that takes the instrument for immediate payment over the counter converts it: the check cannot be cashed; it must be deposited (see Figure 20.4 "Forms of Endorsement").
To illustrate, suppose that Kate Jones indorses her paycheck “For deposit only, Kate Jones,” which is by far the most common type of restrictive indorsement (see Figure 20.4 "Forms of Endorsement", right). A thief steals the check, indorses his name below the restrictive indorsement, and deposits the check in Last Bank, where he has an account, or cashes it. The check moves through the collection process to Second Bank and then to First Bank, which pays the check. Kate has the right to recover only from Last Bank, which did not properly honor the indorsement by depositing the payment in her account.
Trust Indorsement
A second legitimate restrictive indorsement is indorsement in trust, called a trust indorsement (sometimes agency indorsement). Suppose Paul Payee owes Carlene Creditor a debt. Payee indorses a check drawn to him by a third party, “Pay to Tina Attorney in trust for Carlene Creditor.” Attorney indorses in blank and delivers it to (a) a holder for value, (b) a depository bank for collection, or (c) a payor bank for payment. In each case, these takers can safely pay Attorney so long as they have no notice under Section 3-307 of the UCC of any breach of fiduciary duty that Attorney may be committing. For example, under Section 3-307(b), these takers have notice of a breach of trust if the check was taken in any transaction known by the taker to be for Attorney’s personal benefit. Subsequent transferees of the check from the holder or depositary bank are not affected by the restriction unless they have knowledge that Attorney dealt with the check in breach of trust (adapted from UCC, Section 3-206, Official Comment 4). (Of course Attorney should not indorse in blank; she should indorse “Tina Attorney, in trust for Carlene Creditor” and deposit the check in her trust account.)
The dichotomy here between restrictive and unrestrictive indorsements is the indorser’s way of showing to what use the instrument may be put.
Conditional Indorsement
An indorser might want to condition the negotiation of an instrument upon some event, such as “Pay Carla Green if she finishes painting my house by July 15.” Such a conditional indorsement is generally ineffective: the UCC, Section 3-206(b), says a person paying for value can disregard the condition without liability.
Qualified Indorsement
An indorser can limit his liability by making a qualified indorsement. The usual qualified indorsement consists of the words “without recourse,” which mean that the indorser has no contract liability to subsequent holders if a maker or drawee defaults. A qualified indorsement does not impair negotiability. The qualification must be in writing by signature on the instrument itself. By disclaiming contract liability, the qualified indorser also limits his warranty liabilities, though he does not eliminate them. Section 3-415(a) of the UCC narrows the indorser’s warranty that no defense of any party is good against the indorser. In its place, the qualified indorser warrants merely that he has no knowledge of any defense.
“Without recourse” indorsements can have a practical impact on the balance sheet. A company holding a promissory note can obtain cash by discounting it—indorsing it over to a bank for maturity value less the bank’s discount. As an indorser, however, the company remains liable to pay the amount to subsequent holders should the maker default at maturity. The balance sheet must reflect this possibility as a contingent liability. However, if the note is indorsed without recourse, the company need not account for any possible default of the maker as a contingent liability.
The dichotomy here between qualified and unqualified indorsements is the indorser’s way of indicating what liability she is willing to incur to subsequent holders.
Key Takeaway
An indorsement is, usually, the signature of an instrument’s holder on the back of the instrument, indicating an intention that the instrument should proceed through the channels of commerce. The Federal Reserve Board has recommendations for how instruments should be indorsed to speed machine reading of them. Indorsements are either blank or special; they are either restrictive or nonrestrictive; and they are either qualified or unqualified. These pairings show the indorser’s intention as to how further negotiation may be accomplished, to what uses the instrument may be put, and what liability the indorser is willing to assume.
Exercises
1. If an instrument is not indorsed according to Federal Reserve Board standards, is it still valid?
2. Suppose that Indorsee signs an instrument in blank and drops it. Suppose that the instrument is found by Finder and that Finder delivers it to Third Person with the intention to sell it. Is this successful negotiation?
3. Why would a person make a restrictive indorsement? A qualified indorsement? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/20%3A_Negotiation_of_Commercial_Paper/20.03%3A_Section_3-.txt |
Learning Objectives
1. Recognize under what circumstances a negotiation is subject to rescission.
2. Know the effect of reacquisition of an instrument.
3. Understand how instruments made payable to two or more persons are negotiated.
4. Understand how the UCC treats forged indorsements, imposters, and other signatures in the name of the payee.
Common Issues Arising in Negotiation of Commercial Paper
A number of problems commonly arise that affect the negotiation of commercial paper. Here we take up three.
Negotiation Subject to Rescission
A negotiation—again, transfer of possession to a person who becomes a holder—can be effective even when it is made by a person without the capacity to sign. Section 3-202(a) of the UCC declares that negotiation is effective even when the indorsement is made by an infant or by a corporation exceeding its powers; is obtained by fraud, duress, or mistake; is part of an illegal transaction; or is made in breach of a duty.
However, unless the instrument was negotiated to a holder in due course, the indorsement can be rescinded or subjected to another appropriate legal remedy. The Official Comment to this UCC section is helpful:
Subsection (a) applies even though the lack of capacity or the illegality is of a character which goes to the essence of the transaction and makes it entirely void. It is inherent in the character of negotiable instruments that any person in possession of an instrument which by its terms is payable to that person or to bearer is a holder and may be dealt with by anyone as a holder. The principle finds its most extreme application in the well-settled rule that a holder in due course may take the instrument even from a thief and be protected against the claim of the rightful owner. The policy of subsection (a) is that any person to whom an instrument is negotiated is a holder until the instrument has been recovered from that person’s possession.Uniform Commercial Code, Section 3-404, Official Comment 1.
So suppose a mentally incapacitated person under a guardianship evades her guardian, goes to town, and writes a check for a new car. Normally, contracts made by such persons are void. But the check is negotiable here. If the guardian finds out about the escapade before the check leaves the dealer’s hands, the deal could be rescinded: the check could be retrieved and the car returned.
Effect of Reacquisition
A prior party who reacquires an instrument may reissue it or negotiate it further. But doing so discharges intervening parties as to the reacquirer and to later purchasers who are not holders in due course. Section 3-207 of the UCC permits the reacquirer to cancel indorsements unnecessary to his title or ownership; in so doing, he eliminates the liability of such indorsers even as to holders in due course.
Instruments Payable to Two or More Persons
A note or draft can be payable to two or more persons. In form, the payees can be listed in the alternative or jointly. When a commercial paper says “Pay to the order of Lorna Love or Rackets, Inc.,” it is stated in the alternative. Either person may negotiate (or discharge or enforce) the paper without the consent of the other. On the other hand, if the paper says “Pay to the order of Lorna Love and Rackets, Inc.” or does not clearly state that the payees are to be paid in the alternative, then the instrument is payable to both of them and may be negotiated (or discharged or enforced) only by both of them acting together. The case presented in Section 20.4 "Cases", Wisner Elevator Company, Inc. v. Richland State Bank, deals, indirectly, with instruments payable to two or more persons.
The General Rule on Forged Indorsements
When a check already made out to a payee is stolen, an unscrupulous person may attempt to negotiate it by forging the payee’s name as the indorser. Under UCC Section 1-201(43), a forgery is an “unauthorized signature.” Section 3-403(a) provides that any unauthorized signature on an instrument is “ineffective except as the signature of the unauthorized signer.” The consequence is that, generally, the loss falls on the first party to take the instrument with a forged or unauthorized signature because that person is in the best position to prevent the loss.
Lorna Love writes a check to Steve Supplier on her account at First State Bank, but the check goes astray and is found by Carl Crooks. Crooks indorses the check “Steve Supplier” and presents it for cash to a busy teller who fails to request identification. Two days later, Steve Supplier inquires about his check. Love calls First State Bank to stop payment. Too late—the check has been cashed. Who bears the loss—Love, Supplier, or the bank? The bank does, and it must recredit Love’s account. The forged indorsement on the check was ineffective; the bank was not a holder, and the check should not have been allowed into the channels of commerce. This is why banks may retain checks for a while before allowing access to the money. It is, in part, what the Expedited Funds Availability Act (mentioned in Section 20.2 "Indorsements", “Indorsements”) addresses—giving banks time to assess the validity of checks.
Exceptions: Imposter, Fictitious Payee, and Dishonest Employee Rules
The loss for a forged indorsement usually falls on the first party to take the instrument with a forged signature. However, there are three important exceptions to this general rule: the imposter rule, the fictitious payee rule, and the dishonest employee rule.
The Imposter Rule
If one person poses as the named payee or as an agent of the named payee, inducing the maker or drawer to issue an instrument in the name of the payee to the imposter (or his confederate), the imposter’s indorsement of the payee’s name is effective. The paper can be negotiated according to the imposter rule.
If the named payee is a real person or firm, the negotiation of the instrument by the imposter is good and has no effect on whatever obligation the drawer or maker has to the named payee. Lorna Love owes Steve Supplier \$2,000. Knowing of the debt, Richard Wright writes to Love, pretending to be Steve Supplier, requesting her to send a check to Wright’s address in Supplier’s name. When the check arrives, Wright indorses it by signing “Pay to the order of Richard Wright, (signed) Steve Supplier,” and then indorses it in his own name and cashes it. Love remains liable to Steve Supplier for the money that she owes him, and Love is out the \$2,000 unless she can find Wright.
The difference between this case and the one involving the forger Carl Crooks is that in the second case the imposter (Wright) “induced the maker or drawer [Lorna Love] to issue the instrument…by impersonating the payee of the instrument [Steve Supplier]” (UCC, Section 3-404(a)), whereas in the first case the thief did not induce Love to issue the check to him—he simply found it. And the rationale for making Lorna Love bear the loss is that she failed to detect the scam: she intended the imposter, Wright, to receive the instrument. Section 3-404(c) provides that the indorsement of the imposter (Wright, posing as Steve Supplier) is effective. The same rule applies if the imposter poses as an agent: if the check is payable to Supplier, Inc., a company whose president is Steve Supplier, and an impostor impersonates Steve Supplier, the check could be negotiated if the imposter indorses it as Supplier, Inc.’s, agent “Steve Supplier.”Uniform Commercial Code, Section 3-404, Official Comment 1.
Similarly, suppose Love is approached by a young man who says to her, “My company sells tennis balls, and we’re offering a special deal this month: a can of three high-quality balls for \$2 each. We’ll send your order to you by UPS.” He hands her a sample ball: it is substantial, and the price is good. Love has heard of the company the man says he represents; she makes out a check for \$100 to “Sprocket Athletic Supply.” The young man does not represent the company at all, but he cashes the check by forging the indorsement and the bank pays. Love takes the loss: surely she is more to blame than the bank.
The Fictitious Payee Rule
Suppose Lorna Love has a bookkeeper, Abby Accountant. Abby presents several checks for Love to sign, one made out to Carlos Aquino. Perhaps there really is no such person, or perhaps he is somebody whom Love deals with regularly, but Accountant intends him to have no interest here. No matter: Love signs the check in the amount of \$2,000. Accountant takes the check and indorses it: “Carlos Aquino, pay to the order of Abby Accountant.” Then she signs her name as the next indorser and cashes the check at Love’s bank. The check is good, even though it was never intended by Accountant that “Carlos Aquino”—the fictitious payee—have any interest in the instrument. The theory here is to “place the loss on the drawer of the check rather than on the drawee or the Depositary Bank that took the check for collection.…The drawer is in the best position to avoid the fraud and thus should take the loss.”Uniform Commercial Code, Section 3-404, Comment 3. This is also known as “the padded-payroll rule.”
In the imposter cases, Love drew checks made out to real names but gave them to the wrong person (the imposter); in the fictitious payee cases she wrote checks to a nonexistent person (or a real person who was not intended to have any interest at all).
The Dishonest Employee Rule
The UCC takes head-on the recurring problem of a dishonest employee. It says that if an employer “entrust[s] an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective.”Uniform Commercial Code, Section 3-405(B). For example (adapted from UCC 3-405, Official Comment 3; the Comment does not use the names of these characters, of course), the duties of Abby Accountant, a bookkeeper, include posting the amounts of checks payable to Lorna Love to the accounts of the drawers of the checks. Accountant steals a check payable to Love, which was entrusted to Accountant, and forges Love’s indorsement. The check is deposited by Accountant to an account in the depositary bank that Accountant opened in the same name as Lorna Love, and the check is honored by the drawee bank. The indorsment is effective as Love’s indorsement because Accountant’s duties include processing checks for bookkeeping purposes. Thus Accountant is entrusted with “responsibility” with respect to the check. Neither the depositary bank nor the drawee bank is liable to Love for conversion of the check. The same result would follow if Accountant deposited the check in the account in the depositary bank without indorsement (UCC, Section 4-205(a)). Under Section 4-205(c), deposit in a depositary bank in an account in a name substantially similar to that of Lorna Love is the equivalent of an indorsement in the name of Lorna Love. If, say, the janitor had stolen the checks, the result would be different, as the janitor is not entrusted with responsibility regarding the instrument.
Negligence
Not surprisingly, though, if a person fails to exercise ordinary care and thereby substantially contributes to the success of a forgery, that person cannot assert “the alteration or the forgery against a person that, in good faith, pays the instrument or takes it for value.”Uniform Commercial Code, Section 4-406(a). If the issuer is also negligent, the loss is allocated between them based on comparative negligence theories. Perhaps the bank teller in the example about the tennis-ball scam should have inquired whether the young man had any authority to cash the check made out to Sprocket Athletic Supply. If so, the bank could be partly liable. Or suppose Lorna Love regularly uses a rubber signature stamp for her tennis club business but one day carelessly leaves it unprotected. As a result, the stamp and some checks are stolen; Love bears any loss for being negligent. Similarly liable is a person who has had previous notice that his signature has been forged and has taken no steps to prevent reoccurrences, as is a person who negligently mails a check to the wrong person, one who has the same name as the payee. The UCC provides that the negligence of two or more parties might be compared in order to determine whether each party bears a percentage of the loss, as illustrated in Victory Clothing Co., Inc. v. Wachovia Bank, N.A. (Section 20.4 "Cases").
Key Takeaway
A negotiation is effective even if the transaction involving it is void or voidable, but the transferor—liable on the instrument—can regain its possession and rescind the deal (except as to holders in due course or a person paying in good faith without notice). Instruments may be made payable to two or more parties in the alternative or jointly and must be indorsed accordingly. Generally, a forged indorsement is ineffective, but exceptions hold for cases involving imposters, fictitious payees, and certain employee dishonesty. If a person’s own negligence contributes to the forgery, that person must bear as much of the loss as is attributable to his or her negligence.
Exercises
1. A makes a check out to B for \$200 for property both parties know is stolen. Is the check good?
2. What is the difference between (a) the imposter rule, (b) the fictitious payee rule, and (c) the dishonest employee rule?
3. How does comparative negligence work as it relates to forged indorsements? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/20%3A_Negotiation_of_Commercial_Paper/20.04%3A_Section_4-.txt |
Bearer Paper
(Note: this is a trial court’s opinion.)
Chung v. New York Racing Ass’n
714 N.Y.S.2d 429 (N.Y. Dist. Ct. 2000)
Gartner, J.
A published news article recently reported that an investigation into possible money laundering being conducted through the racetracks operated by the defendant New York Racing Association was prompted by a small-time money laundering case in which a Queens bank robber used stolen money to purchase betting vouchers and then exchanged the vouchers for clean cash. [Citation] The instant case does not involve any such question of wrongdoing, but does raise a novel legal issue regarding the negotiability of those same vouchers when their possession is obtained by a thief or finder. The defendant concedes that “there are no cases on point.”
The defendant is a private stock corporation incorporated and organized in New York as a non-profit racing association pursuant to [New York law]. The defendant owns and operates New York’s largest thoroughbred racetracks—Belmont Park Racetrack, Aqueduct Racetrack, and Saratoga Racetrack—where it stages thoroughbred horse races and conducts pari-mutuel wagering on them pursuant to a franchise granted to the defendant by the State of New York.
The plaintiff was a Belmont Park Racetrack horse player. He attended the track and purchased from the defendant a voucher for use in SAMS machines. As explained in [Citation]:
In addition to accepting bets placed at parimutuel facility windows staffed by facility employees, [some] facilities use SAMS. SAMS are automated machines which permit a bettor to enter his bet by inserting money, vouchers or credit cards into the machine, thereby enabling him to select the number or combination he wishes to purchase. A ticket is issued showing those numbers.Authors’ note: Pari-mutuel betting (from the French pari mutuel, meaning mutual stake) is a betting system in which all bets of a particular type are placed together in a pool; taxes and a house take are removed, and payoff odds are calculated by sharing the pool among all winning bets.
When a voucher is utilized for the purpose of placing a bet at a SAMS machine, the SAMS machine, after deducting the amount bet by the horse player during the particular transaction, provides the horse player with, in addition to his betting ticket(s), a new voucher showing the remaining balance left on the voucher.
In the instant case, the unfortunate horse player departed the SAMS machine with his betting tickets, but without his new voucher—showing thousands of dollars in remaining value—which he inadvertently left sitting in the SAMS machine. Within several minutes he realized his mistake and hurried back to the SAMS machine, only to find the voucher gone. He immediately notified a security guard. The defendant’s personnel thereafter quickly confirmed the plaintiff as the original purchaser of the lost voucher. The defendant placed a computerized “stop” on the voucher. However, whoever had happened upon the voucher in the SAMS machine and taken it had acted even more quickly: the voucher had been brought to a nearby track window and “cashed out” within a minute or so of the plaintiff having mistakenly left it in the SAMS machine.
The plaintiff now sues the defendant, contending that the defendant should be liable for having failed to “provide any minimal protection to its customers” in checking the identity and ownership of vouchers prior to permitting their “cash out.” The defendant, in response, contends that the voucher consists of “bearer paper,” negotiable by anyone having possession, and that it is under no obligation to purchasers of vouchers to provide any such identity or ownership checks.
As opposed to instruments such as ordinary checks, which are typically made payable to the order of a specific person and are therefore known as “order paper,” bearer paper is payable to the “bearer,” i.e., whoever walks in carrying (or “bearing”) the instrument. Pursuant to [New York’s UCC] “[a]n instrument is payable to bearer when by its terms it is payable to…(c) ‘cash’ or the order of ‘cash’, or any other indication which does not purport to designate a specific payee.”
Each New York Racing Association voucher is labeled “Cash Voucher.” Each voucher contains the legend “Bet Against the Value or Exchange for Cash.” Each voucher is also encoded with certain computer symbols which are readable by SAMS machines. The vouchers do by their terms constitute “bearer paper.”
There is no doubt that under the [1990 Revision] Model Uniform Commercial Code the defendant would be a “holder in due course” of the voucher, deemed to have taken it free from all defenses that could be raised by the plaintiff. As observed in 2 White & Summers, Uniform Commercial Code pp. 225–226, 152–153 (4th ed.1995):
Consider theft of bearer instruments…[T]he thief can make his or her transferee a holder simply by transfer to one who gives value in good faith. If the thief’s transferee cashes the check and so gives value in good faith and without notice of any defense, that transferee will be a holder in due course under 3-302, free of all claims to the instrument on the part…of any person and free of all personal defenses of any prior party. Therefore, the holder in due course will not be liable in conversion to the true owner.…Of course, the owner of the check will have a good cause of action against the thief, but no other cause of action.…
If an instrument is payable to bearer…the possessor of the instrument will be a holder and, if he meets the other tests, a holder in due course. This is so even though the instrument may have passed through the hands of a thief; the holder in due course is one of the few purchasers in Anglo-Saxon jurisprudence who may derive a good title from a chain of title that includes a thief in its links.
However, the Model Uniform Commercial Code in its present form is not in effect in New York. Authors’ note: As of 2010, New York is the sole remaining state yet to adopt the 1990 revisions to Articles 3 and 4; it entertained a bill in 2007 and 2008 that would have enacted the 1990 revisions as amended by the 2002 amendments. However, that bill floundered. Keith A. Rowley, UCC Update [American Bar Association, Business Law Committee], available at www.abanet.org/buslaw/committees/CL190000pub/newsletter/200901/subcommittees/developments.pdf. In 1990, the National Conference of Commissioners on Uniform State Laws and the American Law Institute approved a revised Article 3. This revised Article 3 has never been enacted in New York. Comment 1 to § 3-201 of the [1990] Uniform Commercial Code, commenting on the difference between it and its predecessor (which is still in effect in New York), states:
A person can become holder of an instrument…as the result of an event that occurs after issuance. “Negotiation” is the term used in Article 3 to describe this post-issuance event.…In defining “negotiation” former Section 3-202(1) used the word “transfer,” an undefined term, and “delivery,” defined in Section 1-201(14) to mean voluntary change of possession. Instead, subsections (a) and (b) [now] use the term “transfer of possession,” and subsection (a) states that negotiation can occur by an involuntary transfer of possession. For example, if an instrument is payable to bearer and it is stolen by Thief or is found by Finder, Thief or Finder becomes the holder of the instrument when possession is obtained. In this case there is an involuntary transfer of possession that results in negotiation to Thief or Finder.
Thus, it would initially appear that under the prior Model Uniform Commercial Code, still in effect in New York, a thief or finder of bearer paper, as the recipient of an involuntary transfer, could not become a “holder,” and thus could not pass holder-in-due-course status, or good title, to someone in the position of the defendant.
This conclusion, however, is not without doubt. For instance, in 2 Anderson, Uniform Commercial Code § 3-202:35 (2nd ed.1971), it was observed that:
The Code states that bearer paper is negotiated by “delivery.” This is likely to mislead for one is not inclined to think of the acquisition of paper by a finder or a thief as a “voluntary transfer of possession.”
By stating that the Code’s terminology was “misleading,” the treatise appears to imply that despite the literal import of the words, the contrary was true—negotiation could be accomplished by involuntary transfer, i.e., loss or theft.
In [Citation], the Appellate Division determined that the Tropicana Casino in New Jersey became a holder in due course of signed cashier’s checks with blank payee designations which a thief had stolen from the defendant and negotiated to the casino for value after filling in the payee designation with his brother-in-law’s name. The Appellate Division, assuming without discussion that the thief was a “holder” of the stolen instruments and therefore able to transfer good title, held the defendant obligated to make payment on the stolen checks. Accord [Citation] (check cashing service which unknowingly took for value from an intervening thief the plaintiff’s check, which the plaintiff had endorsed in blank and thus converted to a bearer instrument, was a holder in due course of the check, having received good title from the thief).
Presumably, these results have occurred because the courts in New York have implicitly interpreted the undefined term “transfer” as utilized in [the pre-1990] U.C.C. § 3-202(1) as including the involuntary transfer of possession, so that as a practical matter the old Code (as still in effect in New York) has the same meaning as the new Model Uniform Commercial Code, which represents a clarification rather than a change in the law.
This result makes sense. A contrary result would require extensive verification procedures to be undertaken by all transferees of bearer paper. The problem with imposing an identity or ownership check requirement on the negotiation of bearer paper is that such a requirement would impede the free negotiability which is the essence of bearer paper. As held in [Citation (1970)],
[Where] the instrument entrusted to a dishonest messenger or agent was freely negotiable bearer paper…the drawee bank [cannot] be held liable for making payment to one presenting a negotiable instrument in bearer form who may properly be presumed to be a holder [citations omitted].
…Moreover, the plaintiff in the instant case knew that the voucher could be “Exchange[d] for cash.” The plaintiff conceded at trial that (1) when he himself utilized the voucher prior to its loss, no identity or ownership check was ever made; and (2) he nevertheless continued to use it. The plaintiff could therefore not contend that he had any expectation that the defendant had in place any safeguards against the voucher’s unencumbered use, or that he had taken any actions in reliance on the same.
This Court is compelled to render judgment denying the plaintiff’s claim, and in favor of the defendant.
case questions
1. Was the instrument in question a note or a draft?
2. How did the court determine it was bearer paper?
3. What would the racetrack have to have done if it wanted the machine to dispense order paper?
4. What confusion arose from the UCC’s pre-1990 use of the words “transfer” and “delivery,” which was clarified by the revised Article 3’s use of the phrase “transfer of possession”? Does this offer any insight into why the change was made?
5. How had—have—the New York courts decided the question as to whether a thief could be a holder when the instrument was acquired from its previous owner involuntarily?
Forged Drawer’s Signature, Forged Indorsements, Fictitious Payee, and Comparative Negligence
Victory Clothing Co., Inc. v. Wachovia Bank, N.A.
2006 WL 773020 (Penn. [Trial Court] 2006)
Abramson, J.
Background
This is a subrogation action brought by the insurance carrier for plaintiff Victory Clothing, Inc. (“Victory”), to recover funds paid to Victory under an insurance policy. This matter arises out of thefts from Victory’s commercial checking account by its office manager and bookkeeper, Jeanette Lunny (“Lunny”). Lunny was employed by Victory for approximately twenty-four (24) years until she resigned in May 2003. From August 2001 through May 2003, Lunny deposited approximately two hundred (200) checks drawn on Victory’s corporate account totaling \$188,273.00 into her personal checking account at defendant Wachovia Bank (“Wachovia”). Lunny’s scheme called for engaging in “double forgeries” (discussed infra). Lunny would prepare the checks in the company’s computer system, and make the checks payable to known vendors of Victory (e.g., Adidas, Sean John), to whom no money was actually owed. The checks were for dollar amounts that were consistent with the legitimate checks to those vendors. She would then forge the signature of Victory’s owner, Mark Rosenfeld (“Rosenfeld”), on the front of the check, and then forge the indorsement of the unintended payee (Victory’s various vendors) on the reverse side of the check. The unauthorized checks were drawn on Victory’s bank account at Hudson Bank (the “drawee bank” or “payor bank”). After forging the indorsement of the payee, Lunny either indorsed the check with her name followed by her account number, or referenced her account number following the forged indorsement. She then deposited the funds into her personal bank account at Wachovia (the “depositary bank” or “collecting bank”).
At the time of the fraud by Lunny, Wachovia’s policies and regulations regarding the acceptance of checks for deposit provided that “checks payable to a non-personal payee can be deposited ONLY into a non-personal account with the same name.” [Emphasis in original]
Rosenfeld reviewed the bank statements from Hudson Bank on a monthly basis. However, among other observable irregularities, he failed to detect that Lunny had forged his signature on approximately two hundred (200) checks. Nor did he have a procedure to match checks to invoices.
In its Complaint, Victory asserted a claim against Wachovia pursuant to the Pennsylvania Commercial Code, [3-405]…[it] states, in relevant part:
Employer’s responsibility for fraudulent indorsement by employee
(b) RIGHTS AND LIABILITIES.-For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
In essence, Victory contends that Wachovia’s actions in accepting the checks payable to various businesses for deposit into Lunny’s personal account were commercially unreasonable, contrary to Wachovia’s own internal rules and regulations, and exhibited a want of ordinary care.
I. Double Forgeries
As stated supra, this case involves a double forgery situation. This matter presents a question of first impression in the Pennsylvania state courts, namely how should the loss be allocated in double forgery situations. A double forgery occurs when the negotiable instrument contains both a forged maker’s [bank customer’s] signature and a forged indorsement. The Uniform Commercial Code (“UCC” or “Code”) addresses the allocation of liability in cases where either the maker’s signature is forged or where the indorsement of the payee or holder is forged. [Citation] (“the Code accords separate treatment to forged drawer signatures…and forged indorsements”). However, the drafters of the UCC failed to specifically address the allocation of liability in double forgery situations.…Consequently, the courts have been left to determine how liability should be allocated in a double forgery case.…
II. The Effect of the UCC Revisions
In 1990, new revisions to Articles 3 and 4 of the UCC were implemented (the “revisions”).…The new revisions made a major change in the area of double forgeries. Before the revisions, the case law was uniform in treating a double forgery case as a forged drawer’s signature case [only], with the loss falling [only] on the drawee bank. The revisions, however, changed this rule by shifting to a comparative fault approach. Under the revised version of the UCC, the loss in double forgery cases is allocated between the depositary and drawee banks based on the extent that each contributed to the loss.…
Specifically, revised § 3-405 of the UCC, entitled “Employer’s Responsibility for Fraudulent Indorsement by Employee,” introduced the concept of comparative fault as between the employer of the dishonest employee/embezzler and the bank(s). This is the section under which Victory sued Wachovia. Section 3-405(b) states, in relevant part:
If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
Wachovia argues that this section is applicable only in cases of forged indorsements, and not in double forgery situations. However, at least one court has found that the new revisions have made section 3-405 apply to double forgery situations. “Nothing in the [Revised UCC] statutory language indicates that, where the signature of the drawer is forged…the drawer is otherwise precluded from seeking recovery from a depositary bank under these sections” [Citation]…The Court finds the reasoning persuasive and holds that…Victory can maintain its cause of action against Wachovia.
III. The Fictitious Payee Rule
Lunny made the fraudulent checks payable to actual vendors of Victory with the intention that the vendors not get paid. Wachovia therefore argues that Victory’s action against it should be barred by the fictitious payee rule under UCC 3-404 [which] states, in relevant part:
(b) Fictitious Payee. If a person…does not intend the person identified as payee to have any interest in the instrument or the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement:
(1) Any person in possession of the instrument is its holder.
(2) An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.…
The theory under the rule is that since the indorsement is “effective,” the drawee bank was justified in debiting the company’s account. Therefore, [Wachovia argues] the loss should fall on the company whose employee committed the fraud.
…[However] under revised UCC §§ 3-404 and 3-405, the fictitious payee defense triggers principles of comparative fault, so a depositary bank’s own negligence may be considered by the trier of fact.…Therefore, based on the foregoing reasons, the fictitious payee defense does not help Wachovia in this case.
IV. Allocation of Liability
As stated supra, comparative negligence applies in this case because of the revisions in the Code. In determining the liability of the parties, the Court has considered, inter alia [among other things], the following factors:
• At the time of the fraud by Lunny, Wachovia’s policies and regulations regarding the acceptance of checks for deposit provided that “checks payable to a non-personal payee can be deposited ONLY into a non-personal account with the same name.” [Emphasis in original]
• Approximately two hundred (200) checks drawn on Victory’s corporate account were deposited into Lunny’s personal account at Wachovia.
• The first twenty-three (23) fraudulent checks were made payable to entities that were not readily distinguishable as businesses, such as “Sean John.” The check dated December 17, 2001 was the first fraudulent check made payable to a payee that was clearly a business, specifically “Beverly Hills Shoes, Inc.”
• In 2001, Victory had approximately seventeen (17) employees, including Lunny.
• Lunny had been a bookkeeper for Victory from approximately 1982 until she resigned in May 2003. Rosenfeld never had any problems with Lunny’s bookkeeping before she resigned.
• Lunny exercised primary control over Victory’s bank accounts.
• Between 2001 and 2003, the checks that were generated to make payments to Victory’s vendors were all computerized checks generated by Lunny. No other Victory employee, other than Lunny, knew how to generate the computerized checks, including Rosenfeld.
• The fraudulent checks were made payable to known vendors of Victory in amounts that were consistent with previous legitimate checks to those vendors.
• After forging the indorsement of the payee, Lunny either indorsed the check with her name followed by her account number, or referenced her account number following the forged indorsement.
• About ten (10) out of approximately three hundred (300) checks each month were forged by Lunny and deposited into her personal account.
• Rosenfeld reviewed his bank statements from Hudson Bank on a monthly basis.
• Rosenfeld received copies of Victory’s cancelled checks from Hudson Bank on a monthly basis. However, the copies of the cancelled checks were not in their normal size; instead, they were smaller, with six checks (front and back side) on each page.
• The forged indorsements were written out in longhand, i.e., Lunny’s own handwriting, rather than a corporate stamped signature.
• Victory did not match its invoices for each check at the end of each month.
• An outside accounting firm performed quarterly reviews of Victory’s bookkeeping records, and then met with Rosenfeld. This review was not designed to pick up fraud or misappropriation.
Based on the foregoing, the Court finds that Victory and Wachovia are comparatively negligent.
With regard to Wachovia’s negligence, it is clear that Wachovia was negligent in violating its own rules in repeatedly depositing corporate checks into Lunny’s personal account at Wachovia. Standard commercial bank procedures dictate that a check made payable to a business be accepted only into a business checking account with the same title as the business. Had a single teller at Wachovia followed Wachovia’s rules, the fraud would have been detected as early as December 17, 2001, when the first fraudulently created non-personal payee check was presented for deposit into Lunny’s personal checking account. Instead, Wachovia permitted another one hundred and seventy-six (176) checks to be deposited into Lunny’s account after December 17, 2001. The Court finds that Wachovia failed to exercise ordinary care, and that failure substantially contributed to Victory’s loss resulting from the fraud. Therefore, the Court concludes that Wachovia is seventy (70) percent liable for Victory’s loss.
Victory, on the other hand, was also negligent in its supervision of Lunny, and for not discovering the fraud for almost a two-year period. Rosenfeld received copies of the cancelled checks, albeit smaller in size, on a monthly basis from Hudson Bank. The copies of the checks displayed both the front and back of the checks. Rosenfeld was negligent in not recognizing his own forged signature on the front of the checks, as well as not spotting his own bookkeeper’s name and/or account number on the back of the checks (which appeared far too many times and on various “payees” checks to be seen as regular by a non-negligent business owner).
Further, there were inadequate checks and balances in Victory’s record keeping process. For example, Victory could have ensured that it had an adequate segregation of duties, meaning that more than one person would be involved in any control activity. Here, Lunny exercised primary control over Victory’s bank accounts. Another Victory employee, or Rosenfeld himself, could have reviewed Lunny’s work. In addition, Victory could have increased the amount of authorization that was needed to perform certain transactions. For example, any check that was over a threshold monetary amount would have to be authorized by more than one individual. This would ensure an additional control on checks that were larger in amounts. Furthermore, Victory did not match its invoices for each check at the end of each month. When any check was created by Victory’s computer system, the value of the check was automatically assigned to a general ledger account before the check could be printed. The values in the general ledger account could have been reconciled at the end of each month with the actual checks and invoices. This would not have been overly burdensome or costly because Victory already had the computer system that could do this in place. Based on the foregoing, the Court concludes that Victory is also thirty (30) percent liable for the loss.
Conclusion
For all the foregoing reasons, the Court finds that Wachovia is 70% liable and Victory is 30% liable for the \$188,273.00 loss. Therefore, Victory Clothing Company, Inc. is awarded \$131,791.10.
case questions
1. How does the double-forgery scam work?
2. What argument did Wachovia make as to why it should not be liable for the double forgeries?
3. What argument did Wachovia make as to why it should not be liable under the fictitious payee rule?
4. What change in the revised UCC (from the pre-1990 version) made Wachovia’s arguments invalid, in the court’s opinion?
5. What factors appear to have caused the court to decide that Wachovia was more than twice as responsible for the embezzlement as Victory was?
Joint Payees and Conditional and Restrictive Indorsements
Wisner Elevator Company, Inc. v. Richland State Bank
862 So.2d 1112 (La. App. 2003)
Gaskins, J.
Wisner Elevator Company, Inc. [plaintiff] (“Wisner”), appeals from a summary judgment in favor of the defendant, Richland State Bank. At issue is the deposit of a check with a typed statement on the back directing that a portion of the funds be paid to a third party. We affirm the trial court judgment.
Facts
On July 13, 2001, the United States Treasury, through the Farm Service Agency, issued a check in the amount of \$17,420.00, made payable to Chad E. Gill. On the back of the check the following was typed:
PAY TO THE ORDER OF RICHLAND STATE BANK FOR ISSUANCE OF A CASHIER’S CHECK PAYABLE TO WISNER ELEVATOR IN THE AMOUNT OF \$13,200.50 AND PAY THE BALANCE TO CHAD GILL IN THE AMOUNT OF \$4,219.50.
On July 23, 2001, the check was deposited into Gill’s checking account at Richland State Bank. Gill’s signature is found on the back of the check below the typed paragraph. No cashier check to Wisner Elevator was issued; instead the entire amount was deposited into Gill’s checking account as per Gill’s deposit ticket.
…On May 28, 2002, Wisner filed suit against the bank, claiming that its failure to apply the funds as per the restrictive indorsement constituted a conversion of the portion of the check due to Wisner under UCC 3-206(c)(2) [that a depositary bank converts an instrument if it pays out on an indorsement “indicating a purpose of having the instrument collected for the indorser or for a particular account”].
[The bank] asserted that the indorsement on the back of the check was a conditional indorsement and ineffective under 3-206(b), [which states:]
An indorsement stating a condition to the right of the indorsee to receive payment does not affect the right of the indorsee to enforce the instrument. A person paying the instrument or taking it for value or collection may disregard the condition, and the rights and liabilities of that person are not affected by whether the condition has been fulfilled.
…[T]he bank asserts the fault of the United States Treasury…, in failing to make the check payable to both Gill and Wisner. To the extent that the indorsement was conditional, the bank contends that it was unenforceable; to the extent that it was restrictive, it maintains that the restrictions were waived by the indorser when he deposited the full amount of the check into his own checking account.
Wisner…[stated that it] was owed \$13,200.50 by Gill for seeds, chemicals, crop supplies and agricultural seed technology fees. [It] further stated that Gill never paid the \$13,200.50 he owed and that Wisner did not receive a cashier’s check issued in that amount by Richland State Bank.…According to [the bank teller], Gill asked to deposit the entire amount in his account. She further stated that the bank was unaware that the indorsement was written by someone other than Gill.
…The court found that the typed indorsement placed on the check was the indorsement of the maker, not Gill. However, when Gill signed below the indorsement, he made it his own indorsement. The court concluded that Gill had the legal power and authority to verbally instruct that the entire proceeds be deposited into his account. The court stated that as long as the indorsement was his own, whether it was restrictive or conditional, Gill had the power to ignore it, strike it out or give contrary instructions. The court further concluded that the bank acted properly when it followed the verbal instructions given by Gill to the teller and the written instructions on his deposit slip to deposit the entire proceeds into Gill’s account. Consequently, the court gave summary judgment in favor of the bank. Wisner appeals.…
Discussion
Wisner contends that the trial court erred in holding that the bank could disregard what Wisner characterizes as a special and restrictive indorsement on the back of the check. It claims that under UCC 3-206, the amount paid by the bank had to be “applied consistently with” the indorsement and that the bank’s failure to comply with the indorsement made it liable to Wisner. According to Wisner, Gill was not entitled to deposit the amount due to Wisner by virtue of his own special indorsement and the bank converted the check under 3-420 by crediting the full amount to Gill’s account.
The bank argues that the indorsement was conditional and thus could be ignored pursuant to 3-206(b). It also asserts that nothing on the check indicated that the indorsement was written by someone other than Gill. Since the check was made payable to Gill, the indorsement was not necessary to his title and could be ignored, struck out or simply waived. The bank also claims that Wisner had no ownership interest in the check, did not receive delivery of the check, and had no claim for conversion under 3-420.
We agree with the bank that the true problem in this case is the failure of the government to issue the check jointly to Gill and Wisner as co-payees. Had the government done so, there would be no question as to Wisner’s entitlement to a portion of the proceeds from the check.
Although the writing on the back of the check is referred to as an indorsement, we note that, standing alone, it does not truly conform to the definition found in 3-204(a) [which states]:
“Indorsement” means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser’s liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement.
This paragraph was placed on the back of the check by the government as the maker or drawer of the check. Consequently, the bank argues that Gill as sole payee could waive, ignore or strike out the language.
Although the Louisiana jurisprudence contains no similar case dealing with the Uniform Commercial Code, we may look to other jurisdictions for guidance…In [Citation, a New Jersey case] (1975), the drawer of a check placed instructions on the backs of several checks…that the instruments not be deposited until a specific future date. However, the payee presented some of the checks prior to the date specified on the back. The court found that the drawer did not have the capacity to indorse the instruments; as a result the typed instructions on the backs of the checks could not be indorsements. Instead, they were “merely requests to plaintiff who may or may not comply at its own pleasure. The instructions are neither binding on plaintiff nor the subsequent holders.” In other words, the payee could ignore the instructions.
In the instant case, the payee did precisely that. Gill ignored the writing on the back of the check and instructed the teller at the defendant bank to do the same through verbal and written instructions.
Wisner argues that by affixing his signature under the writing on the back of the check, Gill made it his own indorsement. Furthermore, it asserts that it was a restrictive indorsement, not a conditional one which could be disregarded pursuant to 3-206. Wisner relies upon the provisions of 3-206 for the proposition that the check had a restrictive indorsement and that the bank converted the check because it failed to apply the amount it paid consistently with the indorsement. However, Comment 3 to 3-206 states, in pertinent part:
This Article does not displace the law of waiver as it may apply to restrictive indorsements. The circumstances under which a restrictive indorsement may be waived by the person who made it is not determined by this Article.
Not all jurisdictions recognize a doctrine of waiver of restrictive indorsements. [Citing cases from various jurisdictions in which a bank customer effectively requested the bank to disregard a restrictive indorsement; some cases affirmed the concept that the restriction could be waived (disregarded), others did not.]…
In two cases arising under pre-UCC law, Louisiana recognized that indorsements could be ignored or struck out. In [Citation] (1925), the Louisiana Supreme Court held that the holder of a check could erase or strike out a restrictive indorsement on a check that was not necessary to the holder’s title. In [Citation] (1967), the court stated that an erroneous indorsement could be ignored and even struck out as unnecessary to the plaintiff’s title.
Like the trial court, we find that when Gill affixed his signature under the writing on the back of the check, he made it his own indorsement. We further find that the indorsement was restrictive, not conditional. As Gill’s own restrictive indorsement, he could waive it and direct that the check, upon which he was designated as the sole payee, be deposited in his account in its entirety.
Affirmed.
case questions
1. Notice that the check was made payable to Chad Gill—he was the named payee on the front side of the check. To avoid the problems here, if the drawer (the US government) wanted to control the uses to which the check could be put, how should it have named the payee?
2. The court held that when Gill “affixed his signature under the writing on the back of the check, he made it his own indorsement.” But why wasn’t it the indorsement of the drawer—the US government?
3. If the language on the back was considered his own conditional indorsement (the instrument was not valid unless the stated conditions were met), how could the condition be disregarded by the bank?
4. If it was his own restrictive indorsement, how could it be disregarded by the bank?
5. What recourse does Wisner have now? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/20%3A_Negotiation_of_Commercial_Paper/20.05%3A_Section_5-.txt |
summary
Negotiation is the transfer of an instrument in such a form that the transferee becomes a holder. There are various methods for doing so; if the procedures are not properly adhered to, the transfer is only an assignment.
An instrument payable to the order of someone must be negotiated by indorsement and delivery to the transferee. The indorsement must convey the entire instrument. An instrument payable to bearer may be negotiated simply by delivery to the transferee.
Those who sign the instrument have made a contract and are liable for its breach. Makers and acceptors are primary parties and are liable to pay the instrument. Drawers and indorsers are secondary parties and are conditionally liable. Signatories are liable under a warranty theory.
Various forms of indorsement are possible: blank or special, restrictive or unrestrictive, qualified or unqualified.
Between drawer and drawee, liability for a forged instrument—one signed without authority—usually falls on the drawee who paid it. There are, however, several exceptions to this rule: where an imposter induces the maker or drawer to issue an instrument in the name of the payee, where the instrument is made to a fictitious payee (or to a real person who is intended to have no interest in it), and where the instrument is made by an employee authorized generally to deal in such paper.
Exercises
1. Mal, a minor, purchased a stereo from Howard for \$425 and gave Howard a negotiable note in that amount. Tanker, a thief, stole the note from Howard, indorsed Howard’s signature and sold the note to Betty. Betty then sold the note to Carl; she did not indorse it. Carl was unable to collect on the note because Mal disaffirmed the contract. Is Betty liable to Carl on a contract or warranty theory? Why?
2. Would the result in Exercise 1 be different if Betty had given a qualified indorsement? Explain.
3. Alphonse received a check one Friday from his employer and cashed the check at his favorite tavern, using a blank indorsement. After the tavern closed that evening, the owner, in reviewing the receipts for the evening, became concerned that if the check was stolen and cashed by a thief, the loss would fall on the tavern. Is this concern justified? What can the owner of the tavern do for protection?
4. Martha owns a sporting goods store. She employs a bookkeeper, Bob, who is authorized to indorse checks received by the store and to deposit them in the store’s bank account at Second Bank. Instead of depositing all the checks, Bob cashes some of them and uses the proceeds for personal purposes. Martha sues the bank for her loss, claiming that the bank should have deposited the money in the store’s account rather than paying Bob. Is the bank liable? Explain.
5. Daniel worked as a writer in order to support himself and his wife while she earned her MBA degree. Daniel’s paychecks were important, as the couple had no other source of income. One day, Daniel drove to Old Faithful State Bank to deposit his paycheck. Standing at a counter, he indorsed the check with a blank indorsement and then proceeded to fill out a deposit slip. While he was completing the slip, a thief stole the check and cashed it. Whose loss? How could the loss be avoided?
6. You are the branch manager of a bank. A well-respected local attorney walks into the bank with a check for \$100,000 that he wants to deposit in the general account his firm has at your bank. The payee on the check is an elderly widow, Hilda Jones, who received the check from the profit-sharing plan of her deceased husband, Horatio Jones. The widow indorsed the check “Pay to the order of the estate of Horatio Jones. Hilda Jones.” The attorney produces court documents showing that he is the executor of the estate. After the attorney indorses the check, you deposit the check in the attorney’s account. The attorney later withdraws the \$100,000 and spends it on a pleasure trip, in violation of his duties as executor. Discuss the bank’s liability.
7. Stephanie borrows \$50,000 from Ginny and gives Ginny a negotiable note in that amount. Ginny sells the note to Roe for \$45,000. Ginny’s indorsement reads, “For valuable consideration, I assign all of my rights in this note to Roe. Ginny.” When Stephanie refuses to pay the note and skips town, Roe demands payment from Ginny, claiming contract liability on the basis of her signature. Ginny argues that she is not liable because the indorsement is qualified by the language she used on the note. Who is correct? Explain.
8. The state of California issued a check that read, “To Alberto Cruz and Roberta Gonzales.” Alberto endorsed it “Pay to the order of Olivia Cruz.” What rights does Olivia get in the instrument?
1. Bill’s weekly paycheck was stolen by a thief. The thief indorsed Bill’s name and cashed the check at the drawee bank before Bill’s employer had time to stop payment. May the drawee bank charge this payment against the drawer’s account? Explain.
2. Would the result change in (a) if Bill had carelessly left his check where it could easily be picked up by the thief? Explain.
3. Would the result change in (a) if the bank had specific regulations that tellers were not to cash any check without examining the identification of the person asking for cash?
4. Would the result change if Bill’s employer had carelessly left the check where it could be found by the thief?
self-test questions
1. A person who signs a negotiable instrument with a blank endorsement has
1. warranty liability
2. contract liability
3. both of the above
4. neither of the above
2. “For deposit” is an example of
1. a special indorsement
2. a restrictive indorsement
3. a qualified indorsement
4. a blank indorsement
3. “Pay to the order of XYZ Company” is an example of
1. a special indorsement
2. a restrictive indorsement
3. a qualified indorsement
4. a blank indorsement
4. The indorser’s signature alone is
1. a special indorsement
2. a restrictive indorsement
3. a qualified indorsement
4. a blank indorsement
5. Generally, liability for a forged instrument falls on
1. the drawer
2. the drawee
3. both of the above
4. neither of the above
6. State whether each of the following is (1) blank or special, (2) restrictive or nonrestrictive, or (3) qualified or unqualified:
1. “Pay to David Murphy without recourse.”
2. “Ronald Jackson”
3. “For deposit only in my account at Industrial Credit Union.”
4. “Pay to ABC Co.”
5. “I assign to Ken Watson all my rights in this note.”
Answer
1. 3
2. 2
3. 1
4. 4
5. 2
1. special, nonrestrictive, qualified
2. blank, nonrestrictive, unqualified
3. special, nonrestrictive, unqualified
4. special, restrictive, unqualified
5. special, restrictive, unqualified | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/20%3A_Negotiation_of_Commercial_Paper/20.06%3A_Section_6-.txt |
Learning Objectives
After reading this chapter, you should understand the following:
1. What a holder in due course is, and why that status is critical to commercial paper
2. What defenses are good against a holder in due course
3. How the holder-in-due-course doctrine is modified in consumer transactions
In this chapter, we consider the final two questions that are raised in determining whether a holder can collect:
1. Is the holder a holder in due course?
2. What defenses, if any, can be asserted against the holder in due course to prevent collection on the instrument?
21: Holder in Due Course and Defenses
Learning Objectives
1. Understand why the concept of holder in due course is important in commercial transactions.
2. Know what the requirements are for being a holder in due course.
3. Determine whether a payee may be a holder in due course.
4. Know what the shelter rule is and why the rule exists.
Importance of the Holder-in-Due-Course Concept
A holder is a person in possession of an instrument payable to bearer or to the identified person possessing it. But a holder’s rights are ordinary, as we noted briefly in Chapter 19 "Nature and Form of Commercial Paper". If a person to whom an instrument is negotiated becomes nothing more than a holder, the law of commercial paper would not be very significant, nor would a negotiable instrument be a particularly useful commercial device. A mere holder is simply an assignee, who acquires the assignor’s rights but also his liabilities; an ordinary holder must defend against claims and overcome defenses just as his assignor would. The holder in due course is really the crux of the concept of commercial paper and the key to its success and importance. What the holder in due course gets is an instrument free of claims or defenses by previous possessors. A holder with such a preferred position can then treat the instrument almost as money, free from the worry that someone might show up and prove it defective.
Requirements for Being a Holder in Due Course
Under Section 3-302 of the Uniform Commercial Code (UCC), to be a holder in due course (HDC), a transferee must fulfill the following:
1. Be a holder of a negotiable instrument;
2. Have taken it:
a) for value,
b) in good faith,
c) without notice
(1) that it is overdue or
(2) has been dishonored (not paid), or
(3) is subject to a valid claim or defense by any party, or
(4) that there is an uncured default with respect to payment of another instrument issued as part of the same series, or
(5) that it contains an unauthorized signature or has been altered, and
3. Have no reason to question its authenticity on account of apparent evidence of forgery, alteration, irregularity or incompleteness.
The point is that the HDC should honestly pay for the instrument and not know of anything wrong with it. If that’s her status, she gets paid on it, almost no matter what.
Holder
Again, a holder is a person who possesses a negotiable instrument “payable to bearer or, the case of an instrument payable to an identified person, if the identified person is in possession.”Uniform Commercial Code, Section 1-201(20). An instrument is payable to an identified person if she is the named payee, or if it is indorsed to her. So a holder is one who possesses an instrument and who has all the necessary indorsements.
Taken for Value
Section 3-303 of the UCC describes what is meant by transferring an instrument “for value.” In a broad sense, it means the holder has given something for it, which sounds like consideration. But “value” here is not the same as consideration under contract law. Here is the UCC language:
An instrument is issued or transferred for value if any of the following apply:
(1) The instrument is issued or transferred for a promise of performance, to the extent the promise has been performed.
(2) The transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding.
(3) The instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due.
(4) The instrument is issued or transferred in exchange for a negotiable instrument.
(5) The instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument.
1. For a promise, to the extent performed. Suppose A contracts with B: “I’ll buy your car for \$5,000.” Under contract law, A has given consideration: the promise is enough. But this executory (not yet performed) promise given by A is not giving “value” to support the HDC status because the promise has not been performed.
Lorna Love sells her car to Paul Purchaser for \$5,000, and Purchaser gives her a note in that amount. Love negotiates the note to Rackets, Inc., for a new shipment of tennis rackets to be delivered in thirty days. Rackets never delivers the tennis rackets. Love has a claim for \$5,000 against Rackets, which is not an HDC because its promise to deliver is still executory. Assume Paul Purchaser has a defense against Love (a reason why he doesn’t want to pay on the note), perhaps because the car was defective. When Rackets presents the note to Purchaser for payment, he refuses to pay, raising his defense against Love. If Rackets had been an HDC, Purchaser would be obligated to pay on the note regardless of the defense he might have had against Love, the payee. See Carter & Grimsley v. Omni Trading, Inc., Section 21.3 "Cases", regarding value as related to executory contracts.
A taker for value can be a partial HDC if the consideration was only partly performed. Suppose the tennis rackets were to come in two lots, each worth \$2,500, and Rackets only delivered one lot. Rackets would be an HDC only to the extent of \$2,500, and the debtor—Paul Purchaser—could refuse to pay \$2,500 of the promised sum.
The UCC presents two exceptions to the rule that an executory promise is not value. Section 3-303(a)(4) provides that an instrument is issued or transferred for value if the issuer or transferor gives it in exchange for a negotiable instrument, and Section 3-303(5) says an instrument is transferred for value if the issuer gives it in exchange for an irrevocable obligation to a third party.
2. Security interest. Value is not limited to cash or the fulfillment of a contractual obligation. A holder who acquires a lien on, or a security interest in, an instrument other than by legal process has taken for value.
3. Antecedent debt. Likewise, taking an instrument in payment of, or as security for, a prior claim, whether or not the claim is due, is a taking for value. Blackstone owes Webster \$1,000, due in thirty days. Blackstone unexpectedly receives a refund check for \$1,000 from the Internal Revenue Service and indorses it to Webster. Webster is an HDC though he gave value in the past.
The rationale for the rule of value is that if the holder has not yet given anything of value in exchange for the instrument, he still has an effective remedy should the instrument prove defective: he can rescind the transaction, given the transferor’s breach of warranty.
In Good Faith
Section 3-103(4) of the UCC defines good faith as “honesty in fact and the observance of reasonable commercial standards of fair dealing.”
Honesty in Fact
“Honesty in fact” is subjectively tested. Suppose Lorna Love had given Rackets, Inc., a promissory note for the tennis rackets. Knowing that it intended to deliver defective tennis rackets and that Love is likely to protest as soon as the shipment arrives, Rackets offers a deep discount on the note to its fleet mechanic: instead of the \$1,000 face value of the note, Rackets will give it to him in payment of an outstanding bill of \$400. The mechanic, being naive in commercial dealings, has no suspicion from the large discount that Rackets might be committing fraud. He has acted in good faith under the UCC test. That is not to say that no set of circumstances will ever exist to warrant a finding that there was a lack of good faith.
Observance of Reasonable Commercial Standards of Fair Dealing
Whether reasonable commercial standards were observed in the dealings is objectively tested, but buying an instrument at a discount—as was done in the tennis rackets example—is not commercially unreasonable, necessarily.
Without Notice
It obviously would be unjust to permit a holder to enforce an instrument that he knew—when he acquired it—was defective, was subject to claims or defenses, or had been dishonored. A purchaser with knowledge cannot become an HDC. But proving knowledge is difficult, so the UCC at Section 3-302(2) lists several types of notice that presumptively defeat any entitlement to status as HDC. Notice is not limited to receipt of an explicit statement; it includes an inference that a person should have made from the circumstances. The explicit things that give a person notice include those that follow.
Without Notice That an Instrument Is Overdue
The UCC provides generally that a person who has notice that an instrument is overdue cannot be an HDC. What constitutes notice? When an inspection of the instrument itself would show that it was due before the purchaser acquired it, notice is presumed. A transferee to whom a promissory note due April 23 is negotiated on April 24 has notice that it was overdue and consequently is not an HDC. Not all paper contains a due date for the entire amount, and demand paper has no due date at all. In Sections 3-302(a)(2) and 3-304, the UCC sets out specific rules dictating what is overdue paper.
Without Notice That an Instrument Has Been Dishonored
Dishonor means that instrument is not paid when it is presented to the party who should pay it.
Without Notice of a Defense or Claim
A purchaser of an instrument cannot be an HDC if he has notice that there are any defenses or claims against it. A defense is a reason why the would-be obligor will not pay; a claim is an assertion of ownership in the instrument. If a person is fraudulently induced to issue or make an instrument, he has a claim to its ownership and a defense against paying.
Without Notice of Unauthorized Signature or Alteration
This is pretty clear: a person will fail to achieve the HDC status if he has notice of alteration or an unauthorized signature.
Without Reason to Question the Instrument’s Authenticity Because of Apparent Forgery, Alteration, or Other Irregularity or Incompleteness as to Call into Question Its Authenticity
This also is pretty straightforward, though it is worth observing that a holder will flunk the HDC test if she has notice of unauthorized signature or alteration, or if she should have notice on account of apparent irregularity. So a clever forgery would not by itself defeat the HDC status, unless the holder had notice of it.
Payee as Holder in Due Course
The payee can be an HDC, but in the usual circumstances, a payee would have knowledge of claims or defenses because the payee would be one of the original parties to the instrument. Nevertheless, a payee may be an HDC if all the prerequisites are met. For instance, Blackstone fraudulently convinces Whitestone into signing a note as a comaker, with Greenstone as the payee. Without authority, Blackstone then delivers the note for value to Greenstone. Having taken the note in good faith, for value, without notice of any problems, and without cause to question its validity because of apparent irregularities, Greenstone is an HDC. In any event, typically the HDC is not the payee of the instrument, but rather, is an immediate or remote transferee of the payee.
The Shelter Rule
There is one last point to mention before we get to the real nub of the holder-in-due-course concept (that the sins of her predecessors are washed away for an HDC). The shelter rule provides that the transferee of an instrument acquires the same rights that the transferor had. Thus a person who does not himself qualify as an HDC can still acquire that status if some previous holder (someone “upstream”) was an HDC.
On June 1, Clifford sells Harold the original manuscript of Benjamin Franklin’s autobiography. Unknown to Harold, however, the manuscript is a forgery. Harold signs a promissory note payable to Clifford for \$250,000 on August 1. Clifford negotiates the note to Betsy on July 1 for \$200,000; she is unaware of the fraud. On August 2, Betsy gives the note to Al as a token of her affection. Al is Clifford’s friend and knows about the scam (see Figure 21.1 "The Shelter Rule"). May Al collect?
Figure 21.1 The Shelter Rule
Begin the analysis by noting that Al is not an HDC. Why? For three reasons: he did not take the instrument for value (it was a gift), he did not take in good faith (he knew of the fraud), and he had notice (he acquired it after the due date). Nevertheless, Al is entitled to collect from Harold the full \$250,000. His right to do so flows from UCC, Section 3-203(b): “Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but the transferee cannot acquire rights of a holder in due course by a direct or indirect transfer from a holder in due course if the transferee engaged in fraud or illegality affecting the instrument.”
By virtue of the shelter rule, Al as transferee from Betsy acquires all rights that she had as transferor. Clearly Betsy is an HDC: she paid for the instrument, she took it in good faith, had no notice of any claim or defense against the instrument, and there were no apparent irregularities. Since Betsy is an HDC, so is Al. His knowledge of the fraud does not undercut his rights as HDC because he was not a party to it and was not a prior holder. Now suppose that after negotiating the instrument to Betsy, Clifford repurchased it from her. He would not be an HDC—and would not acquire all Betsy’s rights—because he had been a party to fraud and as a prior holder had notice of a defense. The purpose of the shelter rule is “to assure the holder in due course a free market for the paper.”Uniform Commercial Code, Section 3-203, Comment 2.
Key Takeaway
The holder-in-due-course doctrine is important because it allows the holder of a negotiable instrument to take the paper free from most claims and defenses against it. Without the doctrine, such a holder would be a mere transferee. The UCC provides that to be an HDC, a person must be a holder of paper that is not suspiciously irregular, and she must take it in good faith, for value, and without notice of anything that a reasonable person would recognize as tainting the instrument. A payee may be an HDC but usually would not be (because he would know of problems with it). The shelter rule says that a transferee of an instrument acquires the same rights her transferor had, so a person can have the rights of an HDC without satisfying the requirements of an HDC (provided she does not engage in any fraud or illegality related to the transaction).
Exercises
1. Summarize the requirements to be a holder in due course.
2. Why is the status of holder in due course important in commercial transactions?
3. Why is it unlikely that a payee would be a holder in due course?
4. What is the shelter rule, and why does it exist? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/21%3A_Holder_in_Due_Course_and_Defenses/21.1%3A_Holder_in_Due_Course.txt |
Learning Objectives
1. Know to what defenses the holder in due course is not subject.
2. Know to what defenses the holder in due course is subject.
3. Understand how the holder-in-due-course doctrine has been modified for consumer transactions and why.
Defenses
We mentioned in Section 21.1 "Holder in Due Course" that the importance of the holder-in-due-course status is that it promotes ready transferability of commercial paper by giving transferees confidence that they can buy and in turn sell negotiable instruments without concern that somebody upstream—previous holders in the chain of distribution—will have some reason not to pay. The holder-in-due-course doctrine makes the paper almost as readily transferable as cash. Almost, but not quite. We examine first the defenses to which the holder in due course (HDC) is not subject and then—the “almost” part—the defenses to which even HDCs are subject.
Holder in Due Course Is Not Subject to Personal Defenses
An HDC is not subject to the obligor’s personal defenses. But a holder who is not an HDC is subject to them: he takes a negotiable instrument subject to the possible personal claims and defenses of numerous people.
In general, the personal defenses—to which the HDC is not subject—are similar to the whole range of defenses for breach of simple contract: lack of consideration; failure of consideration; duress, undue influence, and misrepresentation that does not render the transaction void; breach of warranty; unauthorized completion of an incomplete instrument; prior payment. Incapacity that does not render the transaction void (except infancy) is also a personal defense. As the Uniform Commercial Code (UCC) puts it, this includes “mental incompetence, guardianship, ultra vires acts or lack of corporate capacity to do business, or any other incapacity apart from infancy. If under the state law the effect is to render the obligation of the instrument entirely null and void, the defense may be asserted against a holder in due course. If the effect is merely to render the obligation voidable at the election of the obligor, the defense is cut off.”Uniform Commercial Code, Section 3-305, Comment 1. James White and Robert Summers, in their hornbook on the UCC, opine that unconscionability is almost always a personal defense, not assertable against an HDC. James White and Robert Summers, Uniform Commercial Code, 2/e, 575 (1980). But again, the HDC takes free only from personal defenses of parties with whom she has not dealt. So while the payee of a note can be an HDC, if he dealt with the maker, he is subject to the maker’s defenses.
Holder in Due Course Is Subject to Real Defenses
An HDC in a nonconsumer transaction is not subject to personal defenses, but he is subject to the so-called real defenses (or “universal defenses”)—they are good against an HDC.
The real defenses good against any holder, including HDCs, are as follows (see Figure 21.2 "Real Defenses"):
1. Unauthorized signature (forgery) (UCC, Section 3-401(a))
2. Bankruptcy (UCC, Section 3-305(a))
3. Infancy (UCC, Section 3-305(a))
4. Fraudulent alteration (UCC, Section 3-407(b) and (c))
5. Duress, mental incapacity, or illegality that renders the obligation void (UCC, Section 3-305(a))
6. Fraud in the execution (UCC, Section 3-305(a))
7. Discharge of which the holder has notice when he takes the instrument (UCC, Section 3-601)
Figure 21.2 Real Defenses
Analysis of the Real Defenses
Though most of these concepts are pretty clear, a few comments by way of analysis are appropriate.
Forgery
Forgery is a real defense to an action by an HDC. As we have noted, though, negligence in the making or handling of a negotiable instrument may cut off this defense against an HDC—as, for example, when a drawer who uses a rubber signature stamp carelessly leaves it unattended. And notice, too, that Section 3-308 of the UCC provides that signatures are presumed valid unless their validity is specifically denied, at which time the burden shifts to the person claiming validity. These issues are discussed in Triffin v. Somerset Valley Bank, in Section 21.3 "Cases" of this chapter.
Bankruptcy
Drawers, makers, and subsequent indorsers are not liable to an HDC if they have been discharged in bankruptcy. If they were, bankruptcy would not serve much purpose.
Infancy
Whether an infant’s signature on a negotiable instrument is a valid defense depends on the law of the state. In some states, for instance, an infant who misrepresents his age is estopped from asserting infancy as a defense to a breach of contract. In those states, infancy would not be available as a defense against the effort of an HDC to collect.
Fraudulent Alteration
Under Section 3-407 of the UCC, “fraudulent alteration” means either (1) an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or (2) an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. An alteration fraudulently made discharges a party whose obligation is affected by the alteration unless that party assents or is precluded from asserting the alteration. But a nonfraudulent alteration—for example, filling in an omitted date or giving the obligor the benefit of a lower interest rate—does not discharge the obligor. In any case, the person paying or taking the instrument may pay or collect “according to its original terms, or in the case of an incomplete instrument that is altered by unauthorized completion, according to its terms as completed. If blanks are filled or an incomplete instrument is otherwise completed, subsection (c) places the loss upon the party who left the instrument incomplete by permitting enforcement in its completed form. This result is intended even though the instrument was stolen from the issuer and completed after the theft.” A moral here: don’t leave instruments lying around with blanks that could be filled in.
Void Contract
A void contract is distinguished from a voidable contract; only the former is a real defense.
Fraud in the Execution
You may recall that this is the rather unusual situation in which a person is tricked into signing a document. Able holds out a piece of paper for her boss and points to the signature line, saying, “This is a receipt for goods we received a little while ago.” Baker signs it. It is not a receipt; it’s the signature line on a promissory note. Able has committed fraud in the execution, and the note is void.
Discharge of Which the Holder Has Notice
If the holder knows that the paper—a note, say—has already been paid, she cannot enforce it. That’s a good reason to take back any note you have made from the person who presents it to you for payment.
Consumer Transactions and Holders in Due Course
The holder-in-due-course doctrine often worked considerable hardship on the consumer, usually as the maker of an installment note.
For example, a number of students are approached by a gym owner who induces them to sign one-year promissory notes for \$150 for a one-year gym membership. The owner says, “I know that right now the equipment in the gym is pretty rudimentary, but then, too, \$150 is about half what you’d pay at the YMCA or Gold’s Gym. And the thing is, as we get more customers signing up, we’re going to use the money to invest in new equipment. So within several months we’ll have a fully equipped facility for your use.” Several students sign the notes, which the owner sells to a factor (one that lends money to another, taking back a negotiable instrument as security, usually at about a 20 percent discount). The factor takes as an apparent HDC, but the gym idea doesn’t work and the owner declares bankruptcy. If this were a commercial transaction, the makers (the students) would still owe on the notes even if there was, as here, a complete failure of consideration (called “paying on a dead horse”). But the students don’t have to pay.
Whether the gym owner here committed fraud is uncertain, but the holder-in-due-course doctrine did often work to promote fraud. Courts frequently saw cases brought by credit companies (factors) against consumers who bought machines that did not work and services that did not live up to their promises. The ancient concept of an HDC did not square with the realities of modern commerce, in which instruments by the millions are negotiated for uncompleted transactions. The finance company that bought such commercial paper could never have honestly claimed (in the sociological sense) to be wholly ignorant that many makers will have claims against their payees (though they could and did make the claim in the legal sense).
Acting to curb abuses, the Federal Trade Commission (FTC) in 1976 promulgated a trade regulation rule that in effect abolished the holder-in-due-course rule for consumer credit transactions. Under the FTC rule titled “Preservation of Consumers’ Claims and Defenses,”16 Code of Federal Regulations, Section 433. the creditor becomes a mere holder and stands in the shoes of the seller, subject to all claims and defenses that the debtor could assert against the seller. Specifically, the rule requires the seller to provide notice in any consumer credit contract that the debtor is entitled to raise defenses against any subsequent purchaser of the paper. It also bars the seller from accepting any outside financing unless the loan contract between the consumer and the outside finance company contains a similar notice. (The required notice, to be printed in no less than ten-point, boldface type, is set out in Figure 21.3 "Notice of Defense".) The effect of the rule is to ensure that a consumer’s claim against the seller will not be defeated by a transfer of the paper. The FTC rule has this effect because the paragraph to be inserted in the consumer credit contract gives the holder notice sufficient to prevent him from becoming an HDC.
The rule applies only to consumer credit transactions. A consumer transaction is defined as a purchase of goods or services by a natural person, not a corporation or partnership, for personal, family, or household use from a seller in the ordinary course of business. Uniform Commercial Code, Section 2-201(11). Purchases of goods or services for commercial purposes and purchases of interests in real property, commodities, or securities are not affected. The rule applies to any credit extended by the seller himself (except for credit card transactions) or to any “purchase money loan.” This type of loan is defined as a cash advance to the consumer applied in whole or substantial part to a purchase of goods or services from a seller who either (a) refers consumers to the creditor or (b) is affiliated with the creditor. The purpose of this definition is to prevent the seller from making an end run around the rule by arranging a loan for the consumer through an outside finance company. The rule does not apply to a loan that the consumer arranges with an independent finance company entirely on his own.
The net effect of the FTC rule is this: the holder-in-due-course doctrine is virtually dead in consumer credit contracts. It remains alive and flourishing as a legal doctrine in all other business transactions.
Figure 21.3 Notice of Defense
Key Takeaway
The privileged position of the HDC stands up against the so-called personal defenses, which are—more or less—the same as typical defenses to obligation on any contract, not including, however, the real defenses. Real defenses are good against any holder, including an HDC. These are infancy, void obligations, fraud in the execution, bankruptcy, discharge of which holder has notice, unauthorized signatures, and fraudulent alterations. While a payee may be an HDC, his or her rights as such are limited to avoiding defenses of persons the payee did not deal with. The shelter rule says that the transferee of an instrument takes the same rights that the transferor had. The Federal Trade Commission has abrogated the holder-in-due-course doctrine for consumer transactions.
Exercises
1. What purpose does the holder-in-due-course doctrine serve?
2. What defenses is an HDC not subject to? What defenses is an HDC subject to?
3. What is the Shelter Rule, and what purpose does it serve?
4. For what transactions has the FTC abolished the holder-in-due-course doctrine and why?
5. Under what circumstances is a forged signature valid? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/21%3A_Holder_in_Due_Course_and_Defenses/21.2%3A_Defenses_and_Role_in_Consumer_Transactions.txt |
Executory Promise as Satisfying “Value”
Carter & Grimsley v. Omni Trading, Inc.
716 N.E.2d 320 (Ill. App. 1999)
Lytton, J.
Facts
Omni purchased some grain from Country Grain, and on February 2, 1996, it issued two checks, totaling \$75,000, to Country Grain. Country Grain, in turn, endorsed the checks over to Carter as a retainer for future legal services. Carter deposited the checks on February 5; Country Grain failed the next day. On February 8, Carter was notified that Omni had stopped payment on the checks. Carter subsequently filed a complaint against Omni…alleging that it was entitled to the proceeds of the checks, plus pre-judgment interest, as a holder in due course.…[Carter moved for summary judgment; the motion was denied.]
Discussion
Carter argues that its motion for summary judgment should have been granted because, as a holder in due course, it has the right to recover on the checks from the drawer, Omni.
The Illinois Uniform Commercial Code (UCC) defines a holder in due course as:
“the holder of an instrument if:
(1) the instrument when issued does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity, and (2) the holder took the instrument (i) for value,…
Section 3-303(a) of the UCC also states that:
(a) “An instrument is issued or transferred for value if: (1) the instrument is issued or transferred for a promise of performance, to the extent that the promise has been performed * * *.” (emphasis added)
Carter contends that in Illinois a contract for future legal services should be treated differently than other executory contracts. It contends that when the attorney-client relationship is created by payment of a fee or retainer, the contract is no longer executory. Thus, Carter would achieve holder in due course status. We are not persuaded.
A retainer is the act of a client employing an attorney; it also denotes the fee paid by the client when he retains the attorney to act for him. [Citation] We have found no Illinois cases construing section 3-303(a) as it relates to a promise to perform future legal services under a retainer. The general rule, however, is that “an executory promise is not value.” [Citation] “[T]he promise does not rise to the level of ‘value’ in the commercial paper market until it is actually performed.” [Citation]
The UCC comment to section 303 gives the following example:
“Case # 2. X issues a check to Y in consideration of Y’s promise to perform services in the future. Although the executory promise is consideration for issuance of the check it is value only to the extent the promise is performed.
We have found no exceptions to these principles for retainers. Indeed, courts in other jurisdictions interpreting similar language under section 3-303 have held that attorneys may be holders in due course only to the extent that they have actually performed legal services prior to acquiring a negotiable instrument. See [Citations: Pennsylvania, Florida, Massachusetts]. We agree.
This retainer was a contract for future legal services. Under section 3-303(a)(1), it was a “promise of performance,” not yet performed. Thus, no value was received, and Carter is not a holder in due course.
Furthermore, in this case, no evidence was presented in the trial court that Carter performed any legal services for Country Grain prior to receiving the checks. Without an evidentiary basis for finding that Carter received the checks for services performed, the trial court correctly found that Carter failed to prove that it was a holder in due course. [Citations]
Conclusion
Because we have decided that Carter did not take the checks for value under section 3-303(a) of the UCC, we need not address its other arguments.
The judgment of the circuit court of Peoria County is affirmed.
Holdridge, J., dissenting.
I respectfully dissent. In a contractual relationship between attorney and client, the payment of a fee or retainer creates the relationship, and once that relationship is created the contract is no longer executory. [Citation] Carter’s agreement to enter into an attorney-client relationship with Country Grain was the value exchanged for the checks endorsed over to the firm. Thus, the general rule cited by the majority that “an executory promise is not value” does not apply to the case at bar. On that basis I would hold that the trial court erred in determining that Carter was not entitled to the check proceeds and I therefore dissent.
case questions
1. How did Carter & Grimsley obtain the two checks drawn by Omni?
2. Why—apparently—did Omni stop payments on the checks?
3. Why did the court determine that Carter was not an HDC?
4. Who is it that must have performed here in order for Carter to have been an HDC, Country Grain or Carter?
5. How could making a retainer payment to an attorney be considered anything other than payment on an executory contract, as the dissent argues?
The “Good Faith and Reasonable Commercial Standards” Requirement
Buckeye Check Cashing, Inc. v. Camp
825 N.E.2d 644 (Ohio App. 2005)
Donovan, J.
Defendant-appellant Shawn Sheth appeals from a judgment of the Xenia Municipal Court in favor of plaintiff-appellee Buckeye Check Cashing, Inc. (“Buckeye”). Sheth contends that the trial court erred in finding that Buckeye was a holder in due course of a postdated check drawn by Sheth and therefore was entitled to payment on the instrument despite the fact that Sheth had issued a stop-payment order to his bank.
In support of this assertion, Sheth argues that the trial court did not use the correct legal standard in granting holder-in-due-course status to Buckeye. In particular, Sheth asserts that the trial court used the pre-1990 Uniform Commercial Code (“UCC”) definition of “good faith” as it pertains to holder-in-due-course status, which defined it as “honesty in fact.” The definition of “good faith” was extended by the authors of the UCC in 1990 to also mean “the observance of reasonable commercial standards of fair dealing.” The post-1990 definition was adopted by the Ohio legislature in 1994.
Sheth argues that while Buckeye would prevail under the pre-1990, “honesty in fact” definition of “good faith,” it failed to act in a commercially reasonable manner when it chose to cash the postdated check drawn by Sheth. The lower court…adjudged Buckeye to be a holder in due course and, therefore, entitled to payment. We conclude that the trial court used the incorrect “good faith” standard when it granted holder-in-due-course status to Buckeye because Buckeye did not act in a commercially reasonable manner when it cashed the postdated check drawn by Sheth. Because we accept Sheth’s sole assignment of error, the judgment of the trial court is reversed.
On or about October 12, 2003, Sheth entered into negotiations with James A. Camp for Camp to provide certain services to Sheth by October 15, 2003. To that end, Sheth issued Camp a check for \$1,300. The check was postdated to October 15, 2003.
On October 13, 2003, Camp negotiated the check to Buckeye and received a payment of \$1,261.31. Apparently fearing that Camp did not intend to fulfill his end of the contract, Sheth contacted his bank on October 14, 2003, and issued a stop-payment order on the check. Unaware of the stop-payment order, Buckeye deposited the check with its own bank on October 14, 2003, believing that the check would reach Sheth’s bank by October 15, 2003. Because the stop-payment order was in effect, the check was ultimately dishonored by Sheth’s bank. After an unsuccessful attempt to obtain payment directly from Sheth, Buckeye brought suit.
Sheth’s sole assignment of error is as follows:
“The trial court erred by applying the incorrect legal standard in granting holder in due course status to the plaintiff-appellee because the plaintiff-appellee failed to follow commercially reasonable standards in electing to cash the check that gives rise to this dispute.”
[UCC 3-302] outlines the elements required to receive holder-in-due-course status. The statute states:
…‘holder in due course’ means the holder of an instrument if both of the following apply:
“(1) The instrument when issued or negotiated to the holder does not bear evidence of forgery or alteration that is so apparent, or is otherwise so irregular or incomplete as to call into question its authenticity;
“(2) The holder took the instrument under all of the following circumstances:
(a) For value;
(b) In good faith;
(c) Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
(d) Without notice that the instrument contains an unauthorized signature or has been altered;
(e) Without notice of any claim to the instrument as described in [3-306];
(f) Without notice that any party has a defense or claim in recoupment described in [UCC 3-305(a); emphasis added].
At issue in the instant appeal is whether Buckeye acted in “good faith” when it chose to honor the postdated check originally drawn by Sheth.…UCC 1-201, defines “good faith” as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” Before the Ohio legislature amended UCC 1-201 in 1994, that section did not define “good faith”; the definition of “good faith” as “honesty in fact” in UCC 1-201 was the definition that applied[.]…
“Honesty in fact” is defined as the absence of bad faith or dishonesty with respect to a party’s conduct within a commercial transaction. [Citation] Under that standard, absent fraudulent behavior, an otherwise innocent party was assumed to have acted in good faith. The “honesty in fact” requirement, also known as the “pure heart and empty head” doctrine, is a subjective test under which a holder had to subjectively believe he was negotiating an instrument in good faith for him to become a holder in due course. Maine [Citation, 1999].
In 1994, however, the Ohio legislature amended the definition of “good faith” to include not only the subjective “honesty in fact” test, but also an objective test: “the observance of reasonable commercial standards of fair dealing.” Ohio UCC 1-201(20). A holder in due course must now satisfy both a subjective and an objective test of good faith. What constitutes “reasonable commercial standards of fair dealing” for parties claiming holder-in-due-course status, however, has not heretofore been defined in the state of Ohio.
In support of his contention that Buckeye is not a holder in due course, Sheth cites a decision from the Supreme Court of Maine, [referred to above] in which the court provided clarification with respect to the objective prong of the “good faith” analysis:
“The fact finder must therefore determine, first, whether the conduct of the holder comported with industry or ‘commercial’ standards applicable to the transaction and second, whether those standards were reasonable standards intended to result in fair dealing. Each of those determinations must be made in the context of the specific transaction at hand. If the fact finder’s conclusion on each point is ‘yes,’ the holder will be determined to have acted in good faith even if, in the individual transaction at issue, the result appears unreasonable. Thus, a holder may be accorded holder in due course where it acts pursuant to those reasonable commercial standards of fair dealing—even if it is negligent—but may lose that status, even where it complies with commercial standards, if those standards are not reasonably related to achieving fair dealing.” [Citation]
Check cashing is an unlicensed and unregulated business in Ohio. [Citation] Thus, there are no concrete commercial standards by which check-cashing businesses must operate. Moreover, Buckeye argues that its own internal operating policies do not require that it verify the availability of funds, nor does Buckeye apparently have any guidelines with respect to the acceptance of postdated checks. Buckeye asserts that cashing a postdated check does not prevent a holder from obtaining holder-in-due-course status and cites several cases in support of this contention. All of the cases cited by Buckeye, however, were decided prior to the UCC’s addition of the objective prong to the definition of “good faith.”
Under a purely subjective “honesty in fact” analysis, it is clear that Buckeye accepted the check from Camp in good faith and would therefore achieve holder-in-due-course status. When the objective prong of the good faith test is applied, however, we find that Buckeye did not conduct itself in a commercially reasonable manner. While not going so far as to say that cashing a postdated check prevents a holder from obtaining holder-in-due-course status in every instance, the presentation of a postdated check should put the check cashing entity on notice that the check might not be good. Buckeye accepted the postdated check at its own peril. Some attempt at verification should be made before a check-cashing business cashes a postdated check. Such a failure to act does not constitute taking an instrument in good faith under the current objective test of “reasonable commercial standards” enunciated in [the UCC].
We conclude that in deciding to amend the good faith requirement to include an objective component of “reasonable commercial standards,” the Ohio legislature intended to place a duty on the holders of certain instruments to act in a responsible manner in order to obtain holder-in-due-course status. When Buckeye decided to cash the postdated check presented by Camp, it did so without making any attempt to verify its validity. This court in no way seeks to curtail the free negotiability of commercial instruments. However, the nature of certain instruments, such as the postdated check in this case, renders it necessary for appellee Buckeye to take minimal steps to protect its interests. That was not done. Buckeye was put on notice that the check was not good until October 15, 2003. “Good faith,” as it is defined in the UCC and the Ohio Revised Code, requires that a holder demonstrate not only honesty in fact but also that the holder act in a commercially reasonable manner. Without taking any steps to discover whether the postdated check issued by Sheth was valid, Buckeye failed to act in a commercially reasonable manner and therefore was not a holder in due course.
Based upon the foregoing, Sheth’s single assignment of error is sustained, the judgment of the Xenia Municipal Court is reversed, and this matter is remanded to that court for further proceedings in accordance with law and consistent with this opinion.
Judgment reversed, and cause remanded.
case questions
1. Who was Camp? Why did Sheth give him a check? Why is the case titled Buckeye v. Camp?
2. How does giving someone a postdated check offer the drawer any protection? How does it give rise to any “notice that the check might not be good”?
3. If Camp had taken the check to Sheth’s bank to cash it, what would have happened?
4. What difference did the court discern between the pre-1990 UCC Article 3 and the post-1990 Article 3 (that Ohio adopted in 1994)?
The Shelter Rule
Triffin v. Somerset Valley Bank
777 A.2d 993 (N.J. Ct. App. 2001)
Cuff, J.
This case concerns the enforceability of dishonored checks against the issuer of the checks under Article 3 of the Uniform Commercial Code (UCC), as implemented in New Jersey[.]
Plaintiff [Robert J. Triffin] purchased, through assignment agreements with check cashing companies, eighteen dishonored checks, issued by defendant Hauser Contracting Company (Hauser Co.). Plaintiff then filed suit…to enforce Hauser Co.’s liability on the checks. The trial court granted plaintiff’s motion for summary judgment. Hauser Co. appeals the grant of summary judgment.…We affirm.
In October 1998, Alfred M. Hauser, president of Hauser Co., was notified by Edwards Food Store in Raritan and the Somerset Valley Bank (the Bank), that several individuals were cashing what appeared to be Hauser Co. payroll checks. Mr. Hauser reviewed the checks, ascertained that the checks were counterfeits and contacted the Raritan Borough and Hillsborough Police Departments. Mr. Hauser concluded that the checks were counterfeits because none of the payees were employees of Hauser Co., and because he did not write the checks or authorize anyone to sign those checks on his behalf. At that time, Hauser Co. employed Automatic Data Processing, Inc. (ADP) to provide payroll services and a facsimile signature was utilized on all Hauser Co. payroll checks.
Mr. Hauser executed affidavits of stolen and forged checks at the Bank, stopping payment on the checks at issue. Subsequently, the Bank received more than eighty similar checks valued at \$25,000 all drawn on Hauser Co.’s account.
Plaintiff is in the business of purchasing dishonored negotiable instruments. In February and March 1999, plaintiff purchased eighteen dishonored checks from four different check cashing agencies, specifying Hauser Co. as the drawer. The checks totaled \$8,826.42. Pursuant to assignment agreements executed by plaintiff, each agency stated that it cashed the checks for value, in good faith, without notice of any claims or defenses to the checks, without knowledge that any of the signatures were unauthorized or forged, and with the expectation that the checks would be paid upon presentment to the bank upon which the checks were drawn. All eighteen checks bore a red and green facsimile drawer’s signature stamp in the name of Alfred M. Hauser. All eighteen checks were marked by the Bank as “stolen check” and stamped with the warning, “do not present again.”…
Plaintiff then filed this action against the Bank, Hauser Co.,…Plaintiff contended that Hauser Co. was negligent in failing to safeguard both its payroll checks and its authorized drawer’s facsimile stamp, and was liable for payment of the checks.
The trial court granted plaintiff’s summary judgment motion, concluding that no genuine issue of fact existed as to the authenticity of the eighteen checks at issue. Judge Hoens concluded that because the check cashing companies took the checks in good faith, plaintiff was a holder in due course as assignee. Judge Hoens also found that because the checks appeared to be genuine, Hauser Co. was required, but had failed, to show that plaintiff’s assignor had any notice that the checks were not validly drawn.…
Hauser Co. argues that summary judgment was improperly granted because the court failed to properly address Hauser Co.’s defense that the checks at issue were invalid negotiable instruments and therefore erred in finding plaintiff was a holder in due course.
As a threshold matter, it is evident that the eighteen checks meet the definition of a negotiable instrument [UCC 3-104]. Each check is payable to a bearer for a fixed amount, on demand, and does not state any other undertaking by the person promising payment, aside from the payment of money. In addition, each check appears to have been signed by Mr. Hauser, through the use of a facsimile stamp, permitted by the UCC to take the place of a manual signature. [Section 3-401(b) of the UCC] provides that a “signature may be made manually or by means of a device or machine…with present intention to authenticate a writing.” It is uncontroverted by Hauser Co. that the facsimile signature stamp on the checks is identical to Hauser Co.’s authorized stamp.
Hauser Co., however, contends that the checks are not negotiable instruments because Mr. Hauser did not sign the checks, did not authorize their signing, and its payroll service, ADP, did not produce the checks. Lack of authorization, however, is a separate issue from whether the checks are negotiable instruments. Consequently, given that the checks are negotiable instruments, the next issue is whether the checks are unenforceable by a holder in due course, because the signature on the checks was forged or unauthorized.
[Sections 3-203 and 3-302 of the UCC] discuss the rights of a holder in due course and the rights of a transferee of a holder in due course. Section 3-302 establishes that a person is a holder in due course if:
(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
(2) the holder took the instrument for value, in good faith, without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, without notice that the instrument contains an unauthorized signature or has been altered, without notice of any claim to the instrument described in 3-306, and without notice that any party has a defense or claim in recoupment described in subsection a. of 3-305.
Section 3-203 deals with transfer of instruments and provides:
a. An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.
b. Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but the transferee cannot acquire rights of a holder in due course by a transfer, directly or indirectly, from a holder in due course if the transferee engaged in fraud or illegality affecting the instrument.…
Under subsection (b) a holder in due course that transfers an instrument transfers those rights as a holder in due course to the purchaser. The policy is to assure the holder in due course a free market for the instrument.
The record indicates that plaintiff has complied with the requirements of both sections 3-302 and 3-203. Each of the check cashing companies from whom plaintiff purchased the dishonored checks were holders in due course. In support of his summary judgment motion, plaintiff submitted an affidavit from each company; each company swore that it cashed the checks for value, in good faith, without notice of any claims or defenses by any party, without knowledge that any of the signatures on the checks were unauthorized or fraudulent, and with the expectation that the checks would be paid upon their presentment to the bank upon which the checks were drawn. Hauser Co. does not dispute any of the facts sworn to by the check cashing companies.
The checks were then transferred to plaintiff in accordance with section 3-303, vesting plaintiff with holder in due course status. Each company swore that it assigned the checks to plaintiff in exchange for consideration received from plaintiff. Plaintiff thus acquired the check cashing companies’ holder in due course status when the checks were assigned to plaintiff. Moreover, pursuant to section 3-403(a)’s requirement that the transfer must have been made for the purpose of giving the transferee the right to enforce the instrument, the assignment agreements expressly provided plaintiff with that right, stating that “all payments [assignor] may receive from any of the referenced Debtors…shall be the exclusive property of [assignee].” Again, Hauser Co. does not dispute any facts relating to the assignment of the checks to plaintiff.
Hauser Co. contends, instead, that the checks are per se invalid because they were fraudulent and unauthorized. Presumably, this argument is predicated on section 3-302. This section states a person is not a holder in due course if the instrument bears “apparent evidence of forgery or alteration” or is otherwise “so irregular or incomplete as to call into question its authenticity.”
In order to preclude liability from a holder in due course under section 3-302, it must be apparent on the face of the instrument that it is fraudulent. The trial court specifically found that Hauser Co. had provided no such evidence, stating that Hauser Co. had failed to show that there was anything about the appearance of the checks to place the check cashing company on notice that any check was not valid. Specifically, with respect to Hauser Co.’s facsimile signature on the checks, the court stated that the signature was identical to Hauser Co.’s authorized facsimile signature. Moreover, each of the check cashing companies certified that they had no knowledge that the signatures on the checks were fraudulent or that there were any claims or defenses to enforcement of the checks. Hence, the trial court’s conclusion that there was no apparent evidence of invalidity was not an abuse of discretion and was based on a reasonable reading of the record.
To be sure, section 3-308(a) does shift the burden of establishing the validity of the signature to the plaintiff, but only if the defendant specifically denies the signature’s validity in the pleadings. The section states:
In an action with respect to an instrument, the authenticity of, and authority to make, each signature on the instrument is admitted unless specifically denied in the pleadings. If the validity of a signature is denied in the pleadings, the burden of establishing validity is on the person claiming validity, but the signature is presumed to be authentic and authorized unless the action is to enforce the liability of the purported signer and the signer is dead or incompetent at the time of trial of the issue of validity of the signature.
Examination of the pleadings reveals that Hauser Co. did not specifically deny the factual assertions in plaintiff’s complaint.
Hence, the trial court’s conclusion that there was no apparent evidence of invalidity was not an abuse of discretion and was based on a reasonable reading of the record.
In conclusion, we hold that Judge Hoens properly granted summary judgment. There was no issue of material fact as to: (1) the status of the checks as negotiable instruments; (2) the status of the check cashing companies as holders in due course; (3) the status of plaintiff as a holder in due course; and (4) the lack of apparent evidence on the face of the checks that they were forged, altered or otherwise irregular. Moreover, Hauser Co.’s failure to submit some factual evidence indicating that the facsimile signature was forged or otherwise unauthorized left unchallenged the UCC’s rebuttable presumption that a signature on an instrument is valid. Consequently, the trial court properly held, as a matter of law, that plaintiff was a holder in due course and entitled to enforce the checks. Affirmed.
case questions
1. Why did the plaintiff, Mr. Triffin, obtain possession of the dishonored checks? Regarding the plaintiff, consider this: http://caselaw.findlaw.com/nj-supreme-court/1332248.html.
2. Section 4-401 of the UCC says nobody is liable on an instrument unless the person signed it, and Section 4-403(a) provides that “an unauthorized signature is ineffective” (except as the signature of the unauthorized person), so how could Hauser Co. be liable at all? And why did the court never discuss plaintiff’s contention that the defendant “was negligent in failing to safeguard both its payroll checks and its authorized drawer’s facsimile stamp”?
3. Why didn’t the Hauser Co. specifically deny the authenticity of the signatures?
4. Obviously, the plaintiff must have known that there was something wrong with the checks when he bought them from the check-cashing companies: they had been dishonored and were marked “Stolen, do not present again.” Did he present them again?
5. While the UCC does not require that the transferee of an instrument acted in good faith in order to collect on the instrument as an HDC (though he can’t have participated in any scam), it disallows a person from being an HDC if he takes an instrument with notice of dishonor. Surely the plaintiff had notice of that. What does the UCC require that transformed Mr. Triffin—via the shelter rule—into a person with the rights of an HDC?
6. If the plaintiff had not purchased the checks from the check-cashing companies, who would have taken the loss here?
7. What recourse does the defendant, Hauser Co., have now?
8. Authors’ comment: How this scam unfolded is suggested in the following segment of an online guide to reducing financial transaction fraud.
Recommendations: It is clear from this case that if a thief can get check stock that looks genuine, your company can be held liable for losses that may occur from those counterfeit checks. Most companies buy check stock from vendors that sell the identical check stock entirely blank to other companies, totally uncontrolled, thus aiding the forgers. Many companies opt for these checks because they are less expensive than controlled, high security checks (excluding legal fees and holder in due course judgments). Forgers buy the check stock, and using a \$99 scanner and Adobe Illustrator, create counterfeit checks that cannot be distinguished from the account holder’s original checks. This is how legal exposure to a holder in due course claim can be and is created. Companies should use checks uniquely designed and manufactured for them, or buy from vendors such as SAFEChecks (http://www.safechecks.com) that customize every company’s check and never sells check stock entirely blank without it first being customized for the end user. Frank Abagnale and Greg Litster, Holder in Due Course and Check Fraud, TransactionDirectory.com. | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/21%3A_Holder_in_Due_Course_and_Defenses/21.3%3A_Cases.txt |
summary
A holder is a holder in due course (HDC) if he takes the instrument without reason to question its authenticity on account of obvious facial irregularities, for value, in good faith, and without notice that it is overdue or has been dishonored, or that it contains a forgery or alteration, or that that any person has any defense against it or claim to it. The HDC takes the paper free of most defenses; an ordinary holder takes the paper as an assignee, acquiring only the rights of the assignor.
Value is not the same as consideration; hence, a promise will not satisfy this criterion until it has been performed. The HDC must have given something of value other than a promise to give.
Good faith means (1) honesty in fact in the conduct or transaction concerned and (2) the observance of reasonable commercial standards of fair dealing. Honesty in fact is a subjective test, but the observance of reasonable commercial standards is objective.
Notice is not limited to receipt of an explicit statement of defenses; a holder may be given notice through inferences that should be drawn from the character of the instrument. Thus an incomplete instrument, one that bears marks of forgery, or one that indicates it is overdue may give notice on its face. Certain facts do not necessarily give notice of defense or claim: that the instrument is antedated or postdated, that the instrument was negotiated in return for an executory promise, that any party has signed for accommodation, that an incomplete instrument has been completed, that any person negotiating the instrument is or was a fiduciary, or that there has been default in payment of interest or principal.
A person who could not have become an HDC directly (e.g., because he had notice of a defense or claim) may become so if he takes as transferee from an HDC as long as he was not a party to any fraud or illegality affecting the instrument or had not previously been a holder with notice of a defense or claim. This is the shelter rule.
Holders in due course are not immune from all defenses. A real, as opposed to a personal, defense may be asserted against the HDC. Personal defenses include fraud in the inducement, failure of consideration, nonperformance of a condition precedent, and the like. Real defenses consist of infancy, acts that would make a contract void (such as duress), fraud in the execution, forgery, and discharge in bankruptcy. A 1976 trade regulation rule of the Federal Trade Commission abolishes the holder-in-due-course rule for consumer transactions.
Exercises
1. Mike signed and delivered a note for \$9,000 to Paul Payee in exchange for Paul’s tractor. Paul transferred the note to Hilda, who promised to pay \$7,500 for it. After Hilda had paid Paul \$5,000 of the promised \$7,500, Hilda learned that Mike had a defense: the tractor was defective. How much, if anything, can Hilda collect from Mike on the note, and why?
2. In Exercise 1, if Hilda had paid Paul \$7,500 and then learned of Mike’s defense, how much—if any of the amount—could she collect from Mike?
3. Tex fraudulently sold a boat, to which he did not have title, to Sheryl for \$30,000 and received, as a deposit from her, a check in the amount of \$5,000. He deposited the check in his account at First Bank and immediately withdrew \$3,000 of the proceeds. When Sheryl discovered that Tex had no title, she called her bank (the drawee) and stopped payment on the check. Tex, in the meantime, disappeared. First Bank now wishes to collect the \$3,000 from Sheryl, but she claims it is not an HDC because it did not give value for the check in that the payment to Tex was conditional: the bank retained the right to collect from Tex if it could not collect on the check. Is Sheryl correct? Explain.
4. Corporation draws a check payable to First Bank. The check is given to an officer of Corporation (known to Bank), who is instructed to deliver it to Bank in payment of a debt owed by Corporation to Bank. Instead, the officer, intending to defraud Corporation, delivers the check to Bank in payment of his personal debt. Bank has received funds of Corporation that have been used for the personal benefit of the officer. Corporation asserts a claim to the proceeds of the check against Bank. Is Bank an HDC of the check?
5. Contractor contracted with Betty Baker to install a new furnace in Baker’s business. Baker wrote a check for \$8,000 (the price quoted by Contractor) payable to Furnace Co., which Contractor delivered to Furnace Co. in payment of his own debt to it. Furnace Co. knew nothing of what went on between Contractor and Baker. When Contractor did not complete the job, Baker stopped payment on the check. Furnace Co. sued Baker, who defended by claiming failure of consideration. Is this a good defense against Furnace Co.?
6. Benson purchased a double-paned, gas-filled picture window for his house from Wonder Window, making a \$200 deposit and signing an installment contract, which is here set out in its entirety:
October 3, 2012
I promise to pay to Wonder Window or order the sum of \$1,000 in five equal installments of \$200.
[Signed] Benson
Wonder Window negotiated the installment contract to Devon, who took the instrument for value, in good faith, without notice of any claim or defense of any party, and without question of the instrument’s authenticity. After Benson made three payments, the window fogged up inside and was unacceptable. Benson wants his money back from Wonder Window, and he wants to discontinue further payments. Can he do that? Explain.
7. The Turmans executed a deed of trust note (a note and mortgage) dated November 12, 2012, for \$100,000 payable to Ward’s Home Improvement, Inc. The note was consideration for a contract: Ward was to construct a home on the Turmans’ property. The same day, Ward executed a separate written assignment of the note to Robert L. Pomerantz, which specifically used the word “assigns.” Ward did not endorse the note to Pomerantz or otherwise write on it. Ward did not complete the house; to do so would require the expenditure of an additional \$42,000. Pomerantz maintained he is a holder in due course of the \$100,000 note and demanded payment from the Turmans. Does he get paid? Explain. Turman v. Ward’s Home Imp., Inc., 1995 WL 1055769, Va. Cir. Ct. (1995).
self-test questions
1. Which defeats a person from being an HDC?
1. She takes the paper in return for a promise by the maker or drawer to perform a service in the future.
2. She subjectively takes it in good faith, but most people would recognize the deal as suspect.
3. The instrument contains a very clever, almost undetectable forged signature.
4. The instrument was postdated.
5. All these are grounds to defeat the HDC status.
2. Personal defenses are
1. good against all holders
2. good against holders but not HDCs
3. good against HDCs but not holders
4. not good against any holder, HDC or otherwise
5. sometimes good against HDCs, depending on the facts
3. Fraud in the inducement is a ________________ defense.
1. real
2. personal
4. A person would not be an HDC if she
1. was notified that payment on the instrument had been refused
2. knew that one of the prior indorsers had been discharged
3. understood that the note was collateral for a loan
4. purchased the note at a discount
5. Rock Industries agreed to sell Contractor gravel to repair an airport drain field. Contractor was uncertain how many loads of gravel would be needed, so he drew a check made out to “Rock Industries” as the payee but left the amount blank, to be filled in on the job site when the last load of gravel was delivered. Five truckloads, each carrying ten tons of gravel, were required, with gravel priced at \$20 per ton. Thus Contractor figured he’d pay for fifty tons, or \$1,000, but Rock Industries had apparently filled in the amount as \$1,400 and negotiated it to Fairchild Truck Repair. Fairchild took it in good faith for an antecedent debt. Contractor will
1. be liable to Fairchild, but only for \$1,000
2. be liable to Fairchild for \$1,400
3. not be liable to Fairchild because the check was materially altered
4. not be liable to Fairchild because it did not give “value” for it to Rock Industries
Answer
1. 1
2. 2
3. 2
4. 1
5. 2 | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/21%3A_Holder_in_Due_Course_and_Defenses/21.4%3A_Summary_and_Exercises.txt |
Learning Objectives
After reading this chapter, you should understand the following:
1. The liability of an agent who signs commercial paper
2. What contract liability is imposed when a person signs commercial paper
3. What warranty liability is imposed upon a transferor
4. What happens if there is payment or acceptance by mistake
5. How parties are discharged from liability on commercial paper
In Chapter 19 "Nature and Form of Commercial Paper", Chapter 20 "Negotiation of Commercial Paper", and Chapter 21 "Holder in Due Course and Defenses", we focused on the methods and consequences of negotiating commercial paper when all the proper steps are followed. For example, a maker gives a negotiable note to a payee, who properly negotiates the paper to a third-party holder in due course. As a result, this third party is entitled to collect from the maker, unless the latter has a real defense.
In this chapter, we begin by examining a question especially important to management: personal liability for signing company notes and checks. Then we look at the two general types of liability—contract and warranty—introduced in Chapter 20 "Negotiation of Commercial Paper". We conclude the chapter by reviewing the ways in which parties are discharged from liability.
22: Liability and Discharge
Learning Objectives
1. Recognize what a signature is under Article 3 of the Uniform Commercial Code.
2. Understand how a person’s signature on an instrument affects liability if the person is an agent, or a purported agent, for another.
The liability of an agent who signs commercial paper is one of the most frequently litigated issues in this area of law. For example, Igor is an agent (treasurer) of Frank N. Stein, Inc. Igor signs a note showing that the corporation has borrowed \$50,000 from First Bank. The company later becomes bankrupt. The question: Is Igor personally liable on the note? The unhappy treasurer might be sued by the bank—the immediate party with whom he dealt—or by a third party to whom the note was transferred (see Figure 22.1 "Signature by Representative").
Figure 22.1 Signature by Representative
There are two possibilities regarding an agent who signs commercial paper: the agent was authorized to do so, or the agent was not authorized to do so. First, though, what is a signature?
A “Signature” under the Uniform Commercial Code
Section 3-401 of the Uniform Commercial Code (UCC) provides fairly straightforwardly that “a signature can be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including any trade or assumed name, or by any word, mark, or symbol executed or adopted by a person with the present intention to authenticate a writing.”
Liability of an Agent Who Has Authority to Sign
Agents often sign instruments on behalf of their principals, and—of course—because a corporation’s existence is a legal fiction (you can’t go up and shake hands with General Motors), corporations can only act through their agents.
The General Rule
Section 3-402(a) of the UCC provides that a person acting (or purporting to act) as an agent who signs an instrument binds the principal to the same extent that the principal would be bound if the signature were on a simple contract. The drafters of the UCC here punt to the common law of agency: if, under agency law, the principal would be bound by the act of the agent, the signature is the authorized signature of the principal. And the general rule in agency law is that the agent is not liable if he signs his own name and makes clear he is doing so as an agent. In our example, Igor should sign as follows: “Frank N. Stein, Inc., by Igor, Agent.” Now it is clear under agency law that the corporation is liable and Igor is not. Uniform Commercial Code, Section 4-402(b)(1). Good job, Igor.
Incorrect Signatures
The problems arise where the agent, although authorized, signs in an incorrect way. There are three possibilities: (1) the agent signs only his own name—“Igor”; (2) the agent signs both names but without indication of any agency—“Frank N. Stein, Inc., / Igor” (the signature is ambiguous—are both parties to be liable, or is Igor merely an agent?); (3) the agent signs as agent but doesn’t identify the principal—“Igor, Agent.”
The UCC provides that in each case, the agent is liable to a holder in due course (HDC) who took the instrument without notice that the agent wasn’t intended to be liable on the instrument. As to any other person (holder or transferee), the agent is liable unless she proves that the original parties to the instrument did not intend her to be liable on it. Section 3-402(c) says that, as to a check, if an agent signs his name without indicating agency status but the check has the principal’s identification on it (that would be in the upper left corner), the authorized agent is not liable.
Liability of an “Agent” Who Has No Authority to Sign
A person who has no authority to sign an instrument cannot really be an “agent” because by definition an agent is a person or entity authorized to act on behalf of and under the control of another in dealing with third parties. Nevertheless, unauthorized persons not infrequently purport to act as agents: either they are mistaken or they are crooks. Are their signatures binding on the “principal”?
The General Rule
An unauthorized signature is not binding; it is—as the UCC puts it—“ineffective except as the signature of the unauthorized signer.”Uniform Commercial Code, Section 3-403. So if Crook signs a Frank N. Stein, Inc., check with the name “Igor,” the only person liable on the check is Crook.
The Exceptions
There are two exceptions. Section 4-403(a) of the UCC provides that an unauthorized signature may be ratified by the principal, and Section 3-406 says that if negligence contributed to an instrument’s alteration or forgery, the negligent person cannot assert lack of authority against an HDC or a person who in good faith pays or takes the instrument for value or for collection. This is the situation where Principal leaves the rubber signature stamp lying about and Crook makes mischief with it, making out a check to Payee using the stamp. But if Payee herself failed to exercise reasonable care in taking a suspicious instrument, both Principal and Payee could be liable, based on comparative negligence principles. Uniform Commercial Code, Section 3-406(b).
Key Takeaway
Under the UCC, a “signature” is any writing or mark used by a person to indicate that a writing is authentic. Agents often sign on behalf of principals, and when the authorized agent makes clear that she is so signing—by naming the principal and signing her name as “agent”—the principal is liable, not the agent. But when the agent signs incorrectly, the UCC says, in general, that the agent is personally liable to an HDC who takes the paper without notice that the agent is not intended to be liable. Unauthorized signatures (forgeries) are ineffective as to the principal: they are effective as the forger’s signature, unless the principal or the person paying on the instrument has been negligent in contributing to, or in failing to notice, the forgery, in which case comparative negligence principles are applied.
Exercises
1. Able signs his name on a note with an entirely illegible squiggle. Is that a valid signature?
2. Under what circumstances is an agent clearly not personally liable on an instrument?
3. Under what circumstances is a forgery effective as to the person whose name is forged? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/22%3A_Liability_and_Discharge/22.1%3A_Liability_Imposed_by_Signature%3A_Agents_Authorized_and_Unauthorized.txt |
Learning Objectives
1. Understand that a person who signs commercial paper incurs contract liability.
2. Recognize the two types of such liability: primary and secondary.
3. Know the conditions that must be met before secondary liability attaches.
Two types of liability can attach to those who deal in commercial paper: contract liability and warranty liability. Contract liability is based on a party’s signature on the paper. For contract liability purposes, signing parties are divided into two categories: primary parties and secondary parties.
We discuss here the liability of various parties. You may recall the discussion in Chapter 19 "Nature and Form of Commercial Paper" about accommodation parties. An accommodation party signs a negotiable instrument in order to lend his name to another party to the instrument. The Uniform Commercial Code (UCC) provides that such a person “may sign the instrument as maker, drawer, acceptor, or indorser” and that in whatever capacity the person signs, he will be liable in that capacity.Uniform Commercial Code, Section 3-419.
Liability of Primary Parties
Two parties are primarily liable: the maker of a note and the acceptor of a draft. They are required to pay by the terms of the instrument itself, and their liability is unconditional.
Maker
By signing a promissory note, the maker promises to pay the instrument—that’s the maker’s contract and, of course, the whole point to a note. The obligation is owed to a person entitled to enforce the note or to an indorser that paid the note. Uniform Commercial Code, Section 3-412.
Acceptor
Recall that acceptance is the drawee’s signed engagement to honor a draft as presented. The drawee’s signature on the draft is necessary and sufficient to accept, and if that happens, the drawee as acceptor is primarily liable. The acceptance must be written on the draft by some means—any means is good. The signature is usually accompanied by some wording, such as “accepted,” “good,” “I accept.” When a bank certifies a check, that is the drawee bank’s acceptance, and the bank as acceptor becomes liable to the holder; the drawer and all indorsers prior to the bank’s acceptance are discharged. So the holder—whether a payee or an indorsee—can look only to the bank, not to the drawer, for payment. Uniform Commercial Code, Section 3-414(b). If the drawee varies the terms when accepting the draft, it is liable according to the terms as varied.Uniform Commercial Code, Section 3-413(a)(iii).
Liability of Secondary Parties
Unlike primary liability, secondary liability is conditional, arising only if the primarily liable party fails to pay. The parties for whom these conditions are significant are the drawers and the indorsers. By virtue of UCC Sections 3-414 and 3-415, drawers and indorsers engage to pay the amount of an unaccepted draft to any subsequent holder or indorser who takes it up, again, if (this is the conditional part) the (1) the instrument is dishonored and, in some cases, (2) notice of dishonor is given to the drawer or indorser.
Drawer’s Liability
If Carlos writes (more properly “draws”) a check to his landlord for \$700, Carlos does not expect the landlord to turn around and approach him for the money: Carlos’s bank—the drawee—is supposed to pay from Carlos’s account. But if the bank dishonors the check—most commonly because of insufficient funds to pay it—then Carlos is liable to pay according to the instrument’s terms when he wrote the check or, if it was incomplete when he wrote it, according to its terms when completed (subject to some limitations). Uniform Commercial Code, Section 3-414. Under the pre-1997 UCC, Carlos’s liability was conditioned not only upon dishonor but also upon notice of dishonor; however, under the revised UCC, notice is not required for the drawer to be liable unless the draft has been accepted and the acceptor is not a bank. Most commonly, if a check bounces, the person who wrote it is liable to make it good.
The drawer of a noncheck draft may disclaim her contractual liability on the instrument by drawing “without recourse.”Uniform Commercial Code, Section 3-414(d).
Indorser’s Liability
Under UCC Section 3-415, an indorser promises to pay on the instrument according to its terms if it is dishonored or, if it was incomplete when indorsed, according to its terms when completed. The liability here is conditioned upon the indorser’s receipt of notice of dishonor (with some exceptions, noted in Section 22.2 "Contract Liability of Parties" on contract liability of parties. Indorsers may disclaim contractual liability by indorsing “without recourse.”Uniform Commercial Code, Section 3-415(b).
Conditions Required for Liability
We have alluded to the point that secondary parties do not become liable unless the proper conditions are met—there are conditions precedent to liability (i.e., things have to happen before liability “ripens”).
Conditions for Liability in General
The conditions are slightly different for two classes of instruments. For an unaccepted draft, the drawer’s liability is conditioned on (1) presentment and (2) dishonor. For an accepted draft on a nonbank, or for an indorser, the conditions are (1) presentment, (2) dishonor, and (3) notice of dishonor.
Presentment
Presentment occurs when a person entitled to enforce the instrument (creditor) demands payment from the maker, drawee, or acceptor, or when a person entitled to enforce the instrument (again, the creditor) demands acceptance of a draft from the drawee.Uniform Commercial Code, Section 3-501.
The common-law tort that makes a person who wrongfully takes another’s property liable for that taking is conversion—it’s the civil equivalent of theft. The UCC provides that “the law applicable to conversion of personal property applies to instruments.”Uniform Commercial Code, Section 3-420. Conversion is relevant here because if an instrument is presented for payment or acceptance and the person to whom it is presented refuses to pay, accept, or return it, the instrument is converted. An instrument is also converted if a person pays an instrument on a forged indorsement: a bank that pays a check on a forged indorsement has converted the instrument and is liable to the person whose indorsement was forged. There are various permutations on the theme of conversion; here is one example from the Official Comment:
A check is payable to the order of A. A indorses it to B and puts it into an envelope addressed to B. The envelope is never delivered to B. Rather, Thief steals the envelope, forges B’s indorsement to the check and obtains payment. Because the check was never delivered to B, the indorsee, B has no cause of action for conversion, but A does have such an action. A is the owner of the check. B never obtained rights in the check. If A intended to negotiate the check to B in payment of an obligation, that obligation was not affected by the conduct of Thief. B can enforce that obligation. Thief stole A’s property not B’s. Uniform Commercial Code, Section 3-420, Official Comment 1.
Dishonor
Dishonor generally means failure by the obligor to pay on the instrument when presentment for payment is made (but return of an instrument because it has not been properly indorsed does not constitute dishonor). The UCC at Section 3-502 has (laborious) rules governing what constitutes dishonor and when dishonor occurs for a note, an unaccepted draft, and an unaccepted documentary draft. (A documentary draft is a draft to be presented for acceptance or payment if specified documents, certificates, statements, or the like are to be received by the drawee or other payor before acceptance or payment of the draft.)
Notice of Dishonor
Again, when acceptance or payment is refused after presentment, the instrument is said to be dishonored. The holder has a right of recourse against the drawers and indorsers, but he is usually supposed to give notice of the dishonor. Section 3-503(a) of the UCC requires the holder to give notice to a party before the party can be charged with liability, unless such notice is excused, but the UCC exempts notice in a number of circumstances (Section 3-504, discussed in Section 22.2 "Contract Liability of Parties" on contract liability). The UCC makes giving notice pretty easy: it permits any party who may be compelled to pay the instrument to notify any party who may be liable on it (but each person who is to be charged with liability must actually be notified); notice of dishonor may “be given by any commercially reasonable means including an oral, written, or electronic communication”; and no specific form of notice is required—it is “sufficient if it reasonably identifies the instrument and indicates that the instrument has been dishonored or has not been paid or accepted.”Uniform Commercial Code, Section 3-503(b). Section 3-503(c) sets out time limits when notice of dishonor must be given for collecting banks and for other persons. An oral notice is unwise because it might be difficult to prove. Usually, notice of dishonor is given when the instrument is returned with a stamp (“NSF”—the dreaded “nonsufficient funds”), a ticket, or a memo.
Suppose—you’ll want to graph this out—Ann signs a note payable to Betty, who indorses it to Carl, who in turn indorses it to Darlene. Darlene indorses it to Earl, who presents it to Ann for payment. Ann refuses. Ann is the only primary party, so if Earl is to be paid he must give notice of dishonor to one or more of the secondary parties, in this case, the indorsers. He knows that Darlene is rich, so he notifies only Darlene. He may collect from Darlene but not from the others. If Darlene wishes to be reimbursed, she may notify Betty (the payee) and Carl (a prior indorser). If she fails to notify either of them, she will have no recourse. If she notifies both, she may recover from either. Carl in turn may collect from Betty, because Betty already will have been notified. If Darlene notifies only Carl, then she may collect only from him, but he must notify Betty or he cannot be reimbursed. Suppose Earl notified only Betty. Then Carl and Darlene are discharged. Why? Earl cannot proceed against them because he did not notify them. Betty cannot proceed against them because they indorsed subsequent to her and therefore were not contractually obligated to her. However, if, mistakenly believing that she could collect from either Carl or Darlene, Betty gave each notice within the time allowed to Earl, then he would be entitled to collect from one of them if Betty failed to pay, because they would have received notice. It is not necessary to receive notice from one to whom you are liable; Section 3-503(b) says that notice may be given by any person, so that notice operates for the benefit of all others who have rights against the obligor.
There are some deadlines for giving notice: on an instrument taken for collection, a bank must give notice before midnight on the next banking day following the day on which it receives notice of dishonor; a nonbank must give notice within thirty days after the day it received notice; and in all other situations, the deadline is thirty days after the day dishonor occurred. Uniform Commercial Code, Section 3-503(c).
Waived or Excused Conditions
Presentment and notice of dishonor have been discussed as conditions precedent for imposing liability upon secondarily liable parties (again, drawers and indorsers). But the UCC provides circumstances in which such conditions may be waived or excused.
Presentment Waived or Excused
Under UCC Section 3-504(a), presentment is excused if (1) the creditor cannot with reasonable diligence present the instrument; (2) the maker or acceptor has repudiated the obligation to pay, is dead, or is in insolvency proceedings; (3) no presentment is necessary by the instrument’s terms; (4) the drawer or indorsers waived presentment; (5) the drawer instructed the drawee not to pay or accept; or (6) the drawee was not obligated to the drawer to pay the draft.
Notice of Dishonor Excused
Notice of dishonor is not required if (1) the instrument’s terms do not require it or (2) the debtor waived the notice of dishonor. Moreover, a waiver of presentment is also a waiver of notice of dishonor. Delay in giving the notice is excused, too, if it is caused by circumstances beyond the control of the person giving notice and she exercised reasonable diligence when the cause of delay stopped. Uniform Commercial Code, Section 3-504.
In fact, in real life, presentment and notice of dishonor don’t happen very often, at least as to notes. Going back to presentment for a minute: the UCC provides that the “party to whom presentment is made [the debtor] may require exhibition of the instrument,…reasonable identification of the person demanding payment,…[and] a signed receipt [from the creditor (among other things)]” (Section 3-501). This all makes sense: for example, certainly the prudent contractor paying on a note for his bulldozer wants to make sure the creditor actually still has the note (hasn’t negotiated it to a third party) and is the correct person to pay, and getting a signed receipt when you pay for something is always a good idea. “Presentment” here is listed as a condition of liability, but in fact, most of the time there is no presentment at all:
[I]t’s a fantasy. Every month millions of homeowners make payments on the notes that they signed when they borrowed money to buy their houses. Millions of college graduates similarly make payments on their student loan notes. And millions of drivers and boaters pay down the notes that they signed when they borrowed money to purchase automobiles or vessels. [Probably] none of these borrowers sees the notes that they are paying. There is no “exhibition” of the instruments as section 3-501 [puts it]. There is no showing of identification. In some cases…there is no signing of a receipt for payment. Instead, each month, the borrowers simply mail a check to an address that they have been given. Gregory E. Maggs, “A Complaint about Payment Law Under the U.C.C.: What You See Is Often Not What You Get,” Ohio State Law Journal 68, no. 201, no. 207 (2007), http://ssrn.com/abstract=1029647.
The Official Comment to UCC Section 5-502 says about the same thing:
In the great majority of cases presentment and notice of dishonor are waived with respect to notes. In most cases a formal demand for payment to the maker of the note is not contemplated. Rather, the maker is expected to send payment to the holder of the note on the date or dates on which payment is due. If payment is not made when due, the holder usually makes a demand for payment, but in the normal case in which presentment is waived, demand is irrelevant and the holder can proceed against indorsers when payment is not received.
Key Takeaway
People who sign commercial paper become liable on the instrument by contract: they contract to honor the instrument. There are two types of liability: primary and secondary. The primarily liable parties are makers of notes and drawees of drafts (your bank is the drawee for your check), and their liability is unconditional. The secondary parties are drawers and indorsers. Their liability is conditional: it arises if the instrument has been presented for payment or collection by the primarily liable party, the instrument has been dishonored, and notice of dishonor is provided to the secondarily liable parties. The presentment and notice of dishonor are often unnecessary to enforce contractual liability.
Exercises
1. What parties have primary liability on a negotiable instrument?
2. What parties have secondary liability on a negotiable instrument?
3. Secondary liability is conditional. What are the conditions precedent to liability?
4. What conditions may be waived or excused, and how? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/22%3A_Liability_and_Discharge/22.2%3A_Contract_Liability_of_Parties.txt |
Learning Objectives
1. Understand that independent of contract liability, parties to negotiable instruments incur warranty liability.
2. Know what warranties a person makes when she transfers an instrument.
3. Know what warranties a person makes when he presents an instrument for payment or acceptance.
4. Understand what happens if a bank pays or accepts a check by mistake.
Overview of Warranty Liability
We discussed the contract liability of primary and secondary parties, which applies to those who sign the instrument. Liability arises a second way, too—by warranty. A negotiable instrument is a type of property that is sold and bought, just the way an automobile is, or a toaster. If you buy a car, you generally expect that it will, more or less, work the way cars are supposed to work—that’s the implied warranty of merchantability. Similarly, when an instrument is transferred from A to B for consideration, the transferee (B) expects that the instrument will work the way such instruments are supposed to work. If A transfers to B a promissory note made by Maker, B figures that when the time is right, she can go to Maker and get paid on the note. So A makes some implied warranties to B—transfer warranties. And when B presents the instrument to Maker for payment, Maker assumes that B as the indorsee from A is entitled to payment, that the signatures are genuine, and the like. So B makes some implied warranties to Maker—presentment warranties. Usually, claims of breach of warranty arise in cases involving forged, altered, or stolen instruments, and they serve to allocate the loss to the person in the best position to have avoided the loss, putting it on the person (or bank) who dealt with the wrongdoer. We take up both transfer and presentment warranties.
Transfer Warranties
Transfer warranties are important because—as we’ve seen—contract liability is limited to those who have actually signed the instrument. Of course, secondary liability will provide a holder with sufficient grounds for recovery against a previous indorser who did not qualify his indorsement. But sometimes there is no indorsement, and sometimes the indorsement is qualified. Sometimes, also, the holder fails to make timely presentment or notice of dishonor, thereby discharging a previous indorsee. In such cases, the transferee-holder can still sue a prior party on one or more of the five implied warranties.
A person who receives consideration for transferring an instrument makes the five warranties listed in UCC Section 3-416. The warranty may be sued on by the immediate transferee or, if the transfer was by indorsement, by any subsequent holder who takes the instrument in good faith. The warranties thus run with the instrument. They are as follows:
1. The transferor is entitled to enforce the instrument. The transferor warrants that he is—or would have been if he weren’t transferring it—entitled to enforce the instrument. As UCC Section 3-416, Comment 2, puts it, this “is in effect a warranty that there are no unauthorized or missing indorsements that prevent the transferor from making the transferee a person entitled to enforce the instrument.” Suppose Maker makes a note payable to Payee; Thief steals the note, forges Payee’s indorsement, and sells the note. Buyer is not a holder because he is not “a person in possession of an instrument drawn, issued, or indorsed to him, or to his order, or to bearer, or in blank,” so he is not entitled to enforce it. “‘Person entitled to enforce’ means (i) the holder, (ii) a non-holder in possession of the instrument who has the rights of a holder [because of the shelter rule]” (UCC, Section 3-301). Buyer sells the note to Another Party, who can hold Buyer liable for breach of the warranty: he was not entitled to enforce it.
2. All signatures on the instrument are authentic and authorized. This warranty would be breached, too, in the example just presented.
3. The instrument has not been altered.
4. The instrument is not subject to a defense or claim in recoupment of any party that can be asserted against the warrantor. “Recoupment” means to hold back or deduct part of what is due to another. The Official Comment to UCC Section 3-416 observes, “[T]he transferee does not undertake to buy an instrument that is not enforceable in whole or in part, unless there is a contrary agreement. Even if the transferee takes as a holder in due course who takes free of the defense or claim in recoupment, the warranty gives the transferee the option of proceeding against the transferor rather than litigating with the obligor on the instrument the issue of the holder-in-due-course status of the transferee.”
5. The warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer. The UCC Official Comment here provides the following: “The transferor does not warrant against difficulties of collection, impairment of the credit of the obligor or even insolvency [only knowledge of insolvency]. The transferee is expected to determine such questions before taking the obligation. If insolvency proceedings…have been instituted against the party who is expected to pay and the transferor knows it, the concealment of that fact amounts to a fraud upon the transferee, and the warranty against knowledge of such proceedings is provided accordingly.”Uniform Commercial Code, Section 3-416, Official Comment 4.
Presentment Warranties
A payor paying or accepting an instrument in effect takes the paper from the party who presents it to the payor, and that party has his hand out. In doing so, the presenter makes certain implied promises to the payor, who is about to fork over cash (or an acceptance). The UCC distinguishes between warranties made by one who presents an unaccepted draft for payment and warranties made by one who presents other instruments for payment. The warranties made by the presenter are as follows.Uniform Commercial Code, Section 3-417.
Warranties Made by One Who Presents an Unaccepted Draft
1. The presenter is entitled to enforce the draft or to obtain payment or acceptance. This is “in effect a warranty that there are no unauthorized or missing indorsements.”Uniform Commercial Code, Section 3-417, Comment 2. Suppose Thief steals a check drawn by Drawer to Payee and forges Payee’s signature, then presents it to the bank. If the bank pays it, the bank cannot charge Drawer’s account because it has not followed Drawer’s order in paying to the wrong person (except in the case of an imposter or fictitious payee). It can, though, go back to Thief (fat chance it can find her) on the claim that she breached the warranty of no unauthorized indorsement.
2. There has been no alteration of the instrument. If Thief takes a check and changes the amount from \$100 to \$1,000 and the bank pays it, the bank can recover from Thief \$900, the difference between the amount paid by the bank and the amount Drawer (customer) authorized the bank to pay.Uniform Commercial Code, Sections 3-417(2) and (b). If the drawee accepts the draft, the same rules apply.
3. The presenter has no knowledge that the signature of the drawer is unauthorized. If the presenter doesn’t know Drawer’s signature is forged and the drawee pays out on a forged signature, the drawee bears the loss. (The bank would be liable for paying out over the forged drawer’s signature: that’s why it has the customer’s signature on file.)
These rules apply—again—to warranties made by the presenter to a drawee paying out on an unaccepted draft. The most common situation would be where a person has a check made out to her and she gets it cashed at the drawer’s bank.
Warranties Made by One Who Presents Something Other Than an Unaccepted Draft
In all other cases, there is only one warranty made by the presenter: that he or she is a person entitled to enforce the instrument or obtain payment on it.
This applies to the presentment of accepted drafts, to the presentment of dishonored drafts made to the drawer or an indorser, and to the presentment of notes. For example, Maker makes a note payable to Payee; Payee indorses the note to Indorsee, Indorsee indorses and negotiates the note to Subsequent Party. Subsequent Party presents the note to Maker for payment. The Subsequent Party warrants to Maker that she is entitled to obtain payment. If she is paid and is not entitled to payment, Maker can sue her for breach of that warranty. If the reason she isn’t entitled to payment is because Payee’s signature was forged by Thief, then Maker can go after Thief: the UCC says that “the person obtaining payment [Subsequent Party] and a prior transferor [Thief] warrant to the person making payment in good faith [Maker] that the warrantor [Subsequent Party] is entitled to enforce the instrument.”Uniform Commercial Code, Section 3-417(d). Or, again, Drawer makes the check out to Payee; Payee attempts to cash or deposit the check, but it is dishonored. Payee presents the check to Drawer to make it good: Payee warrants he is entitled to payment on it.
Warranties cannot be disclaimed in the case of checks (because, as UCC Section 3-417, Comment 7, puts it, “it is not appropriate to allow disclaimer of warranties appearing on checks that normally will not be examined by the payor bank”—they’re machine read). But a disclaimer of warranties is permitted as to other instruments, just as disclaimers of warranty are usually OK under general contract law. The reason presentment warranties 2 and 3 don’t apply to makers and drawers (they apply to drawees) is because makers and drawers are going to know their own signatures and the terms of the instruments; indorsers already warranted the wholesomeness of their transfer (transfer warranties), and acceptors should examine the instruments when they accept them.
Payment by Mistake
Sometimes a drawee pays a draft (most familiarly, again, a bank pays a check) or accepts a draft by mistake. The UCC says that if the mistake was in thinking that there was no stop-payment order on it (when there was), or that the drawer’s signature was authorized (when it was not), or that there were sufficient funds in the drawer’s account to pay it (when there were not), “the drawee may recover the amount paid…or in the case of acceptance, may revoke the acceptance.”Uniform Commercial Code, Section 3-418. Except—and it’s a big exception—such a recovery of funds does not apply “against a person who took the instrument in good faith and for value.”Uniform Commercial Code, Section 3-418(c). The drawee in that case would have to go after the forger, the unauthorized signer, or, in the case of insufficient funds, the drawer. Example: Able draws a check to Baker. Baker deposits the check in her bank account, and Able’s bank mistakenly pays it even though Able doesn’t have enough money in his account to cover it. Able’s bank cannot get the money back from Baker: it has to go after Able. To rephrase, in most cases, the remedy of restitution will not be available to a bank that pays or accepts a check because the person receiving payment of the check will have given value for it in good faith.
Key Takeaway
A transferor of a negotiable instrument warrants to the transferee five things: (1) entitled to enforce, (2) authentic and authorized signatures, (3) no alteration, (4) no defenses, and (5) no knowledge of insolvency. If the transfer is by delivery, the warranties run only to the immediate transferee; if by indorsement, to any subsequent good-faith holder. Presenters who obtain payment of an instrument and all prior transferors make three presenter’s warranties: (1) entitled to enforce, (2) no alteration, (3) genuineness of drawer’s signature. These warranties run to any good-faith payor or acceptor. If a person pays or accepts a draft by mistake, he or she can recover the funds paid out unless the payee took the instrument for value and in good faith.
Exercises
1. What does it mean to say that the transferor of a negotiable instrument warrants things to the transferee, and what happens if the warranties are breached? What purpose do the warranties serve?
2. What is a presenter, and to whom does such a person make warranties?
3. Under what circumstances would suing for breach of warranties be useful compared to suing on the contract obligation represented by the instrument?
4. Why are the rules governing mistaken payment not very often useful to a bank? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/22%3A_Liability_and_Discharge/22.3%3A_Warranty_Liability_of_Parties.txt |
Learning Objectives
1. Understand how the obligations represented by commercial paper may be discharged.
Overview
Negotiable instruments eventually die. The obligations they represent are discharged (terminated) in two general ways: (1) according to the rules stated in Section 3-601 of the Uniform Commercial Code (UCC) or (2) by an act or agreement that would discharge an obligation to pay money under a simple contract (e.g., declaring bankruptcy).
Discharge under the Uniform Commercial Code
The UCC provides a number of ways by which an obligor on an instrument is discharged from liability, but notwithstanding these several ways, under Section 3-601, no discharge of any party provided by the rules presented in this section operates against a subsequent holder in due course unless she has notice when she takes the instrument.
Discharge by Payment
A person primarily liable discharges her liability on an instrument to the extent of payment by paying or otherwise satisfying the holder, and the discharge is good even if the payor knows that another has claim to the instrument. However, discharge does not operate if the payment is made in bad faith to one who unlawfully obtained the instrument (and UCC Section 3-602(b) lists two other exceptions).
Discharge by Tender
A person who tenders full payment to a holder on or after the date due discharges any subsequent liability to pay interest, costs, and attorneys’ fees (but not liability for the face amount of the instrument). If the holder refuses to accept the tender, any party who would have had a right of recourse against the party making the tender is discharged. Mario makes a note payable to Carol, who indorses it to Ed. On the date the payment is due, Mario (the maker) tenders payment to Ed, who refuses to accept the payment; he would rather collect from Carol. Carol is discharged: had she been forced to pay as indorser in the event of Mario’s refusal, she could have looked to him for recourse. Since Mario did tender, Ed can no longer look to Carol for payment. Uniform Commercial Code, Section 3-603(b).
Discharge by Cancellation and Renunciation
The holder may discharge any party, even without consideration, by marking the face of the instrument or the indorsement in an unequivocal way, as, for example, by intentionally canceling the instrument or the signature by destruction or mutilation or by striking out the party’s signature. The holder may also renounce his rights by delivering a signed writing to that effect or by surrendering the instrument itself. Uniform Commercial Code, Section 3-604.
Discharge by Material and Fraudulent Alteration
Under UCC Section 3-407, if a holder materially and fraudulently alters an instrument, any party whose contract is affected by the change is discharged. A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith, and without notice of the alteration, may enforce rights with respect to the instrument according to its original terms or, if the incomplete instrument was altered by unauthorized completion, according to its terms as completed.
• Example 1: Marcus makes a note for \$100 payable to Pauline. Pauline fraudulently raises the amount to \$1,000 without Marcus’s negligence and negotiates it to Ned, who qualifies as a holder in due course (HDC). Marcus owes Ned \$100.
• Example 2: Charlene writes a check payable to Lumber Yard and gives it to Contractor to buy material for a deck replacement. Contractor fills it in for \$1,200: \$1,000 for the decking and \$200 for his own unauthorized purposes. Lumber Yard, if innocent of any wrongdoing, could enforce the check for \$1,200, and Charlene must go after Contractor for the \$200.
Discharge by Certification
As we have noted, where a drawee certifies a draft for a holder, the drawer and all prior indorsers are discharged.
Discharge by Acceptance Varying a Draft
If the holder assents to an acceptance varying the terms of a draft, the obligation of the drawer and any indorsers who do not expressly assent to the acceptance is discharged. Uniform Commercial Code, Section 3-410.
Discharge of Indorsers and Accommodation Parties
The liability of indorsers and accommodation parties is discharged under the following three circumstances. Uniform Commercial Code, Section 3-605.
Extension of Due Date
If the holder agrees to an extension of the due date of the obligation of the obligor, the extension discharges an indorser or accommodation party having a right of recourse against the obligor to the extent the indorser or accommodation party proves that the extension caused her loss with respect to the right of recourse.
Material Modification of Obligation
If the holder agrees to a material modification of the obligor’s obligation, other than an extension of the due date, the modification discharges the obligation of an indorser or accommodation party having a right of recourse against the obligor to the extent the modification causes her loss with respect to the right of recourse.
Impairment of Collateral
If the obligor’s duty to pay is secured by an interest in collateral and the holder impairs the value of the interest in collateral, the obligation of an indorser or accommodation party having a right of recourse against the obligor is discharged to the extent of the impairment.
The following explanatory paragraph from UCC Section 3-605, Official Comment 1, may be helpful:
Bank lends \$10,000 to Borrower who signs a note under which she (in suretyship law, the “Principal Debtor”) agrees to pay Bank on a date stated. But Bank insists that an accommodation party also become liable to pay the note (by signing it as a co-maker or by indorsing the note). In suretyship law, the accommodation party is a “Surety.” Then Bank agrees to a modification of the rights and obligations between it and Principal Debtor, such as agreeing that she may pay the note at some date after the due date, or that she may discharge her \$10,000 obligation to pay the note by paying Bank \$3,000, or the Bank releases collateral she gave it to secure the note. Surety is discharged if changes like this are made by Bank (the creditor) without Surety’s consent to the extent Surety suffers loss as a result. Section 3-605 is concerned with this kind of problem with Principal Debtor and Surety. But it has a wider scope: it also applies to indorsers who are not accommodation parties. Unless an indorser signs without recourse, the indorser’s liability under section 3-415(a) is that of a surety. If Bank in our hypothetical case indorsed the note and transferred it to Second Bank, Bank has rights given to an indorser under section 3-605 if it is Second Bank that modifies rights and obligations of Borrower.
Discharge by Reacquisition
Suppose a prior party reacquires the instrument. He may—but does not automatically—cancel any indorsement unnecessary to his title and may also reissue or further negotiate the instrument. Any intervening party is thereby discharged from liability to the reacquiring party or to any subsequent holder not in due course. If an intervening party’s indorsement is cancelled, she is not liable even to an HDC. Uniform Commercial Code, Section 3-207.
Discharge by Unexcused Delay in Presentment or Notice of Dishonor
If notice of dishonor is not excused under UCC Section 3-504, failure to give it discharges drawers and indorsers.
Key Takeaway
The potential liabilities arising from commercial paper are discharged in several ways. Anything that would discharge a debt under common contract law will do so. More specifically as to commercial paper, of course, payment discharges the obligation. Other methods include tender of payment, cancellation or renunciation, material and fraudulent alteration, certification, acceptance varying a draft, reacquisition, and—in some cases—unexcused delay in giving notice of presentment or dishonor. Indorsers and accommodation parties’ liability may be discharged by the same means that a surety’s liability is discharged, to the extent that alterations in the agreement between the creditor and the holder would be defenses to a surety because right of recourse is impaired to the surety.
Exercises
1. What is the most common way that obligations represented by commercial paper are discharged?
2. Parents loan Daughter \$6,000 to attend college, and she gives them a promissory note in return. At her graduation party, Parents ceremoniously tear up the note. Is Daughter’s obligation terminated?
3. Juan signs Roberta’s note to Creditor as an accommodation party, agreeing to serve in that capacity for two years. At the end of that term, Roberta has not paid Creditor, who—without Juan’s knowledge—gives Roberta an extra six months to pay. She fails to do so. Does Creditor still have recourse against Juan? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/22%3A_Liability_and_Discharge/22.4%3A_Discharge.txt |
Breach of Presentment Warranties and Conduct Precluding Complaint about Such Breach
Bank of Nichols Hills v. Bank of Oklahoma
196 P.3d 984 (Okla. Civ. App. 2008)
Gabbard, J.
Plaintiff, Bank of Nichols Hills (BNH), appeals a trial court judgment for Defendant, Bank of Oklahoma (BOK), regarding payment of a forged check. The primary issue on appeal is whether BOK presented sufficient proof to support the trial court’s finding that the [UCC] § 3-406 preclusion defense applied. We find that it did, and affirm.
Facts
Michael and Stacy Russell owned a mobile home in Harrah, Oklahoma. The home was insured by Oklahoma Farm Bureau Mutual Insurance Company (Farm Bureau). The insurance policy provided that in case of loss, Farm Bureau “will pay you unless another payee is named on the Declarations page,” that “Loss shall be payable to any mortgagee named in the Declarations,” and that one of Farm Bureau’s duties was to “protect the mortgagee’s interests in the insured building.” The Declarations page of the policy listed Conseco Finance as the mortgagee. Conseco had a mortgage security interest in the home.
In August 2002, a fire completely destroyed the mobile home. The Russells submitted an insurance claim to Farm Bureau. Farm Bureau then negotiated a \$69,000 settlement with the Russells, issued them a check in this amount payable to them and Conseco jointly, and mailed the check to the Russells. Neither the Russells nor Farm Bureau notified Conseco of the loss, the settlement, or the mailing of the check.
The check was drawn on Farm Bureau’s account at BNH. The Russells deposited the check into their account at BOK. The check contains an endorsement by both Russells, and a rubber stamp endorsement for Conseco followed by a signature of a Donna Marlatt and a phone number. It is undisputed that Conseco’s endorsement was forged. Upon receipt, BOK presented the check to BNH. BNH paid the \$69,000 check and notified Farm Bureau that the check had been paid from its account.
About a year later, Conseco learned about the fire and the insurance payoff. Conseco notified Farm Bureau that it was owed a mortgage balance of more than \$50,000. Farm Bureau paid off the balance and notified BNH of the forgery. BNH reimbursed Farm Bureau the amount paid to Conseco. BNH then sued BOK.
Both banks relied on the Uniform Commercial Code. BNH asserted that under § 4-208, BOK had warranted that all the indorsements on the check were genuine. BOK asserted an affirmative defense under § 3-406, alleging that Farm Bureau’s own negligence contributed to the forgery. After a non-jury trial, the court granted judgment to BOK, finding as follows:
• Conseco’s endorsement was a forgery, accomplished by the Russells;
• Farm Bureau was negligent in the manner and method it used to process the claim and pay the settlement without providing any notice or opportunity for involvement in the process to Conseco;
• Farm Bureau’s negligence substantially contributed to the Russells’ conduct in forging Conseco’s endorsement; and
• BOK proved its affirmative defense under § 3-406 by the greater weight of the evidence.
From this judgment, BNH appeals.
Analysis
It cannot be disputed that BOK breached its presentment warranty to BNH under § 4-208.Section 4-208 provides as follows: “(a) If an unaccepted draft is presented [in this case, by BOK] to the drawee [BNH] for payment or acceptance and the drawee pays or accepts the draft,(i) the person obtaining payment or acceptance, at the time of presentment, and(ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith, that:(1) The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;(2) The draft has not been altered; and(3) The warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized.(b) A drawee making payment may recover from a warrantor damages for breach of warranty.…(c) If a drawee asserts a claim for breach of warranty under subsection (a) of this section based on an unauthorized indorsement of the draft or an alteration of the draft, the warrantor may defend by proving that…the drawer [here, Farm Bureau] is precluded under Section 3-406 or 4-406 of this title from asserting against the drawee the unauthorized indorsement or alteration.” Thus the primary issue raised is whether BOK established a preclusion defense under 3-406 [that BNH is precluded from complaining about BOK’s breach of presentment warranty because of its own negligence].(a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection. BNH asserts that the evidence fails to establish this defense because the mailing of its check to and receipt by the insured “is at most an event of opportunity and has nothing to do with the actual forgery.”
Section 3-406 requires less stringent proof than the “direct and proximate cause” test for general negligence. The parties do not address Section 3-406(b), which states that the person asserting preclusion may be held partially liable under comparative negligence principles for failing to exercise ordinary care in paying or taking the check. They also do not address any possible negligence by either bank in accepting the forged check without confirming the legitimacy of Conseco’s indorsement. Conduct is a contributing cause of an alteration or forgery if it is a substantial factor in bringing it about, or makes it “easier for the wrongdoer to commit his wrong.” The UCC Comment to § 3-406 notes that the term has the meaning as used by the Pennsylvania court in Thompson [Citation].
In Thompson, an independent logger named Albers obtained blank weighing slips, filled them out to show fictitious deliveries of logs for local timber owners, delivered the slips to the company, accepted checks made payable to the timber owners, forged the owners’ signatures, and cashed the checks at the bank. When the company discovered the scheme, it sued the bank and the bank raised § 3-406 as a defense. The court specifically found that the company’s negligence did not have to be the direct and proximate cause of the bank’s acceptance of the forged checks. Instead, the defense applied because the company left blank logging slips readily accessible to haulers, the company had given Albers whole pads of blank slips, the slips were not consecutively numbered, haulers were allowed to deliver both the original and duplicate slips to the company’s office, and the company regularly entrusted the completed checks to the haulers for delivery to the payees without the payees’ consent. The court noted:
While none of these practices, in isolation, might be sufficient to charge the plaintiff [the company] with negligence within the meaning of § 3-406, the company’s course of conduct, viewed in its entirety, is surely sufficient to support the trial judge’s determination that it substantially contributed to the making of the unauthorized signatures.…[T]hat conduct was ‘no different than had the plaintiff simply given Albers a series of checks signed in blank for his unlimited, unrestrictive use.’
The UCC Comment to § 3-406 gives three examples of conduct illustrating the defense. One example involves an employer who leaves a rubber stamp and blank checks accessible to an employee who later commits forgery; another example involves a company that issues a ten dollar check but leaves a blank space after the figure which allows the payee to turn the amount into ten thousand dollars; and the third example involves an insurance company that mails a check to one policyholder whose name is the same as another policyholder who was entitled to the check. In each case, the company’s negligence substantially contributed to the alterations or forgeries by making it easier for the wrongdoer to commit the malfeasance.
In the present case, we find no negligence in Farm Bureau’s delivery of the check to the Russells. There is nothing in the insurance policy that prohibits the insurer from making the loss-payment check jointly payable to the Russells and Conseco. Furthermore, under § 3-420, if a check is payable to more than one payee, delivery to one of the payees is deemed to be delivery to all payees. The authority cited by BOK, in which a check was delivered to one joint payee who then forged the signature of the other, involve cases where the drawer knew or should have known that the wrongdoer was not entitled to be a payee in the first place. See [Citations].
We also find no negligence in Farm Bureau’s violation of its policy provisions requiring the protection of the mortgage holder. Generally, violation of contract provisions and laxity in the conduct of the business affairs of the drawer do not per se establish negligence under this section. See [Citations].
However, evidence was presented that the contract provision merely reflected an accepted and customary commercial standard in the insurance industry. Failure to conform to the reasonable commercial standards of one’s business has been recognized by a number of courts as evidence of negligence. See, e.g., [Citations].
Here, evidence was presented that Farm Bureau did not act in a commercially reasonable manner or in accordance with reasonable commercial standards of its business when it issued the loss check to the insured without notice to the mortgagee. BOK’s expert testified that it is standard practice in the industry to notify the lender of a loss this size, in order to avoid exactly the result that occurred here. Mortgagees often have a greater financial stake in an insurance policy than do the mortgagors. That was clearly true in this case. While there was opinion testimony to the contrary, the trial court was entitled to conclude that Farm Bureau did not act in a commercially reasonably manner and that this failure was negligence which substantially contributed to the forgery, as contemplated by § 3-406.
We find the trial court’s judgment supported by the law and competent evidence. Accordingly, the trial court’s decision is affirmed. Affirmed.
case questions
1. How did BOK breach its presentment warranty to BNH?
2. What part of the UCC did BOK point to as why it should not be liable for that breach?
3. In what way was Farm Bureau Mutual Insurance Co. negligent in this case, and what was the consequence?
Presentment, Acceptance, Dishonor, and Warranties
Messing v. Bank of America
821 A.2d 22 (Md. 2003)
At some point in time prior to 3 August 2000, Petitioner, as a holder, came into possession of a check in the amount of Nine Hundred Seventy-Six Dollars (\$976.00) (the check) from Toyson J. Burruss, the drawer, doing business as Prestige Auto Detail Center. Instead of depositing the check into his account at his own bank, Petitioner elected to present the check for payment at a branch of Mr. Burruss’ bank, Bank of America, the drawee. Petitioner’s choice could be viewed as an attempt at risk shifting. Petitioner, an attorney, may have known that he could have suffered a fee charged by his own bank if he deposited a check into his own account and then the bank on which it was drawn returned it for insufficient funds, forged endorsement, alteration, or the like. Petitioner’s action, viewed against that backdrop, would operate as a risk-shifting strategy, electing to avoid the risk of a returned-check fee by presenting in person the check for acceptance at the drawee bank. On 3 August 2000, Petitioner approached a teller at Bank of America…in Baltimore City and asked to cash the check. The teller, by use of a computer, confirmed the availability of funds on deposit, and placed the check into the computer’s printer slot. The computer stamped certain data on the back of the check, including the time, date, amount of the check, account number, and teller number. The computer also effected a hold on the amount of \$976.00 in the customer’s account. The teller gave the check back to the Petitioner, who endorsed it. The teller then asked for Petitioner’s identification. Petitioner presented his driver’s license and a major credit card. The teller took the indorsed check from Petitioner and manually inscribed the driver’s license information and certain credit card information on the back of the check.
At some point during the transaction, the teller counted out \$976.00 in cash from her drawer in anticipation of completing the transaction. She asked if the Petitioner was a customer of Bank of America. The Petitioner stated that he was not. The teller returned the check to Petitioner and requested, consistent with bank policy when cashing checks for non-customers, that Petitioner place his thumbprint on the check. [The thumbprint identification program was designed by various banking and federal agencies to reduce check fraud.] Petitioner refused and the teller informed him that she would be unable to complete the transaction without his thumbprint.
…Petitioner presented the check to the branch manager and demanded that the check be cashed notwithstanding Petitioner’s refusal to place his thumbprint on the check. The branch manager examined the check and returned it to the Petitioner, informing him that, because Petitioner was a non-customer, Bank of America would not cash the check without Petitioner’s thumbprint on the instrument.…Petitioner left the bank with the check in his possession.…
Rather than take the check to his own bank and deposit it there, or returning it to Burruss, the drawer, as dishonored and demanding payment, Petitioner,…[sued] Bank of America (the Bank)…Petitioner claimed that the Bank had violated the Maryland Uniform Commercial Code (UCC) and had violated his personal privacy when the teller asked Petitioner to place an “inkless” thumbprint on the face of the check at issue.…
…[T]he Circuit Court heard oral arguments…, entered summary judgment in favor of the Bank, dismissing the Complaint with prejudice. [The special appeals court affirmed. The Court of Appeals—this court—accepted the appeal.]
[Duty of Bank on Presentment and Acceptance]
Petitioner argues that he correctly made “presentment” of the check to the Bank pursuant to § 3-111 and § 3-501(a), and demands that, as the person named on the instrument and thus entitled to enforce the check, the drawee Bank pay him.…In a continuation, Petitioner contends that the teller, by placing the check in the slot of her computer, and the computer then printing certain information on the back of the check, accepted the check as defined by § 3-409(a).…Thus, according to Petitioner, because the Bank’s computer printed information on the back of the check, under § 3-401(b) the Bank “signed” the check, said “signature” being sufficient to constitute acceptance under § 3-409(a).
Petitioner’s remaining arguments line up like so many dominos. According to Petitioner, having established that under his reading of § 3-409(a) the Bank accepted the check, Petitioner advances that the Bank is obliged to pay him, pursuant to § 3-413(a)…Petitioner extends his line of reasoning by arguing that the actions of the Bank amounted to a conversion under § 3-420,…Petitioner argues that because the Bank accepted the check, an act which, according to Petitioner, discharged the drawer, he no longer had enforceable rights in the check and only had a right to the proceeds. Petitioner’s position is that the Bank exercised unauthorized dominion and control over the proceeds of the check to the complete exclusion of the Petitioner after the Bank accepted the check and refused to distribute the proceeds, counted out by the teller, to him.
We turn to the Bank’s obligations, or lack thereof, with regard to the presentment of a check by someone not its customer. Bank argues, correctly, that it had no duty to the Petitioner, a non-customer and a stranger to the Bank, and that nothing in the Code allows Petitioner to force Bank of America to act as a depository bank…
Absent a special relationship, a non-customer has no claim against a bank for refusing to honor a presented check. [Citations] This is made clear by § 3-408, which states:
A check or other draft does not of itself operate as an assignment of funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it.
Once a bank accepts a check, under § 3-409, it is obliged to pay on the check under § 3-413. Thus, the relevant question in terms of any rights Petitioner had against the Bank [regarding presentment] turns not on the reasonableness of the thumbprint identification, but rather upon whether the Bank accepted the check when presented as defined by § 3-409. As will be seen infra [below] the question of the thumbprint identification is relevant only to the issue of whether the Bank’s refusal to pay the instrument constituted dishonor under § 3-502, a determination which has no impact in terms of any duty allegedly owed by the Bank to the Petitioner.
The statute clearly states that acceptance becomes effective when the presenter is notified of that fact. The facts demonstrate that at no time did the teller notify Petitioner that the Bank would pay on the check. Rather, the facts show that:
[T]he check was given back to [Petitioner] by the teller so that he could put his thumbprint signature on it, not to notify or give him rights on the purported acceptance. After appellant declined to put his thumbprint signature on the check, he was informed by both the teller and the branch manager that it was against bank policy to honor the check without a thumbprint signature. Indignant, [Petitioner] walked out of the bank with the check.
As the intermediate appellate court correctly pointed out, the negotiation of the check is in the nature of a contract, and there can be no agreement until notice of acceptance is received. As a result, there was never acceptance as defined by § 3-409(a), and thus the Bank, pursuant to § 3-408 never was obligated to pay the check under § 3-413(a). Thus, the answer to Petitioner’s second question [Did the lower court err in finding the Bank did not accept the…check at issue, as “acceptance” is defined in UCC Section 3-409?] is “no.”
“Conversion” under § 3-420.
Because it never accepted the check, Bank of America argues that the intermediate appellate court also correctly concluded that the Bank did not convert the check or its proceeds under § 3-420. Again, we must agree. The Court of Special Appeals stated:
“Conversion,” we have held, “requires not merely temporary interference with property rights, but the exercise of unauthorized dominion and control to the complete exclusion of the rightful possessor.” [Citation] At no time did [Respondent] exercise “unauthorized dominion and control [over the check] to the complete exclusion of the rightful possessor,” [Petitioner].
[Petitioner] voluntarily gave the check to [Respondent’s] teller. When [Petitioner] indicated to the teller that he was not an account holder, she gave the check back to him for a thumbprint signature in accordance with bank policy. After being informed by both [Respondent’s] teller and branch manager that it was [Respondent’s] policy not to cash a non-account holder’s check without a thumbprint signature, [Petitioner] left the bank with the check in hand.
Because [Petitioner] gave the check to the teller, [Respondent’s] possession of that check was anything but “unauthorized,” and having returned the check, within minutes of its receipt, to [Petitioner] for his thumbprint signature, [Respondent] never exercised “dominion and control [over it] to the complete exclusion of the rightful possessor,” [Petitioner]. In short, there was no conversion.
D. “Reasonable Identification” under § 3-501(b)(2)(ii) and “Dishonor” under § 3-502
We now turn to the issue of whether the Bank’s refusal to accept the check as presented constituted dishonor under § 3-501 and § 3-502 as Petitioner contends. Petitioner’s argument that Bank of America dishonored the check under § 3-502(d) fails because that section applies to dishonor of an accepted draft. We have determined, supra, [above] that Bank of America never accepted the draft. Nevertheless, the question remains as to whether Bank of America dishonored the draft under § 3-502(b)…
(2) Upon demand of the person to whom presentment is made, the person making presentment must (i) exhibit the instrument, (ii) give reasonable identification…
(3) Without dishonoring the instrument, the party to whom presentment is made may (i) return the instrument for lack of a necessary indorsement, or (ii) refuse payment or acceptance for failure of the presentment to comply with the terms of the instrument, an agreement of the parties, or other applicable law or rule.
The question is whether requiring a thumbprint constitutes a request for “reasonable identification” under § 3-501(b)(2)(ii). If it is “reasonable,” then under § 3-501(b)(3)(ii) the refusal of the Bank to accept the check from Petitioner did not constitute dishonor. If, however, requiring a thumbprint is not “reasonable” under § 3-501(b)(2)(ii), then the refusal to accept the check may constitute dishonor under § 3-502(b)(2). The issue of dishonor is arguably relevant because Petitioner has no cause of action against any party, including the drawer, until the check is dishonored.
Respondent Bank of America argues that its relationship with its customer is contractual, [Citations] and that in this case, its contract with its customer, the drawer, authorizes the Bank’s use of the Thumbprint Signature Program as a reasonable form of identification.
According to Respondent, this contractual agreement allowed it to refuse to accept the check, without dishonoring it pursuant to § 3-501(b)(3)(ii), because the Bank’s refusal was based upon the presentment failing to comply with “an agreement of the parties.” The intermediate appellate court agreed. We, however, do not.
…Bank and its customer cannot through their contract define the meaning of the term “reasonable” and impose it upon parties who are not in privity with that contract. Whether requiring a thumbprint constitutes “reasonable identification” within the meaning of § 3-501(b)(2)(ii) is therefore a broader policy consideration, and not, as argued in this case, simply a matter of contract. We reiterate that the contract does not apply to Petitioner and, similarly, does not give him a cause of action against the Bank for refusing to accept the check. This also means that the Bank cannot rely on the contract as a defense against the Petitioner, on the facts presented here, to say that it did not dishonor the check.
Petitioner, as noted, argues that requiring a thumbprint violates his privacy, and further argues that a thumbprint is not a reasonable form of identification because it does not prove contemporaneously the identity of an over the counter presenter at the time presentment is made. According to Petitioner, the purpose of requiring “reasonable identification” is to allow the drawee bank to determine that the presenter is the proper person to be paid on the instrument. Because a thumbprint does not provide that information at the time presentment and payment are made, Petitioner argues that a thumbprint cannot be read to fall within the meaning of “reasonable identification” for the purposes of § 3-501(b)(2)(ii).
Bank of America argues that the requirement of a thumbprint has been upheld, in other non-criminal circumstances, not to be an invasion of privacy, and is a reasonable and necessary industry response to the growing problem of check fraud. The intermediate appellate court agreed, pointing out that the form of identification was not defined by the statute, but that the Code itself recognized a thumbprint as a form of signature, § 1-201(39), and observing that requiring thumbprint or fingerprint identification has been found to be reasonable and not to violate privacy rights in a number of non-criminal contexts.…
We agree with [Petitioner] that a thumbprint cannot be used, in most instances, to confirm the identity of a non-account checkholder at the time that the check is presented for cashing, as his or her thumbprint is usually not on file with the drawee at that time. We disagree, however, with [Petitioner’s] conclusion that a thumbprint signature is therefore not “reasonable identification” for purposes of § 3-501(b)(2).
Nowhere does the language of § 3-501(b)(2) suggest that “reasonable identification” is limited to information [Bank] can authenticate at the time presentment is made. Rather, all that is required is that the “person making presentment must…give reasonable identification.” § 3-501(b)(2). While providing a thumbprint signature does not necessarily confirm identification of the checkholder at presentment—unless of course the drawee bank has a duplicate thumbprint signature on file—it does assist in the identification of the checkholder should the check later prove to be bad. It therefore serves as a powerful deterrent to those who might otherwise attempt to pass a bad check. That one method provides identification at the time of presentment and the other identification after the check may have been honored, does not prevent the latter from being “reasonable identification” for purposes of § 3-501(b)(2) [Citation].
[So held the lower courts.] We agree, and find this conclusion to be compelled, in fact, by our State’s Commercial Law Article.
The reason has to do with warranties. The transfer of a check for consideration creates both transfer warranties (§ 3-416(a) and (c)) and presentment warranties (§ 3-417(a) and (e)) which cannot be disclaimed. The warranties include, for example, that the payee is entitled to enforce the instrument and that there are no alterations on the check. The risk to banks is that these contractual warranties may be breached, exposing the accepting bank to a loss because the bank paid over the counter on an item which was not properly payable.…In such an event, the bank would then incur the expense to find the presenter, to demand repayment, and legal expenses to pursue the presenter for breach of his warranties.
In short, when a bank cashes a check over the counter, it assumes the risk that it may suffer losses for counterfeit documents, forged endorsements, or forged or altered checks. Nothing in the Commercial Law Article forces a bank to assume such risks. See [Citations] To the extent that banks are willing to cash checks over the counter, with reasonable identification, such willingness expands and facilitates the commercial activities within the State.…
Because the reduction of risk promotes the expansion of commercial practices, we… conclude that a bank’s requirement of a thumbprint placed upon a check presented over the counter by a non-customer is reasonable. [Citations] As the intermediate appellate court well documented, the Thumbprint Program is part of an industry wide response to the growing threat of check fraud. Prohibiting banks from taking reasonable steps to protect themselves from losses could result in banks refusing to cash checks of non-customers presented over the counter at all, a result which would be counter to the direction of § 1-102(2)(b).
As a result of this conclusion, Bank of America in the present case did not dishonor the check when it refused to accept it over the counter. Under § 3-501(b)(3)(ii), Bank of America “refused payment or acceptance for failure of the presentment to comply with…other applicable law or rule.” The rule not complied with by the Petitioner-presenter was § 3-502(b)(2)(ii), in that he refused to give what we have determined to be reasonable identification. Therefore, there was no dishonor of the check by Bank of America’s refusal to accept it. The answer to Petitioner’s third question is therefore “no,” [Did Bank dishonor the check?]…
Judgment of the court of special appeals affirmed; costs to be paid by petitioner.
Eldridge, J., concurring in part and dissenting in part.
I cannot agree with the majority’s holding that, after the petitioner presented his driver’s license and a major credit card, it was “reasonable” to require the petitioner’s thumbprint as identification.
Today, honest citizens attempting to cope in this world are constantly being required to show or give drivers’ licenses, photo identification cards, social security numbers, the last four digits of social security numbers, mothers’ “maiden names,” 16 digit account numbers, etc. Now, the majority takes the position that it is “reasonable” for banks and other establishments to require, in addition, thumbprints and fingerprints. Enough is enough. The most reasonable thing in this case was petitioner’s “irritation with the Bank of America’s Thumbprint Signature Program.” Chief Judge Bell has authorized me to state that he joins this concurring and dissenting opinion.
case questions
1. Petitioner claimed (a) he made a valid presentment, (b) Bank accepted the instrument, (c) Bank dishonored the acceptance, and (d) Bank converted the money and owes it to him. What did the court say about each assertion?
2. There was no dispute that there was enough money in the drawer’s account to pay the check, so why didn’t Petitioner just deposit it in his own account (then he wouldn’t have been required to give a thumbprint)?
3. What part of UCC Article 3 became relevant to the question of whether it was reasonable for Bank to demand Petitioner’s thumbprint?
4. How do the presentment and transfer warranties figure into the majority opinion?
5. What did the dissenting judges find fault with in the majority’s opinion? What result would have obtained if the minority side had prevailed?
Breach of Transfer Warranties and the Bank’s Obligation to Act in Good Faith
PNC Bank v. Robert L. Martin
2010 WL 3271725, U.S. Dist. Ct. (Ky. 2010)
Coffman, J.
This matter is before the court on plaintiff PNC Bank’s motion for summary judgment. The court will grant the motion as to liability and damages, because the defendant, Robert L. Martin, fails to raise any genuine issue of material fact, and the evidence establishes that Martin breached his transfer warranties and account agreement with PNC.…
I. Background
Martin, an attorney, received an e-mail message on August 16, 2008, from a person who called himself Roman Hidotashi. Hidotashi claimed that he was a representative of Chipang Lee Song Manufacturing Company and needed to hire a lawyer to collect millions of dollars from past-due accounts of North American customers. Martin agreed to represent the company.
On September 8, 2008, Martin received a check for \$290,986.15 from a purported Chipang Lee Song Manufacturing Company customer, even though Martin had yet to commence any collections work. The check, which was drawn on First Century Bank USA, arrived in an envelope with a Canadian postmark and no return address. The check was accompanied by an undated transmittal letter. Martin endorsed the check and deposited it in his client trust account at PNC. Martin then e-mailed Hidotashi, reported that he had deposited the check, and stated that he would await further instructions.
Hidotashi responded to Martin’s e-mail message on September 9, 2008. Hidotashi stated that he had an “immediate need for funds” and instructed Martin to wire \$130,600 to a bank account in Tokyo. Martin went to PNC’s main office in Louisville the next morning and met with representative Craig Friedman. According to Martin, Friedman advised that the check Martin deposited had cleared. Martin instructed Friedman to wire \$130,600 to the Tokyo account.
Martin returned to PNC later the same day. According to Martin, Friedman accessed Martin’s account information and said, “I don’t understand this. The check was cleared yesterday. Let me go find out what is going on.” Friedman returned with PNC vice president and branch manager Sherry Jennewein, who informed Martin that the check was fraudulent. According to Martin, Jennewein told him that she wished he had met with her instead of Friedman because she never would have authorized the wire transfer.
First Century Bank, on which the check was drawn, dishonored the check. PNC charged Martin’s account for \$290,986.15. PNC, however, could not recover the \$130,600 the bank had wired to the Tokyo account. Martin’s account, as a result, was left overdrawn by \$124,313.01.
PNC commenced this action. PNC asserts one count for Martin’s alleged breach of the transfer warranties provided in Kentucky’s version of the Uniform Commercial Code and one count for breach of Martin’s account agreement. PNC moves for summary judgment on both counts.
A. Breach of transfer warranties
PNC is entitled to summary judgment on its breach-of-transfer-warranties claim because the undisputed facts establish Martin’s liability.
Transfer warranties trigger when a person transfers an instrument for consideration. UCC § 3-416(a)). A transfer, for purposes of the statute, occurs when an instrument is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. § 3-203(a). Martin transferred an instrument to PNC when he endorsed the check and deposited it in his account, thereby granting PNC the right to enforce the check. [Citation] Consideration, for purposes of the statute, need only be enough to support a simple contract. [Citation] Martin received consideration from PNC because PNC made the funds provisionally available before confirming whether First Century Bank would honor the check.
As a warrantor, Martin made a number of representations to PNC, including representations that he was entitled to enforce the check and that all signatures on the check were authentic and authorized. [UCC] § 3-416(a). Martin breached his warranties twofold. First, he was not entitled to enforce the check because the check was a counterfeit and, as a result, Martin had nothing to enforce. Second, the drawer’s signature was not authentic because the check was a counterfeit.
Martin does not dispute these facts. Instead, Martin argues, summary judgment is inappropriate because Friedman and Jennewein admitted that PNC made a mistake when Friedman said that he thought the check cleared and Jennewein said that she never would have authorized the wire transfer. Friedman’s and Jennewein’s statements are immaterial facts. The transfer warranties placed the risk of loss on Martin, regardless of whether PNC, Martin, or both of them were at fault. [Citation] Martin, in any event, fails to support Friedman’s and Jennewein’s statements with firsthand deposition testimony or affidavits, so the statements do not qualify as competent evidence. [Citation]
Martin claims that the risk of loss falls on the bank. But the cases Martin cites in support of that proposition suffer from two defects. First, all but one of the cases were decided before the Kentucky General Assembly adopted the Uniform Commercial Code. Martin fails to argue, much less demonstrate, that his cases are good law. Second, Martin’s cases are inapposite even if they are good law. [UCC] § 3-416(a) addresses whether a transferor or transferee bears the risk of loss. Martin’s cases address who bears the risk of loss as between other players: a drawee bank and a collecting agent [Citation]; a drawer and a drawee bank [Citation]; and an execution creditor and drawee bank [Citation—all of these cases are from 1910–1930]. The one modern case that Martin cites is also inapposite because the case involves a drawer and a drawee bank. [Citation]
In sum, the court must grant summary judgment in PNC’s favor on the breach-of-transfer-warranties claim because the parties do not contest any material facts, which establish Martin’s liability.
B. Breach of Contract
PNC is also entitled to summary judgment on its breach-of-contract claim because the undisputed facts establish Martin’s liability.
To support its allegation that a contract existed, PNC filed copies of Martin’s account agreement and Martin’s accompanying signature card. Under the agreement’s terms, Martin agreed to bind himself to the agreement by signing the signature card. Martin does not dispute that the account agreement was a binding contract, and he does not dispute the account agreement’s terms.
Martin’s account agreement authorized PNC to charge Martin’s account for the value of any item returned to PNC unpaid or any item on which PNC did not receive payment. If PNC’s charge-back created an overdraft, Martin was required to pay PNC the amount of the overdraft immediately.
The scam of which Martin was a victim falls squarely within the charge-back provision of the account agreement. The check was returned to PNC unpaid. PNC charged Martin’s account, leaving it with an overdraft. Martin was obliged to pay PNC immediately.
As with the breach-of-transfer-warranties claim, Martin cannot defend against the breach-of-contract claim by arguing that PNC made a mistake. The account agreement authorized PNC to charge back Martin’s account “even if the amount of the item has already been made available to you.” The account agreement, as a result, placed the risk of loss on Martin. Any mistake on PNC’s part was immaterial because PNC always had the right to charge back Martin’s account. [Citation]
C. Martin’s Counterclaims
Martin has asserted counterclaims for violations of various Uniform Commercial Code provisions; negligence and failure to exercise ordinary care; negligent misrepresentation; breach of contract and breach of the implied covenants of good faith and fair dealing; detrimental reliance; conversion; and negligent retention and supervision. Martin argues that “[t]o the extent that either party should be entitled to summary judgment in this case, it would be Martin with respect to his counterclaims against PNC.” Martin, however, has not moved for summary judgment on his counterclaims, and the court does not address them on PNC’s motion.
D. Damages
PNC’s recovery under both theories of liability is contingent on PNC’s demonstrating that it acted in good faith. PNC may recover for breach of the transfer warranties only if it took the check in good faith. § 3-416(b). Moreover, PNC must satisfy the implied covenant of good faith and fair dealing, which Kentucky law incorporates in the account agreement. [Citation] Good faith, under both theories, means honesty in fact and the observance of reasonable commercial standards of fair dealing. That means “contracts impose on the parties thereto a duty to do everything necessary to carry them out.” [Citation]
The undisputed evidence establishes that PNC acted in good faith. PNC accepted deposit of Martin’s check, attempted to present the check for payment at First Century Bank, and charged back Martin’s account when the check was dishonored. Martin cannot claim that PNC lacked good faith and fair dealing when PNC took actions permitted under the contract. [Citation] Although PNC might have had the ability to investigate the authenticity of the check before crediting Martin’s account, PNC bore no such obligation because Martin warranted that the check was authentic. [UCC] § 3-416(a). Friedman’s and Jennewein’s statements do not impute a lack of good faith to PNC, even if Martin could support the statements with competent evidence. The Uniform Commercial Code and the account agreement place the risk of loss on Martin, even if PNC made a mistake.
Martin suggests that an insurance carrier might have already reimbursed PNC for the loss. Martin, however, presents no evidence of reimbursement, which PNC, presumably, would have disclosed in discovery.
PNC, therefore, may recover from Martin the overdraft value of \$124,313.01, which is the loss PNC suffered as a result of Martin’s breach of the transfer warranties and breach of contract. [UCC] § 3-416(b)…
III. Conclusion
For the foregoing reasons, IT IS ORDERED that PNC’s motion for summary judgment is granted…to the extent that…PNC is permitted to recover \$124,313.01 from Martin.…
case questions
1. How did Martin come to have an overdraft of \$124,313.01 in his account?
2. Under what UCC provision did the court hold Martin liable for this amount?
3. The contract liability the court discusses was not incurred by Martin on account of his signature on the check (though he did indorse it); what was the contract liability?
4. If the bank had not taken the check in good faith (honesty in fact and observing reasonable commercial standards), what would the consequence have been, and why?
5. Is a reader really constrained here to say that Mr. Martin got totally scammed, or was his behavior reasonable under the circumstances? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/22%3A_Liability_and_Discharge/22.5%3A_Cases.txt |
summary
As a general rule, one who signs a note as maker or a draft as drawer is personally liable unless he or she signs in a representative capacity and either the instrument or the signature shows that the signing has been made in a representative capacity. Various rules govern the permutations of signatures when an agent and a principal are involved.
The maker of a note and the acceptor of a draft have primary contract liability on the instruments. Secondarily liable are drawers and indorsers. Conditions precedent to secondary liability are presentment, dishonor, and notice of dishonor. Under the proper circumstances, any of these conditions may be waived or excused.
Presentment is a demand for payment made on the maker, acceptor, or drawee, or a demand for acceptance on the drawee. Presentment must be made (1) at the time specified in the instrument unless no time is specified, in which case it must be at the time specified for payment, or (2) within a reasonable time if a sight instrument.
Dishonor occurs when acceptance or payment is refused after presentment, at which time a holder has the right of recourse against secondary parties if he has given proper notice of dishonor.
A seller-transferor of any commercial paper gives five implied warranties, which become valuable to a holder seeking to collect in the event that there has been no indorsement or the indorsement has been qualified. These warranties are (1) good title, (2) genuine signatures, (3) no material alteration, (4) no defenses by other parties to the obligation to pay the transferor, and (5) no knowledge of insolvency of maker, acceptor, or drawer.
A holder on presentment makes certain warranties also: (1) entitled to enforce the instrument, (2) no knowledge that the maker’s or drawer’s signature is unauthorized, and (3) no material alteration.
Among the ways in which the parties may be discharged from their contract to honor the instrument are the following: (1) payment or satisfaction, (2) tender of payment, (3) cancellation and renunciation, (4) impairment of recourse or of collateral, (5) reacquisition, (6) fraudulent and material alteration, (7) certification, (8) acceptance varying a draft, and (9) unexcused delay in presentment or notice of dishonor.
Exercises
1. Howard Corporation has the following instrument, which it purchased in good faith and for value from Luft Manufacturing, Inc.
Figure 22.2
Judith Glen indorsed the instrument on the back in her capacity as president of Luft when it was transferred to Howard on July 15, 2012.
1. Is this a note or a draft?
2. What liability do McHugh and Luft have to Howard? Explain.
2. An otherwise valid negotiable bearer note is signed with the forged signature of Darby. Archer, who believed he knew Darby’s signature, bought the note in good faith from Harding, the forger. Archer transferred the note without indorsement to Barker, in partial payment of a debt. Barker then sold the note to Chase for 80 percent of its face amount and delivered it without indorsement. When Chase presented the note for payment at maturity, Darby refused to honor it, pleading forgery. Chase gave proper notice of dishonor to Barker and to Archer.
1. Can Chase hold Barker liable? Explain.
2. Can Chase hold Archer liable? Explain.
3. Can Chase hold Harding liable? Explain.
3. Marks stole one of Bloom’s checks, already signed by Bloom and made payable to Duval, drawn on United Trust Company. Marks forged Duval’s signature on the back of the check and cashed it at Check Cashing Company, which in turn deposited it with its bank, Town National. Town National proceeded to collect on the check from United. None of the parties was negligent. Who will bear the loss, assuming Marks cannot be found?
4. Robb stole one of Markum’s blank checks, made it payable to himself, and forged Markum’s signature on it. The check was drawn on the Unity Trust Company. Robb cashed the check at the Friendly Check Cashing Company, which in turn deposited it with its bank, the Farmer’s National. Farmer’s National proceeded to collect on the check from Unity. The theft and forgery were quickly discovered by Markum, who promptly notified Unity. None of the parties mentioned was negligent. Who will bear the loss, assuming the amount cannot be recovered from Robb? Explain.
5. Pat stole a check made out to the order of Marks, forged the name of Marks on the back, and made the instrument payable to herself. She then negotiated the check to Harrison for cash by signing her own name on the back of the instrument in Harrison’s presence. Harrison was unaware of any of the facts surrounding the theft or forged indorsement and presented the check for payment. Central County Bank, the drawee bank, paid it. Disregarding Pat, who will bear the loss? Explain.
6. American Music Industries, Inc., owed Disneyland Records over \$340,000. As evidence of the debt, Irv Schwartz, American’s president, issued ten promissory notes, signing them himself. There was no indication they were obligations of the corporation, American Music Industries, Inc., or that Irv Schwartz signed them in a representative capacity, but Mr. Schwartz asserted that Disneyland knew the notes were corporate obligations, not his personally. American paid four of the notes and then defaulted, and Disneyland sued him personally on the notes. He asserted he should be allowed to prove by parol evidence that he was not supposed to be liable. Is he personally liable? Explain. Schwartz v. Disneyland Vista Records, 383 So.2d 1117 (Fla. App. 1980).
7. Alice Able hired Betty Baker as a bookkeeper for her seamstress shop. Baker’s duties included preparing checks for Able to sign and reconciling the monthly bank statements. Baker made out several checks to herself, leaving a large space to the left of the amount written, which Able noticed when she signed the checks. Baker took the signed checks, altered the amount by adding a zero to the right of the original amount, and cashed them at First Bank, the drawee. Able discovered the fraud, Baker was sent to prison, and Able sued First Bank, claiming it was liable for paying out on altered instruments. What is the result?
8. Christina Reynolds borrowed \$16,000 from First Bank to purchase a used Ford automobile. Bank took a note and a secured interest in the car (the car is collateral for the loan). It asked for further security, so Christina got her sister Juanita to sign the note as an accommodation maker. Four months later, Christina notified Bank that she wished to sell the Ford for \$14,000 in order to get a four-wheel drive Jeep, and Bank released its security interest. When Christina failed to complete payment on the note for the Ford, Bank turned to Juanita. What, if anything, does Juanita owe?
self-test questions
1. Drawers and indorsers have
1. primary contract liability
2. secondary liability
3. no liability
4. none of the above
2. Conditions(s) needed to establish secondary liability include
1. presentment
2. dishonor
3. notice of dishonor
4. all of the above
3. A demand for payment made on a maker, acceptor, or drawee is called
1. protest
2. notice
3. presentment
4. certification
4. An example of an implied warranty given by a seller of commercial paper includes a warranty
1. of good title
2. that there are no material alterations
3. that signatures are genuine
4. covering all of the above
5. Under UCC Article 3, discharge may result from
1. cancellation
2. impairment of collateral
3. fraudulent alteration
4. all of the above
Answer
1. 2
2. 4
3. 3
4. 4
5. 4 | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/22%3A_Liability_and_Discharge/22.6%3A_Summary_and_Exercises.txt |
Learning Objectives
After reading this chapter, you should understand the following:
1. Banks’ relationships with their customers for payment or nonpayment of checks;
2. Electronic funds transfers and how the Electronic Fund Transfer Act affects the bank-consumer relationship;
3. What a wholesale funds transfer is and the scope of Article 4A;
4. What letters of credit are and how they are used.
To this point we have examined the general law of commercial paper as found in Article 3 of the UCC. Commercial paper—notwithstanding waves of digital innovation—still passes through bank collection processes by the ton every day, and Article 3 applies to this flow. But there is also a separate article in the UCC, Article 4, “Bank Deposits and Collections.” In case of conflict with Article 3 rules, those of Article 4 govern.
A discussion of government regulation of the financial services industry is beyond the scope of this book. Our focus is narrower: the laws that govern the operations of the banking system with respect to its depositors and customers. Although histories of banking dwell on the relationship between banks and the national government, the banking law that governs the daily operation of checking accounts is state based—Article 4 of the UCC. The enormous increase in noncheck banking has given rise to the Electronic Fund Transfer Act, a federal law.
23: Legal Aspects of Banking
Learning Objectives
1. Understand how checks move, both traditionally and electronically.
2. Know how Article 4 governs the relationship between a bank and its customers.
The Traditional System in General
Once people mostly paid for things with cash: actual bills. That is obviously not very convenient or safe: a lost ten-dollar bill is almost certainly gone, and carrying around large quantities of cash is dangerous (probably only crooks do much of that). Today a person might go for weeks without reaching for a bill (except maybe to get change for coins to put in the parking meter). And while it is indisputable that electronic payment is replacing paper payment, the latter is still very significant. Here is an excerpt from a Federal Reserve Report on the issue:
In 2008, U.S. consumers had more payment instruments to choose from than ever before: four types of paper instruments—cash, check, money order, and travelers checks; three types of payment cards—debit, credit, and prepaid; and two electronic instruments—online banking bill payment (OBBP) and electronic bank account deductions (EBAD) using their bank account numbers. The average consumer had 5.1 of the nine instruments in 2008, and used 4.2 instruments in a typical month. Consumers made 52.9 percent of their monthly payments with a payment card. More consumers now have debit cards than credit cards (80.2 percent versus 78.3 percent), and consumers use debit cards more often than cash, credit cards, or checks individually. However, paper instruments are still popular and account for 36.5 percent of consumer payments. Most consumers have used newer electronic payments at some point, but these only account for 9.7 percent of consumer payments. Security and ease of use are the characteristics of payment instruments that consumers rate as most important. Kevin Foster, et al., The 2008 Survey of Consumer Payment Choice, Federal Reserve Bank of Boston, Public Policy Discussion Paper No. 09-10, p. 2 (April 2010), http://www.bos.frb.org/economic/ppdp/2009/ppdp0910.pdf.
Americans still wrote some thirty billion checks in 2006. Scott Schuh, Overview of the Survey of Consumer Payment Choice (SCPC) Program, Federal Reserve Bank of Boston, p. 5 (May 2010). http://www.bos.frb.org/economic/cprc/presentations/2010/Schuh050610.pdf. You can readily imagine how complex the bank collection process must be to cope with such a flood of paper. Every check written must eventually come back to the bank on which it is drawn, after first having been sent to the landlord, say, to pay rent, then to the landlord’s bank, and from there through a series of intermediate banks and collection centers.
Terminology
To trace the traditional check-collection process, it is necessary to understand the terminology used. The bank upon which a check is written is the payor bank (the drawee bank). The depository bank is the one the payee deposits the check into. Two terms are used to describe the various banks that may handle the check after it is written: collecting banks and intermediary banks. All banks that handle the check—except the payor bank—are collecting banks (including the depository bank); intermediary banks are all the collecting banks except the payor and depository banks. A bank can take on more than one role: Roger in Seattle writes a check on his account at Seattle Bank and mails it to Julia in Los Angeles in payment for merchandise; Julia deposits it in her account at Bank of L.A. Bank of L.A. is a depository bank and a collecting bank. Any other bank through which the check travels (except the two banks already mentioned) is an intermediary bank.
Collection Process between Customers of the Same Bank
If the depository bank is also the payor bank (about 30% of all checks), the check is called an “on-us” item and UCC 4-215(e)(2) provides that—if the check is not dishonored—it is available by the payee “at the opening of the bank’s second banking day following receipt of the item.” Roger writes a check to Matthew, both of whom have accounts at Seattle Bank; Matthew deposits the check on Monday. On Wednesday the check is good for Matthew (he may have been given “provisional credit” before then, as discussed below, the bank could subtract the money from his account if Roger didn’t have enough to cover the check).
Collection Process between Customers of Different Banks
Roger in Seattle writes a check on Seattle Bank payable to Julia in L.A. Julia deposits it in her account at L.A. Bank, the depository bank. L.A. Bank must somehow present the check to Seattle Bank either directly or through intermediary banks. If the collecting banks (again, all of them except Seattle Bank) act before the midnight deadline following receipt, they have acted “seasonably” according to UCC 4-202. When the payor bank—Seattle Bank—gets the check it must pay it, unless the check is dishonored or returned (UCC 4-302).
Physical Movement of Checks
The physical movement of checks—such as it still occurs—is handled by three possible systems.
The Federal Reserve System’s regional branches process checks for banks holding accounts with them. The Feds charge for the service, and prior to 2004 it regularly included check collection, air transportation of checks to the Reserve Bank (hired out to private contractors) and ground transportation delivery of checks to paying banks. Reserve Banks handle about 27 percent of US checks, but the air service is decreasing with “Check 21,” a federal law discussed below, that allows electronic transmission of checks.
Correspondent banks are banks that have formed “partnerships” with other banks in order to exchange checks and payments directly, bypassing the Federal Reserve and its fees. Outside banks may go through a correspondent bank to exchange checks and payments with one of its partners.
Correspondent banks may also form a clearinghouse corporation, in which members exchange checks and payments in bulk, instead of on a check-by-check basis, which can be inefficient considering that each bank might receive thousands of checks in a day. The clearinghouse banks save up the checks drawn on other members and exchange them on a daily basis. The net payments for these checks are often settled through Fedwire, a Federal Reserve Board electronic funds transfer (EFT) system that handles large-scale check settlement among US banks. Correspondent banks and clearinghouse corporations make up the private sector of check clearing, and together they handle about 43 percent of US checks.
Rationale for the “Check Clearing for the 21st Century Act”
After the events of September 11, 2001, Congress felt with renewed urgency that banks needed to present and clear checks in a way not dependent upon the physical transportation of the paper instruments by air and ground, in case such transportation facilities were disrupted. The federal Check Clearing for the 21st Century Act (Public Law 108-100)—more commonly referred to as “Check 21 Act”—became effective in 2004.
Basic Idea of Check 21 Act
Check 21 Act provides the legal basis for the electronic transportation of check data. A bank scans the check. The data on the check is already encoded in electronically readable numbers and the data, now separated (“truncated”) from the paper instrument (which may be destroyed), is transmitted for processing. “The Act authorizes a new negotiable instrument, called a substitute check, to replace the original check. A substitute check is a paper reproduction of the original check that is suitable for automated processing in the same manner as the original check. The Act permits banks to provide substitute checks in place of original checks to subsequent parties in the check processing stream.…Any financial institution in the check clearing process can truncate the original check and create a substitute check. United States Treasury, The Check Clearing for the 21st Century Act: Frequently Asked Questions, October 2004, www.justice.gov/ust/eo/private_trustee/library/chapter07/docs/check21/Check21FAQs-final.pdf. However, in the check collection process it is not required that the image be converted to a substitute check: the electronic image itself may suffice.
For example, suppose Roger in Seattle writes a check on Seattle Bank payable to Julia in L.A. and mails it to her. Julia deposits it in her account at L.A. Bank, the depository bank. L.A. Bank truncates the check (again, scans it and destroys the original) and transmits the data to Seattle Bank for presentation and payment. If for any reason Roger, or any appropriate party, wants a paper version, a substitute check will be created (see Figure 23.1 "Substitute Check Front and Back"). Most often, though, that is not necessary: Roger does not receive the actual cancelled checks he wrote in his monthly statement as he did formerly. He receives instead a statement listing paid checks he’s written and a picture of the check (not a substitute check) is available to him online through his bank’s website. Or he may receive his monthly statement itself electronically, with pictures of the checks he wrote available with a mouse click. Roger may also dispense with mailing the check to Julia entirely, as noted in the discussion of electronic funds transfers.
Figure 23.1 Substitute Check Front and Back
Front and back of a substitute check (not actual size).
Images from Federal Reserve Board: www.federalreserve.gov/pubs/check21/consumer_guide
Substitute checks are legal negotiable instruments. The act provides certain warranties to protect recipients of substitute checks that are intended to protect recipients against losses associated with the check substitution process. One of these warranties provides that “[a] bank that transfers, presents, or returns a substitute check…for which it receives consideration warrants…that…[t]he substitute check meets the requirements of legal equivalence” (12 CFR § 229.52(a)(1)). The Check 21 Act does not replace existing state laws regarding such instruments. The Uniform Commercial Code still applies, and we turn to it next.
Two notable consequences of the Check 21 Act are worth mentioning. The first is that a check may be presented to the payor bank for payment very quickly, perhaps in less than an hour: the customer’s “float” time is abbreviated. That means be sure you have enough money in your account to cover the checks that you write. The second consequence of Check 21 Act is that it is now possible for anybody—you at home or the merchant from whom you are buying something—to scan a check and deposit it instantly. “Remote deposit capture” allows users to transmit a scanned image of a check for posting and clearing using a web-connected computer and a check scanner. The user clicks to send the deposit to the desired existing bank account. Many merchants are using this system: that’s why if you write a check at the hardware store you may see it scanned and returned immediately to you. The digital data are transmitted, and the scanned image may be retrieved, if needed, as a “substitute check.”
Reason for Article 4
Over the years, the states had begun to enact different statutes to regulate the check collection process. Eighteen states adopted the American Bankers Association Bank Collection Code; many others enacted Deferred Posting statutes. Not surprisingly, a desire for uniformity was the principal reason for the adoption of UCC Article 4. Article 4 absorbed many of the rules of the American Bankers Association Code and of the principles of the Deferred Posting statutes, as well as court decisions and common customs not previously codified.
Banks Covered
Article 4 covers three types of banks: depository banks, payor banks, and collecting banks. These terms—already mentioned earlier—are defined in UCC Section 4-105. A depositary bank is the first bank to which an item is transferred for collection. Section 4-104 defines “item” as “an instrument or a promise or order to pay money handled by a bank for collection or payment[,]…not including a credit or debit card slip.” A payor bank is any bank that must pay a check because it is drawn on the bank or accepted there—the drawee bank (a depositary bank may also be a payor bank). A collecting bank is any bank except the payor bank that handles the item for collection.
Technical Rules
Detailed coverage of Parts 2 and 3 of Article 4, the substantive provisions, is beyond the scope of this book. However, Article 4 answers several specific questions that bank customers most frequently ask.
1. What is the effect of a “pay any bank” indorsement? The moment these words are indorsed on a check, only a bank may acquire the rights of a holder. This restriction can be lifted whenever (a) the check has been returned to the customer initiating collection or (b) the bank specially indorses the check to a person who is not a bank (4-201).
2. May a depositary bank supply a missing indorsement? It may supply any indorsement of the customer necessary to title unless the check contains words such as “payee’s indorsement required.” If the customer fails to indorse a check when depositing it in his account, the bank’s notation that the check was deposited by a customer or credited to his account takes effect as the customer’s indorsement. (Section 4-205(1)).
3. Are any warranties given in the collection process? Yes. They are identical to those provided in Article 3, except that they apply only to customers and collecting banks (4-207(a)). The customer or collecting bank that transfers an item and receives a settlement or other consideration warrants (1) he is entitled to enforce the item; (2) all signatures are authorized authentic; (3) the item has not been altered; (4) the item is not subject to a defense or claim in recoupment; (5) he has no knowledge of insolvency proceedings regarding the maker or acceptor or in the case of an unaccepted draft, the drawer. These warranties cannot be disclaimed as to checks.
4. Does the bank have the right to a charge-back against a customer’s account, or refund? The answer turns on whether the settlement was provisional or final. A settlement is the proper crediting of the amount ordered to be paid by the instrument. Someone writes you a check for \$1,000 drawn on First Bank, and you deposit it in Second Bank. Second Bank will make a “provisional settlement” with you—that is, it will provisionally credit your account with \$1,000, and that settlement will be final when First Bank debits the check writer’s account and credits Second Bank with the funds. Under Section 4-212(1), as long as the settlement was still provisional, a collecting bank has the right to a “charge-back” or refund if the check “bounces” (is dishonored). However, if settlement was final, the bank cannot claim a refund.
What determines whether settlement is provisional or final? Section 4-213(1) spells out four events (whichever comes first) that will convert a payor bank’s provisional settlement into final settlement: When it (a) pays the item in cash; (b) settles without reserving a right to revoke and without having a right under statute, clearinghouse rule, or agreement with the customer; finishes posting the item to the appropriate account; or (d) makes provisional settlement and fails to revoke the settlement in the time and manner permitted by statute, clearinghouse rule, or agreement. All clearinghouses have rules permitting revocation of settlement within certain time periods. For example an item cleared before 10 a.m. may be returned and the settlement revoked before 2 p.m. From this section it should be apparent that a bank generally can prevent a settlement from becoming final if it chooses to do so.
Relationship with Customers
The relationship between a bank and its customers is governed by UCC Article 4. However, Section 4-103(1) permits the bank to vary its terms, except that no bank can disclaim responsibility for failing to act in good faith or to exercise ordinary care. Most disputes between bank and customer arise when the bank either pays or refuses to pay a check. Under several provisions of Article 4, the bank is entitled to pay, even though the payment may be adverse to the customer’s interest.
Payment of Overdrafts
Suppose a customer writes a check for a sum greater than the amount in her account. May the bank pay the check and charge the customer’s account? Under Section 4-401(1), it may. Moreover, it may pay on an altered check and charge the customer’s account for the original tenor of the check, and if a check was completed it may pay the completed amount and charge the customer’s account, assuming the bank acted in good faith without knowledge that the completion was improper.
Payment of Stale Checks
Section 4-404 permits a bank to refuse to pay a check that was drawn more than six months before being presented. Banks ordinarily consider such checks to be “stale” and will refuse to pay them, but the same section gives them the option to pay if they choose. A corporate dividend check, for example, will be presumed to be good more than six months later. The only exception to this rule is for certified checks, which must be paid whenever presented, since the customer’s account was charged when the check was certified.
Payment of Deceased’s or Incompetent’s Checks
Suppose a customer dies or is adjudged to be incompetent. May the bank honor her checks? Section 4-405 permits banks to accept, pay, and collect an item as long as it has no notice of the death or declaration of incompetence, and has no reasonable opportunity to act on it. Even after notice of death, a bank has ten days to payor certify checks drawn on or prior to the date of death unless someone claiming an interest in the account orders it to refrain from doing so.
Stop Payment Orders
Section 4-403 expressly permits the customer to order the bank to “stop payment” on any check payable for her account, assuming the stop order arrives in enough time to reasonably permit the bank to act on it. An oral stop order is effective for fourteen days; a follow-up written confirmation within that time is effective for six months and can be renewed in writing. But if a stop order is not renewed, the bank will not be liable for paying the check, even one that is quite stale (e.g., Granite Equipment Leasing Corp. v. Hempstead Bank, 326 N.Y.S. 2d 881 (1971)).
Wrongful Dishonor
If a bank wrongfully dishonors an item, it is liable to the customer for all damages that are a direct consequence of (“proximately caused by”) the dishonor. The bank’s liability is limited to the damages actually proved; these may include damages for arrest and prosecution. See Section 23.4 "Cases" under “Bank’s Liability for Paying over Customer’s ‘Stop Payment’ Order” (Meade v. National Bank of Adams County).
Customers’ Duties
In order to hold a bank liable for paying out an altered check, the customer has certain duties under Section 4-406. Primarily, the customer must act promptly in examining her statement of account and must notify the bank if any check has been altered or her signature has been forged. If the customer fails to do so, she cannot recover from the bank for an altered signature or other term if the bank can show that it suffered a loss because of the customer’s slowness. Recovery may also be denied when there has been a series of forgeries and the customer did not notify the bank within two weeks after receiving the first forged item. See Section 23.4 "Cases" under “Customer’s Duty to Inspect Bank Statements” (the Planters Bank v. Rogers case).
These rules apply to a payment made with ordinary care by the bank. If the customer can show that the bank negligently paid the item, then the customer may recover from the bank, regardless of how dilatory the customer was in notifying the bank—with two exceptions: (1) from the time she first sees the statement and item, the customer has one year to tell the bank that her signature was unauthorized or that a term was altered, and (2) she has three years to report an unauthorized indorsement.
In General
In addition to UCC Article 4 (again, state law), the federal Expedited Funds Availability Act—also referred to as “Regulation CC” after the Federal Reserve regulation that implements it—addresses an aspect of the relationship between a bank and its customers. It was enacted in 1988 in response to complaints by consumer groups about long delays before customers were allowed access to funds represented by checks they had deposited. It has nothing to do with electronic transfers, although the increasing use of electronic transfers does speed up the system and make it easier for banks to comply with Regulation CC.
The Act’s Provisions
The act provides that when a customer deposits a cashier’s check, certified check, or a check written on an account in the same bank, the funds must be available by the next business day. Funds from other local checks (drawn on institutions within the same Federal Reserve region) must be available within two working days, while there is a maximum five-day wait for funds from out-of-town checks. In order for these time limits to be effective, the customer must endorse the check in a designated space on the back side. The FDIC sets out the law at its website: www.fdic.gov/regulations/laws/rules/6500-3210.html.
Key Takeaway
The bank collection process is the method by which checks written on one bank are transferred by the collecting bank to a clearing house. Traditionally this has been a process of physical transfer by air and ground transportation from the depository bank to various intermediary banks to the payor bank where the check is presented. Since 2004 the Check 21 Act has encouraged a trend away from the physical transportation of checks to the electronic transportation of the check’s data, which is truncated (stripped) from the paper instrument and transmitted. However, if a paper instrument is required, a “substitute check” will recreate it. The UCC’s Article 4 deals generally with aspects of the bank-customer relationship, including warranties on payment or collection of checks, payment of overdrafts, stop orders, and customers’ duties to detect irregularities. The Expedited Funds Availability Act is a federal law governing customer’s access to funds in their accounts from deposited checks.
Exercises
1. Describe the traditional check-collection process from the drawing of the check to its presentation for payment to the drawee (payor) bank
2. Describe how the Check 21 Act has changed the check-collection process.
3. Why was Article 4 developed, and what is its scope of coverage? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/23%3A_Legal_Aspects_of_Banking/23.1%3A_Banks_and_Their_Customers.txt |
Learning Objectives
1. Understand why electronic fund transfers have become prevalent.
2. Recognize some typical examples of EFTs.
3. Know that the EFT Act of 1978 protects consumers, and recognize what some of those protections—and liabilities—are.
4. Understand when financial institutions will be liable for violating the act, and some of the circumstances when the institutions will not be liable.
In General
Drowning in the yearly flood of billions of checks, eager to eliminate the “float” that a bank customer gets by using her money between the time she writes a check and the time it clears, and recognizing that better customer service might be possible, financial institutions sought a way to computerize the check collection process. What has developed is electronic fund transfer (EFT), a system that has changed how customers interact with banks, credit unions, and other financial institutions. Paper checks have their advantages, but their use is decreasing in favor of EFT.
In simplest terms, EFT is a method of paying by substituting an electronic signal for checks. A “debit card,” inserted in the appropriate terminal, will authorize automatically the transfer of funds from your checking account, say, to the account of a store whose goods you are buying.
Types of EFT
You are of course familiar with some forms of EFT:
• The automated teller machine (ATM) permits you to electronically transfer funds between checking and savings accounts at your bank with a plastic ID card and a personal identification number (PIN), and to obtain cash from the machine.
• Telephone transfers or computerized transfers allow customers to access the bank’s computer system and direct it to pay bills owed to a third party or to transfer funds from one account to another.
• Point of sale terminals located in stores let customers instantly debit their bank accounts and credit the merchant’s account.
• Preauthorized payment plans permit direct electronic deposit of paychecks, Social Security checks, and dividend checks.
• Preauthorized withdrawals from customers’ bank accounts or credit card accounts allow paperless payment of insurance premiums, utility bills, automobile or mortgage payments, and property tax payments.
The “short circuit” that EFT permits in the check processing cycle is illustrated in Figure 23.2 "How EFT Replaces Checks".
Figure 23.2 How EFT Replaces Checks
Unlike the old-fashioned check collection process, EFT is virtually instantaneous: at one instant a customer has a sum of money in her account; in the next, after insertion of a plastic card in a machine or the transmission of a coded message by telephone or computer, an electronic signal automatically debits her bank checking account and posts the amount to the bank account of the store where she is making a purchase. No checks change hands; no paper is written on. It is quiet, odorless, smudge-proof. But errors are harder to trace than when a paper trail exists, and when the system fails (“our computer is down”) the financial mess can be colossal. Obviously some sort of law is necessary to regulate EFT systems.
Purpose
Because EFT is a technology consisting of several discrete types of machines with differing purposes, its growth has not been guided by any single law or even set of laws. The most important law governing consumer transactions is the Electronic Fund Transfer Act of 1978, FDIC, “Electronic Fund Transfer Act of 1978,” www.fdic.gov/regulations/laws/rules/6500-1350.html. whose purpose is “to provide a basic framework establishing the rights, liabilities, and responsibilities of participants in electronic fund transfer systems. The primary objective of [the statute], however, is the provision of individual consumer rights.” This federal statute has been implemented and supplemented by the Federal Reserve Board’s Regulation E, Comptroller of the Currency guidelines on EFT, and regulations of the Federal Home Loan Bank Board. (Wholesale transactions are governed by UCC Article 4A, which is discussed later in this chapter.)
The EFT Act of 1978 is primarily designed to disclose the terms and conditions of electronic funds transfers so the customer knows the rights, costs and liabilities associated with EFT, but it does not embrace every type of EFT system. Included are “point-of-sale transfers, automated teller machine transactions, direct deposits or withdrawal of funds, and transfers initiated by telephone or computer” (EFT Act Section 903(6)). Not included are such transactions as wire transfer services, automatic transfers between a customer’s different accounts at the same financial institution, and “payments made by check, draft, or similar paper instrument at electronic terminals” (Reg. E, Section 205.2(g)).
Consumer Protections Afforded by the Act
Four questions present themselves to the mildly wary consumer facing the advent of EFT systems: (1) What record will I have of my transaction? (2) How can I correct errors? (3) What recourse do I have if a thief steals from my account? (4) Can I be required to use EFT? The EFT Act, as implemented by Regulation E, answers these questions as follows.
1. Proof of transaction. The electronic terminal itself must be equipped to provide a receipt of transfer, showing date, amount, account number, and certain other information. Perhaps more importantly, the bank or other financial institution must provide you with a monthly statement listing all electronic transfers to and from the account, including transactions made over the computer or telephone, and must show to whom payment has been made.
2. Correcting errors. You must call or write the financial institution whenever you believe an error has been made in your statement. You have sixty days to do so. If you call, the financial institution may require you to send in written information within ten days. The financial institution has forty-five days to investigate and correct the error. If it takes longer than ten days, however, it must credit you with the amount in dispute so that you can use the funds while it is investigating. The financial institution must either correct the error promptly or explain why it believes no error was made. You are entitled to copies of documents relied on in the investigation.
3. Recourse for loss or theft. If you notify the issuer of your EFT card within two business days after learning that your card (or code number) is missing or stolen, your liability is limited to \$50. If you fail to notify the issuer in this time, your liability can go as high as \$500. More daunting is the prospect of loss if you fail within sixty days to notify the financial institution of an unauthorized transfer noted on your statement: after sixty days of receipt, your liability is unlimited. In other words, a thief thereafter could withdraw all your funds and use up your line of credit and you would have no recourse against the financial institution for funds withdrawn after the sixtieth day, if you failed to notify it of the unauthorized transfer.
4. Mandatory use of EFT. Your employer or a government agency can compel you to accept a salary payment or government benefit by electronic transfer. But no creditor can insist that you repay outstanding loans or pay off other extensions of credit electronically. The act prohibits a financial institution from sending you an EFT card “valid for use” unless you specifically request one or it is replacing or renewing an expired card. The act also requires the financial institution to provide you with specific information concerning your rights and responsibilities (including how to report losses and thefts, resolve errors, and stop payment of preauthorized transfers). A financial institution may send you a card that is “not valid for use” and that you alone have the power to validate if you choose to do so, after the institution has verified that you are the person for whom the card was intended.
Liability of the Financial Institution
The financial institution’s failure to make an electronic fund transfer, in accordance with the terms and conditions of an account, in the correct amount or in a timely manner when properly instructed to do so by the consumer makes it liable for all damages proximately caused to the consumer, except where
1) the consumer’s account has insufficient funds;
2) the funds are subject to legal process or other encumbrance restricting such transfer;
3) such transfer would exceed an established credit limit;
4) an electronic terminal has insufficient cash to complete the transaction; or
5) a circumstance beyond its control, where it exercised reasonable care to prevent such an occurrence, or exercised such diligence as the circumstances required.
Enforcement of the Act
A host of federal regulatory agencies oversees enforcement of the act. These include the Comptroller of the Currency (national banks), Federal Reserve District Bank (state member banks), Federal Deposit Insurance Corporation regional director (nonmember insured banks), Federal Home Loan Bank Board supervisory agent (members of the FHLB system and savings institutions insured by the Federal Savings & Loan Insurance Corporation), National Credit Union Administration (federal credit unions), Securities & Exchange Commission (brokers and dealers), and the Federal Trade Commission (retail and department stores) consumer finance companies, all nonbank debit card issuers, and certain other financial institutions. Additionally, consumers are empowered to sue (individually or as a class) for actual damages caused by any EFT system, plus penalties ranging from \$100 to \$1,000. Section 23.4 "Cases", under “Customer’s Duty to Inspect Bank Statements” (Commerce Bank v. Brown), discusses the bank’s liability under the act.
Key Takeaway
Eager to reduce paperwork for both themselves and for customers, and to speed up the check collection process, financial institutions have for thirty years been moving away from paper checks and toward electronic fund transfers. These EFTs are ubiquitous, including ATMs, point-of-sale systems, direct deposits and withdrawals and online banking of various kinds. Responding to the need for consumer protection, Congress adopted the Electronic Fund Transfers Act, effective in 1978. The act addresses many common concerns consumers have about using electronic fund transfer systems, sets out liability for financial institutions and customers, and provides an enforcement mechanism.
Exercises
1. Why have EFTs become very common?
2. What major issues are addressed by the EFTA?
3. If you lose your credit card, what is your liability for unauthorized charges? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/23%3A_Legal_Aspects_of_Banking/23.2%3A_Electronic_Funds_Transfers.txt |
Learning Objectives
1. Understand what a “wholesale transaction” is; recognize that UCC Article 4A governs such transactions, and recognize how the Article addresses three common issues.
2. Know what a “letter of credit” (LC) is, the source of law regarding LCs, and how such instruments are used.
Wholesale Funds Transfers
Another way that money is transferred is by commercial fund transfers or wholesale funds transfers, which is by far the largest segment of the US payment system measured in amounts of money transferred. It is trillions of dollars a day. Wholesale transactions are the transfers of funds between businesses or financial institutions.
Background and Coverage
It was in the development of commercial “wholesale wire transfers” of money in the nineteenth and early twentieth centuries that businesses developed the processes enabling the creation of today’s consumer electronic funds transfers. Professor Jane Kaufman Winn described the development of uniform law governing commercial funds transfers:
Although funds transfers conducted over funds transfer facilities maintained by the Federal Reserve Banks were subject to the regulation of the Federal Reserve Board, many funds transfers took place over private systems, such as the Clearing House for Interbank Payment Systems (“CHIPS”). The entire wholesale funds transfer system was not governed by a clear body of law until U.C.C. Article 4A was promulgated in 1989 and adopted by the states shortly thereafter. The Article 4A drafting process resulted in many innovations, even though it drew heavily on the practices that had developed among banks and their customers during the 15 years before the drafting committee was established. While a consensus was not easy to achieve, the community of interests shared by both the banks and their customers permitted the drafting process to find workable compromises on many thorny issues. Jane Kaufman Winn, Clash of the Titans: Regulating the Competition between Established and Emerging Electronic Payment Systems, http://www.law.washington.edu/Directory/docs/Winn/Clash%20of%20the%20Titans.htm.
All states and US territories have adopted Article 4A. Consistent with other UCC provisions, the rights and obligations under Article 4A may be varied by agreement of the parties. Article 4A does not apply if any step of the transaction is governed by the Electronic Fund Transfer Act. Although the implication may be otherwise, the rules in Article 4A apply to any funds transfer, not just electronic ones (i.e., transfers by mail are covered, too). Certainly, however, electronic transfers are most common, and—as the Preface to Article 4A notes—a number of characteristics of them influenced the Code’s rules. These transactions are characterized by large amounts of money—multimillions of dollars; the parties are sophisticated businesses or financial institutions; funds transfers are completed in one day, they are highly efficient substitutes for paper delivery; they are usually low cost—a few dollars for the funds transfer charged by the sender’s bank.
Operation of Article 4A
The UCC “Prefatory Note” to Article 4A observes that “the funds transfer that is covered by Article 4A is not a complex transaction.” To illustrate the operation of Article 4A, assume that Widgets International has an account with First Bank. In order to pay a supplier, Supplies Ltd., in China, Widgets instructs First Bank to pay \$6 million to the account of Supplies Ltd. in China Bank. In the terminology of Article 4A, Widgets’ instruction to its bank is a “payment order.” Widgets is the “sender” of the payment order, First Bank is the “receiving bank,” and Supplies Ltd. is the “beneficiary” of the order.
When First Bank performs the purchase order by instructing China Bank to credit the account of Supplies Limited, First Bank becomes a sender of a payment order, China Bank becomes a receiving bank, and Supplies Ltd. is still the beneficiary. This transaction is depicted in Figure 23.3 "Funds Transfer". In some transactions there may also be one or more “intermediary banks” between First and Second Bank.
Figure 23.3 Funds Transfer
Frequently Occurring Legal Issues in Funds Transfers
Three legal issues that frequently arise in funds transfer litigation are addressed in Article 4A and might be mentioned here.
Responsibility for Unauthorized Payments
First, who is responsible for unauthorized payment orders? The usual practice is for banks and their customers to agree to security procedures for the verification of payment orders. If a bank establishes a commercially reasonable procedure, complies with that procedure, and acts in good faith and according to its agreement with the customer, the customer is bound by an unauthorized payment order. There is, however, an important exception to this rule. A customer will not be liable when the order is from a person unrelated to its business operations.
Error by Sender
Second, who is responsible when the sender makes a mistake—for instance, in instructing payment greater than what was intended? The general rule is that the sender is bound by its own error. But in cases where the error would have been discovered had the bank complied with its security procedure, the receiving bank is liable for the excess over the amount intended by the sender, although the bank is allowed to recover this amount from the beneficiary.
Bank Mistake in Transferring Funds
Third, what are the consequences when the bank makes a mistake in transferring funds? Suppose, for example, that Widgets (in the previous situation) instructed payment of \$2 million but First Bank in turn instructed payment of \$20 million. First Bank would be entitled to only \$2 million from Widgets and would then attempt to recover the remaining \$18 million from Supplies Ltd. If First Bank had instructed payment to the wrong beneficiary, Widgets would have no liability and the bank would be responsible for recovering the entire payment. Unless the parties agree otherwise, however, a bank that improperly executes a payment order is not liable for consequential damages.
Letters of Credit
Because international trade involves risks not usually encountered in domestic trade—government control of exports, imports, and currency; problems in verifying goods’ quality and quantity; disruptions caused by adverse weather, war; and so on—merchants have over the years devised means to minimize these risks, most notably the letter of credit (“LC”). Here are discussed the definition of letters of credit, the source of law governing them, how they work as payments for exports and as payments for imports.
Definition
A letter of credit is a statement by a bank (or other financial institution) that it will pay a specified sum of money to specific persons if certain conditions are met. Or, to rephrase, it is a letter issued by a bank authorizing the bearer to draw a stated amount of money from the issuing bank (or its branches, or other associated banks or agencies). Originally, a letter of credit was quite literally that—a letter addressed by the buyer’s bank to the seller’s bank stating that the former could vouch for their good customer, the buyer, and that it would pay the seller in case of the buyer’s default. An LC is issued by a bank on behalf of its creditworthy customers, whose application for the credit has been approved by that bank.
Source of Law
Letters of credit are governed by both international and US domestic law.
International Law
Many countries (including the United States) have bodies of law governing letters of credit. Sophisticated traders will agree among themselves by which body of law they choose to be governed. They can agree to be bound by the UCC, or they may decide they prefer to be governed by the Uniform Customs and Practice for Commercial Documentary Credits (UCP), a private code devised by the Congress of the International Chamber of Commerce. Suppose the parties do not stipulate a body of law for the agreement, and the various bodies of law conflict, what then? Julius is in New York and Rochelle is in Paris; does French law or New York law govern? The answer will depend on the particulars of the dispute. An American court must determine under the applicable principles of the law of “conflicts of law” whether New York or French law applies.
Domestic Law
The principal body of law applicable to the letter of credit in the United States is Article 5 of the UCC. Section 5-103 declares that Article 5 “applies to letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.” The Official Comment to 5-101 observes, “A letter of credit is an idiosyncratic form of undertaking that supports performance of an obligation incurred in a separate financial, mercantile, or other transaction or arrangement.” And—as is the case in other parts of the Code—parties may, within some limits, agree to “variation by agreement in order to respond to and accommodate developments in custom and usage that are not inconsistent with the essential definitions and mandates of the statute.” Although detailed consideration of Article 5 is beyond the scope of this book, a distinction between guarantees and letters of credit should be noted: Article 5 applies to the latter and not the former.
Letters of Credit as Payment for Exports
The following discussion presents how letters of credit work as payment for exports, and a sample letter of credit is presented in Figure 23.4 "A Letter of Credit".
Figure 23.4 A Letter of Credit
Julius desires to sell fine quality magic wands and other stage props to Rochelle’s Gallery in Paris. Rochelle agrees to pay by letter of credit—she will, in effect, get her bank to inform Julius that he will get paid if the goods are right. She does so by “opening” a letter of credit at her bank—the issuing bank—the Banque de Rue de Houdini where she has funds in her account, or good credit. She tells the bank the terms of sale, the nature and quantity of the goods, the amount to be paid, the documents she will require as proof of shipment, and an expiration date. Banque de Rue de Houdini then directs its correspondent bank in the United States, First Excelsior Bank, to inform Julius that the letter of credit has been opened: Rochelle is good for it. For Julius to have the strongest guarantee that he will be paid, Banque de Rou de Houdini can ask First Excelsior to confirm the letter of credit, thus binding both Banque de Rue de Houdini and Excelsior to pay according to the terms of the letter.
Once Julius is informed that the letter of credit has been issued and confirmed, he can proceed to ship the goods and draw a draft to present (along with the required documents such as commercial invoice, bill of lading, and insurance policy) to First Excelsior, which is bound to follow exactly its instructions from Banque de Rue de Houdini. Julius can present the draft and documents directly, through correspondent banks, or by a representative at the port from which he is shipping the goods. On presentation, First Excelsior may forward the documents to Banque de Rue de Houdini for approval and when First Excelsior is satisfied it will take the draft and pay Julius immediately on a sight draft or will stamp the draft “accepted” if it is a time draft (payable in thirty, sixty, or ninety days). Julius can discount an accepted time draft or hold it until it matures and cash it in for the full amount. First Excelsior will then forward the draft through international banking channels to Banque de Rue de Houdini to debit Rochelle’s account.
As Payment for Imports
US importers—buyers—also can use the letter of credit to pay for goods bought from abroad. The importer’s bank may require that the buyer put up collateral to guarantee it will be reimbursed for payment of the draft when it is presented by the seller’s agents. Since the letter of credit ordinarily will be irrevocable, the bank will be bound to pay the draft when presented (assuming the proper documents are attached), regardless of deficiencies ultimately found in the goods. The bank will hold the bill of lading and other documents and could hold up transfer of the goods until the importer pays, but that would saddle the bank with the burden of disposing of the goods if the importer failed to pay. If the importer’s credit rating is sufficient, the bank could issue a trust receipt. The goods are handed over to the importer before they are paid for, but the importer then becomes trustee of the goods for the bank and must hold the proceeds for the bank up to the amount owed
Key Takeaway
Wholesale funds transfers are a mechanism by which businesses and financial institutions can transmit large sums of money—millions of dollars—between each other, usually electronically, from and to their clients’ accounts. Article 4A of the UCC governs these transactions. A letter of credit is a promise by a buyer’s bank that upon presentation of the proper paperwork it will pay a specified sum to the identified seller. Letters of credit are governed by domestic and international law. | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/23%3A_Legal_Aspects_of_Banking/23.3%3A_Wholesale_Transactions_and_Letters_of_Credit.txt |
Bank’s Liability for Paying over Customer’s “Stop Payment” Order
Meade v. National Bank of Adams County
2002 WL 31379858 (Ohio App. 2002)
Kline, J.
The National Bank of Adams County appeals the Adams County Court’s judgment finding that it improperly paid a check written by Denton Meade, and that Meade incurred \$3,800 in damages as a result of that improper payment.…
I.
Denton Meade maintained a checking account at the Bank. In 2001, Meade entered into an agreement with the Adams County Lumber Company to purchase a yard barn for \$2,784 and paid half the cost as a deposit. On the date of delivery, Friday, March 9, 2001, Meade issued a check to the Lumber Company for the remaining amount he owed on the barn, \$1,406.79.
Meade was not satisfied with the barn. Therefore, at 5:55 p.m. on March 9, 2001, Meade called the Bank to place a stop payment order on his check. Jacqueline Evans took the stop payment order from Meade. She received all the information and authorization needed to stop payment on the check at that time.
Bank employees are supposed to enter stop payments into the computer immediately after taking them. However, Evans did not immediately enter the stop payment order into the computer because it was 6:00 p.m. on Friday, and the Bank closes at 6:00 p.m. on Fridays. Furthermore, the Bank’s policy provides that any matters that are received after 2:00 p.m. on a Friday are treated as being received on the next business day, which was Monday, March 12, 2001 in this instance.
On the morning of Saturday, March 10, 2001, Greg Scott, an officer of the Lumber Company, presented the check in question for payment at the Bank. The Bank paid the check. On Monday, the Bank entered Meade’s stop payment into the computer and charged Meade a \$15 stop payment fee. Upon realizing that it already paid the check, on Tuesday the Bank credited the \$15 stop payment fee back to Meade’s account. On Thursday, the Bank deducted the amount of the check, \$1,406.79, from Meade’s account.
In the meanwhile, Meade contacted Greg Scott at the Lumber Company regarding his dissatisfaction with the barn. Scott sent workers to repair the barn on Saturday, March 10 and on Monday, March 12. However, Meade still was not satisfied. In particular, he was unhappy with the runners supporting the barn. Although his order with the Lumber Company specifically provided for 4 x 6” runner boards, the Lumber Company used 2 x 6” boards. The Lumber Company “laminated” the two by six-inch boards to make them stronger. However, carpenter Dennis Baker inspected the boards and determined that the boards were not laminated properly.
Meade hired Baker to repair the barn. Baker charged Meade approximately three hundred dollars to make the necessary repairs. Baker testified that properly laminated two by six-inch boards are just as strong as four by six-inch boards.
Meade filed suit against the Bank in the trial court seeking \$5,000 in damages. The Bank filed a motion for summary judgment, which the trial court denied. At the subsequent jury trial the court permitted Meade to testify, over the Bank’s objections, to the amount of his court costs, attorney fees, and deposition costs associated with this case. The Bank filed motions for directed verdict at the close of Meade’s case and at the close of evidence, which the trial court denied.
The jury returned a general verdict finding the Bank liable to Meade in the amount of \$3,800. The Bank filed motions for a new trial and for judgment notwithstanding the verdict, which the trial court denied. The Bank now appeals, asserting the following five assignments of error.…
II.
In its first assignment of error, the Bank contends that the trial court erred in denying its motion for summary judgment. Specifically, the Bank asserts that Meade did not issue the stop payment order within a reasonable time for the Bank to act upon it, and therefore that the trial court should have granted summary judgment in favor of the Bank.
Summary judgment is appropriate only when it has been established: (1) that there is no genuine issue as to any material fact; (2) that the moving party is entitled to judgment as a matter of law; and (3) that reasonable minds can come to only one conclusion, and that conclusion is adverse to the nonmoving party. [Citation]
[UCC 4-403(A)] provides that a customer may stop payment on any item drawn on the customer’s account by issuing an order to the bank that describes the item with reasonable certainty and is received by the bank “at a time and in a manner that affords the bank a reasonable opportunity to act on it before any action by the bank with respect to the item.” What constitutes a reasonable time depends upon the facts of the case. See Chute v. Bank One of Akron, (1983) [Citation]
In Chute, Bank One alleged that its customer, Mr. Chute, did not give it a reasonable opportunity to act upon his stop payment order when he gave an oral stop payment at one Bank One branch office, and a different Bank One branch office paid the check the following day. In ruling that Bank One had a reasonable opportunity to act upon Mr. Chute’s order before it paid the check, the court considered the teller’s testimony that stop payment orders are entered onto the computer upon receipt, where they are virtually immediately accessible to all Bank One tellers.
In this case, as in Chute, Meade gave notice one day, and the Bank paid the check the following day. Additionally, in this case, the same branch that took the stop payment order also paid the check. Moreover, Evans testified that the Bank’s policy for stop payment orders is to enter them into the computer immediately, and that Meade’s stop payment order may have shown up on the computer on Saturday if she had entered it on Friday. Based on this information, and construing the facts in the light most favorable to Meade, reasonable minds could conclude that Meade provided the Bank with the stop payment order within time for the Bank to act upon the stop payment order. Accordingly, we overrule the Bank’s first assignment of error.
III.
In its second assignment of error, the Bank contends that the trial court erred in permitting Meade to testify regarding the amount he spent on court costs, attorney fees, and taking depositions. Meade contends that because he incurred these costs as a result of the Bank paying his check over a valid stop payment order, the costs are properly recoverable.
As a general rule, the costs and expenses of litigation, other than court costs, are not recoverable in an action for damages. [Citations]
In this case, the statute providing for damages, [UCC 4-403(c)], provides that a customer’s recoverable loss for a bank’s failure to honor a valid stop payment order “may include damages for dishonor of subsequent items * * *.” The statute does not provide for recouping attorney fees and costs. Meade did not allege that the Bank acted in bad faith or that he is entitled to punitive damages. Additionally, although Meade argues that the Bank caused him to lose his bargaining power with the Lumber Company, Meade did not present any evidence that he incurred attorney fees or costs by engaging in litigation with the Lumber Company.
Absent statutory authority or an allegation of bad faith, attorney fees are improper in a compensatory damage award.…Therefore, the trial court erred in permitting the jury to hear evidence regarding Meade’s expenditures for his attorney fees and costs. Accordingly, we sustain the Bank’s second assignment of error.…
IV.
In its third assignment of error, the Bank contends that the trial court erred when it overruled the Bank’s motion for a directed verdict. The Bank moved for a directed verdict both at the conclusion of Meade’s case and at the close of evidence.
The Bank first asserts that the record does not contain sufficient evidence to show that Meade issued a stop payment order that provided it with a reasonable opportunity to act as required by [the UCC]. Meade presented evidence that he gave the Bank his stop payment order prior to 6:00 p.m. on Friday, and that the Bank paid the check the following day.…We find that this constitutes sufficient evidence that Meade communicated the stop payment order to the Bank in time to allow the Bank a reasonable opportunity to act upon it.
The Bank also asserts that the record does not contain sufficient evidence that Meade incurred some loss resulting from its payment of the check. Pursuant to [UCC 4-403(c)] “[t]he burden of establishing the fact and amount of loss resulting from the payment of an item contrary to a stop payment order or order to close an account is on the customer.” Establishing the fact and amount of loss, “the customer must show some loss other than the mere debiting of the customer’s account.” [Citation]
…Baker testified that he charged Meade between two hundred-eighty and three hundred dollars to properly laminate the runners and support the barn. Based upon these facts, we find that the record contains sufficient evidence that Meade sustained some loss beyond the mere debiting of his account as a result of the Bank paying his check. Accordingly, we overrule the Bank’s third assignment of error.
V.
…In its final assignment of error, the Bank contends that the trial court erred in denying its motions for judgment notwithstanding the verdict and for a new trial.…
[U]nlike our consideration of the Bank’s motions for a directed verdict, in considering the Bank’s motion for judgment notwithstanding the verdict, we also must consider whether the amount of the jury’s award is supported by sufficient evidence. The Bank contends the jury’s general verdict, awarding Meade \$3,800, is not supported by evidence in the record.
A bank customer seeking damages for the improper payment of a check over a valid stop payment order carries the burden of proving “the fact and amount of loss.” [UCC 4-403(C).] To protect banks and prevent unjust enrichment to customers, the mere debiting of the customer’s account does not constitute a loss. [Citation]
In this case, the Bank’s payment of Meade’s \$1,406.79 check to the Lumber Company discharged Meade’s debt to the Lumber Company in the same amount. Therefore, the mere debiting of \$1,406.79 from Meade’s account does not constitute a loss.
Meade presented evidence that he incurred \$300 in repair costs to make the barn satisfactory. Meade also notes that he never got the four by six-inch runners he wanted. However, Meade’s carpenter, Baker, testified that since he properly laminated the two by six-inch runners, they are just as strong or stronger than the four by six-inch runners would have been.
Meade also presented evidence of his costs and fees. However, as we determined in our review of the Bank’s second assignment of error, only the court may award costs and fees, and therefore this evidence was improperly admitted. Thus, the evidence cannot support the damage award. Meade did not present any other evidence of loss incurred by the Bank’s payment of his check.… Therefore, we find that the trial court erred in declining to enter a judgment notwithstanding the verdict on the issue of damages. Upon remand, the trial court should grant in part the Bank’s motion for judgment notwithstanding the verdict as it relates to damages and consider the Bank’s motion for a new trial only on the issue of damages[.…] Accordingly, we sustain the Banks fourth and fifth assignments of error in part.
VI.
In conclusion, we find that the trial court did not err in denying the Bank’s motions for summary judgment and for directed verdict. However, we find that the trial court erred in permitting Meade to testify as to his court costs, attorney fees and deposition costs. Additionally, we find that the trial court erred in totally denying the Bank’s motion for judgment notwithstanding the verdict, as the amount of damages awarded by the jury is not supported by sufficient evidence in the record. Accordingly, we affirm the judgment of the trial court as to liability, but reverse the judgment of the trial court as to the issue of damages, and remand this cause for further proceedings consistent with this opinion.
case questions
1. What did the bank do wrong here?
2. Why did the court deny Meade damages for his attorneys’ fees?
3. Why did the court conclude that the jury-awarded damages were not supported by evidence presented at trial? What damages did the evidence support?
Customer’s Duty to Inspect Bank Statements
Union Planters Bank, Nat. Ass’n v. Rogers
912 So.2d 116 (Miss. 2005)
Waller, J.
This appeal involves an issue of first impression in Mississippi—the interpretation of [Mississippi’s UCC 4-406], which imposes duties on banks and their customers insofar as forgeries are concerned.
Facts
Neal D. and Helen K. Rogers maintained four checking accounts with the Union Planters Bank in Greenville, Washington County, Mississippi.…The Rogers were both in their eighties when the events which gave rise to this lawsuit took place. Neal Rogers died prior to the institution of this lawsuit. Helen Rogers died after Union Planters filed this appeal. We have substituted Helen’s estate as appellee. After Neal became bedridden, Helen hired Jackie Reese to help her take care of Neal and to do chores and errands.
In September of 2000, Reese began writing checks on the Rogers’ four accounts and forged Helen’s name on the signature line. Some of the checks were made out to “cash,” some to “Helen K. Rogers,” and some to “Jackie Reese.” The following chart summarizes the forgeries to each account:
Account Number Beginning Ending Number of Checks Amount of Checks
54282309 11/27/2000 6/18/2001 46 \$16,635.00
0039289441 9/27/2000 1/25/2001 10 \$2,701.00
6100110922 11/29/2000 8/13/2001 29 \$9,297.00
6404000343 11/20/2000 8/16/2001 83 \$29,765.00
Total 168 \$58,398.00
Neal died in late May of 2001. Shortly thereafter, the Rogers’ son, Neal, Jr., began helping Helen with financial matters. Together they discovered that many bank statements were missing and that there was not as much money in the accounts as they had thought. In June of 2001, they contacted Union Planters and asked for copies of the missing bank statements. In September of 2001, Helen was advised by Union Planters to contact the police due to forgeries made on her accounts. More specific dates and facts leading up to the discovery of the forgeries are not found in the record.
Subsequently, criminal charges were brought against Reese. (The record does not reveal the disposition of the criminal proceedings against Reese.) In the meantime, Helen filed suit against Union Planters, alleging conversion (unlawful payment of forged checks) and negligence. After a trial, the jury awarded Helen \$29,595 in damages, and the circuit court entered judgment accordingly. From this judgment, Union Planters appeals.
Discussion
…II. Whether Rogers’ Delay in Detecting the Forgeries Barred Suit against Union Planters.
The relationship between Rogers and Union Planters is governed by Article 4 of the Uniform Commercial Code. [UCC] 4-406(a) and (c) provide that a bank customer has a duty to discover and report “unauthorized signatures”; i.e., forgeries. [The section] reflects an underlying policy decision that furthers the UCC’s “objective of promoting certainty and predictability in commercial transactions.” The UCC facilitates financial transactions, benefiting both consumers and financial institutions, by allocating responsibility among the parties according to whomever is best able to prevent a loss. Because the customer is more familiar with his own signature, and should know whether or not he authorized a particular withdrawal or check, he can prevent further unauthorized activity better than a financial institution which may process thousands of transactions in a single day.…The customer’s duty to exercise this care is triggered when the bank satisfies its burden to provide sufficient information to the customer. As a result, if the bank provides sufficient information, the customer bears the loss when he fails to detect and notify the bank about unauthorized transactions. [Citation]
A. Union Planters’ Duty to Provide Information under 4-406(a).
The court admitted into evidence copies of all Union Planters statements sent to Rogers during the relevant time period. Enclosed with the bank statements were either the cancelled checks themselves or copies of the checks relating to the period of time of each statement. The evidence shows that all bank statements and cancelled checks were sent, via United States Mail, postage prepaid, to all customers at their “designated address” each month. Rogers introduced no evidence to the contrary. We therefore find that the bank fulfilled its duty of making the statements available to Rogers and that the remaining provisions of 4-406 are applicable to the case at bar.…
In defense of her failure to inspect the bank statements, Rogers claims that she never received the bank statements and cancelled checks. Even if this allegation is true, since there was a series of forged checks, it is reasonable to assume that Reese intercepted the bank statements before Rogers could inspect them. However, Union Planters cannot be held liable for Reese’s fraudulent concealment. it does not excuse Rogers from failing to fulfill her duties under 4-406(a) & (c) because the statute clearly states a bank discharges its duty in providing the necessary information to a customer when it “sends…to a customer a statement of account showing payment of items.”…The word “receive” is absent. The customer’s duty to inspect and report does not arise when the statement is received, as Rogers claims; the customer’s duty to inspect and report arises when the bank sends the statement to the customer’s address. A reasonable person who has not received a monthly statement from the bank would promptly ask the bank for a copy of the statement. Here, Rogers claims that she did not receive numerous statements. We find that she failed to act reasonably when she failed to take any action to replace the missing statements.
B. Rogers’ Duty to Report the Forgeries under 4-406(d).
[Under UCC 4-406] a customer who has not promptly notified a bank of an irregularity may be precluded from bringing certain claims against the bank:
“(d) If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (c), the customer is precluded from asserting against the bank:
(1) The customer’s unauthorized signature…on the item,…
Also, when there is a series of forgeries, 406(d)(2) places additional duties on the customer, [who is precluded from asserting against the bank]:
(2) The customer’s unauthorized signature…by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature…and after the customer had been afforded a reasonable period of time, not exceeding thirty (30) days, in which to examine the item or statement of account and notify the bank.
Although there is no mention of a specific date, Rogers testified that she and her son began looking for the statements in late May or early June of 2001, after her husband had died.… When they discovered that statements were missing, they notified Union Planters in June of 2001 to replace the statements. At this time, no mention of possible forgery was made, even though Neal, Jr., thought that “something was wrong.” In fact, Neal, Jr., had felt that something was wrong as far back as December of 2000, but failed to do anything. Neal, Jr., testified that neither he nor his mother knew that Reese had been forging checks until September of 2001. Actually, it was Union Planters that notified Rogers that there had been forgeries, as opposed to Rogers’ discovering the forgeries herself.
Rogers is therefore precluded from making claims against Union Planters because (1) under 4-406(a), Union Planters provided the statements to Rogers, and (2) under 4-406(d)(2), Rogers failed to notify Union Planters of the forgeries within 30 days of the date she should have reasonably discovered the forgeries.…
Conclusion
The circuit court erred in denying Union Planters’ motion for JNOV because, under 4-406, Rogers is precluded from recovering amounts paid by Union Planters on any of the forged checks because she failed to timely detect and notify the bank of the unauthorized transactions and because she failed to show that Union Planters failed to use ordinary care in its processing of the forged checks. Therefore, we reverse the circuit court’s judgment and render judgment here that Rogers take nothing and that the complaint and this action are finally dismissed with prejudice. Reversed.
case questions
1. If a bank pays out over a forged drawer’s signature one time, and the customer (drawer) reports the forgery to the bank within thirty days, why does the bank take the loss?
2. Who forged the checks?
3. Why did Mrs. Rogers think she should not be liable for the forgeries?
4. In the end, who probably really suffered the loss here?
Customer’s Duty to Inspect Bank Statements
Commerce Bank of Delaware v. Brown
2007 WL 1207171 (Del. Com. Pl. 2007)
I. Procedural Posture
Plaintiff, Commerce Bank/Delaware North America (“Commerce”) initially filed a civil complaint against defendant Natasha J. Brown (“Brown”) on October 28, 2005. Commerce seeks judgment in the amount of \$4.020.11 plus costs and interest and alleges that Brown maintained a checking account with Commerce and has been unjustly enriched by \$4,020.11.…
The defendant, Brown…denied all allegations of the complaint. As an affirmative defense Brown claims the transaction for which plaintiff seeks to recover a money judgment were made by means of an ATM Machine using a debit card issued by the defendant. On January 16, 2005 Brown asserts that she became aware of the fraudulent transactions and timely informed the plaintiff of the facts on January 16, 2005. Brown asserts that she also requested Commerce in her answer to investigate the matter and to close her account. Based upon these facts, Brown asserts a maximum liability on her own part from \$50.00 to \$500.00 in accordance with the Electronic Fund Transfer Act (“EFTA”) 15 U.S.C. § 1693(g) and regulation (e), 12 CFR 205.6. [Commerce Bank withdrew its complaint at trial, leaving only the defendant’s counter-claim in issue.]
Defendant Brown asserts [that] defendant failed to investigate and violated EFTA and is therefore liable to the plaintiff for money damages citing [EFTA].
II. The Facts
Brown was the only witness called at trial. Brown is twenty-seven years old and has been employed by Wilmington Trust as an Administrative Assistant for the past three years. Brown previously opened a checking account with Commerce and was issued a debit/ATM card by Commerce which was in her possession in December 2004. Brown, on or about January 14, 2005 went to Commerce to charge a \$5.00 debit to the card at her lunch-break was informed that there was a deficiency balance in the checking account. Brown went to the Talleyville branch of Commerce Bank and spoke with “Carla” who agreed to investigate these unauthorized charges, as well as honor her request to close the account. Defendant’s Exhibit No.: 1 is a Commerce Bank electronic filing and/or e-mail which details a visit by defendant on January 16, 2005 to report her card loss. The “Description of Claim” indicates as follows:
Customer came into speak with a CSR “Carla Bernard” on January 16, 2005 to report her card loss. At this time her account was only showing a negative \$50.00 balance. She told Ms. Bernard that this was not her transaction and to please close this account. Ms. Bernard said that she would do this and that there would be an investigation on the unauthorized transactions. It was at this time also that she had Ms. Bernard change her address. In the meantime, several transactions posted to the account causing a balance of negative \$3,948.11 and this amount has since been charged off on 1/27/05. Natasha Brown never received any notification of this until she received a letter from one of our collection agencies. She is now here to get this resolved.
On the back of defendant’s Exhibit No.: 1 were 26 separate unauthorized transactions at different mercantile establishments detailing debits with the pin number used on Brown’s debit card charged to Commerce Bank. The first charge was \$501.75 on January 13, 2005.… Brown asserts at trial that she therefore timely gave notice to Commerce to investigate and requested Commerce to close the debit checking account on January 16, 2005.
At trial Brown also testified she “never heard” from Commerce again until she received a letter in December 2005 citing a \$4,000.00 deficiency balance.…
On cross-examination Brown testified she received a PIN number from Commerce and “gave the PIN number to no other person.” In December 2004 she resided with Charles Williams, who is now her husband. Brown testified on cross-examination that she was the only person authorized as a PIN user and no one else knew of the card, ‘used the card,’ or was provided orally or in writing of the PIN number. Brown spoke with Carla Bernard at the Commerce Bank at the Talleyville branch. Although Brown did not initially fill out a formal report, she did visit Commerce on January 16, 2005 the Talleyville branch and changed her address with Carla. Brown does not recall the last time she ever received a statement from Commerce Bank on her checking account. Brown made no further purchases with the account and she was unaware of all the “incidents of unauthorized debit charges on her checking account” until she was actually sued by Commerce Bank in the Court of Common Pleas.
III. The Law
15 U.S.C. § 1693(g). Consumer Liability:
(a) Unauthorized electronic fund transfers; limit. A consumer shall be liable for any unauthorized electronic fund transfer.…In no event, however, shall a consumer’s liability for an unauthorized transfer exceed the lesser of—
(1) \$ 50; or
(2) the amount of money or value of property or services obtained in such unauthorized electronic fund transfer prior to the time the financial institution is notified of, or otherwise becomes aware of, circumstances which lead to the reasonable belief that an unauthorized electronic fund transfer involving the consumer’s account has been or may be affected. Notice under this paragraph is sufficient when such steps have been taken as may be reasonably required in the ordinary course of business to provide the financial institution with the pertinent information, whether or not any particular officer, employee, or agent of the financial institution does in fact receive such information.
15 U.S.C. § 1693(m) Civil Liability:
(a) [A]ction for damages; amount of award.…[A]ny person who fails to comply with any provision of this title with respect to any consumer, except for an error resolved in accordance with section 908, is liable to such consumer in an amount equal to the sum of—
(1) any actual damage sustained by such consumer as a result of such failure;
(2) in the case of an individual action, an amount not less than \$ 100 nor greater than \$ 1,000; or…
(3) in the case of any successful action to enforce the foregoing liability, the costs of the action, together with a reasonable attorney’s fee as determined by the court.
12 C.F.R. § 205.6 Liability of consumer for unauthorized transfers.
(b) Limitations on amount of liability. A consumer’s liability for an unauthorized electronic fund transfer or a series of related unauthorized transfers shall be determined as follows:
(1) Timely notice given. If the consumer notifies the financial institution within two business days after learning of the loss or theft of the access device, the consumer’s liability shall not exceed the lesser of \$ 50 or the amount of unauthorized transfers that occur before notice to the financial institution.
(2) Timely notice not given. If the consumer fails to notify the financial institution within two business days after learning of the loss or theft of the access device, the consumer’s liability shall not exceed the lesser of \$ 500 or the sum of:
(i) \$ 50 or the amount of unauthorized transfers that occur within the two business days, whichever is less; and
(ii) The amount of unauthorized transfers that occur after the close of two business days and before notice to the institution, provided the institution establishes that these transfers would not have occurred had the consumer notified the institution within that two-day period.
IV. Opinion and Order
The Court finds based upon the testimony presented herein that defendant in her counter-claim has proven by a preponderance of evidence damages in the amount of \$1,000.00 plus an award of attorney’s fees. Clearly, Commerce failed to investigate the unauthorized charges pursuant to 15 U.S.C. § 1693(h). Nor did Commerce close the account as detailed in Defendant’s Exhibit No. 1. Instead, Commerce sued Brown and then withdrew its claim at trial. The Court finds \$50.00 is the appropriate liability for Brown for the monies charged on her account as set forth within the above statute because she timely notified, in person, Commerce on January 16, 2005. Brown also requested Commerce to close her checking account. Based upon the trial record, defendant has proven by a preponderance of the evidence damages of \$1,000.00 as set forth in the above statute, 15 U.S.C. § 1693(m).
case questions
1. Why—apparently—did the bank withdraw its complaint against Brown at the time of trial?
2. Why does the court mention Ms. Brown’s occupation, and that she was at the time of the incident living with the man who was—at the time of trial—her husband?
3. What is the difference between the United States Code (USC) and the Code of Federal Regulations (CFR), both of which are cited by the court?
4. What did the bank do wrong here?
5. What damages did Ms. Brown suffer for which she was awarded \$1,000? What else did she get by way of an award that is probably more important? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/23%3A_Legal_Aspects_of_Banking/23.4%3A_Cases.txt |
summary
Traditionally when a customer wrote a check (on the payor bank) and the payee deposited it into his account (at the depository bank), the check was physically routed by means of ground and air transportation to the various intermediary banks until it was physically presented to the payor bank for final settlement. The federal Check 21 Act (2004) promotes changes in this process by allowing banks to process electronic images of customers’ checks instead of the actual paper instrument: the data on the check is truncated (stripped) from the instrument and the data are transmitted. The original check can be digitally recreated by the making of a “substitute check.” Merchants—indeed, anyone with a check scanner and a computer—can also process electronic data from checks to debit the writer’s account and credit the merchant’s instantly.
In addition to Check 21 Act, the Electronic Fund Transfer Act of 1978 also facilitates electronic banking. It primarily addresses the uses of credit and debit cards. Under this law, the electronic terminal must provide a receipt of transfer. The financial institution must follow certain procedures on being notified of errors, the customer’s liability is limited to \$50 if a card or code number is wrongfully used and the institution has been notified, and an employer or government agency can compel acceptance of salary or government benefits by EFT.
Article 4 of the UCC—state law, of course—governs a bank’s relationship with its customers. It permits a bank to pay an overdraft, to pay an altered check (charging the customer’s account for the original tenor of the check), to refuse to pay a six-month-old check, to pay or collect an item of a deceased person (if it has no notice of death) and obligates it to honor stop payment orders. A bank is liable to the customer for damages if it wrongfully dishonors an item. The customer also has duties; primarily, the customer must inspect each statement of account and notify the bank promptly if the checks have been altered or signatures forged. The federal Expedited Funds Availability Act requires that, within some limits, banks make customers’ funds available quickly.
Wholesale funds transactions, involving tens of millions of dollars, were originally made by telegraph (“wire transfers”). The modern law governing such transactions is, in the United States, UCC Article 4A.
A letter of credit is a statement by a bank or other financial institution that it will pay a specified sum of money to specified persons when certain conditions are met. Its purpose is to facilitate nonlocal sales transactions by ensuring that the buyer will not get access to the goods until the seller has proper access to the buyer’s money. In the US letters of credit are governed by UCC Article 5, and in international transactions they may be covered by a different internationally recognized law.
Exercises
1. On March 20, Al gave Betty a check for \$1,000. On March 25, Al gave Carl a check for \$1,000, which Carl immediately had certified. On October 24, when Al had \$1,100 in his account, Betty presented her check for payment and the bank paid her \$1,000. On October 25, Carl presented his check for payment and the bank refused to pay because of insufficient funds. Were the bank’s actions proper?
2. Winifred had a balance of \$100 in her checking account at First Bank. She wrote a check payable to her landlord in the amount of \$400. First Bank cashed the check and then attempted to charge her account. May it? Why?
3. Assume in Exercise 2 that Winifred had deposited \$4,000 in her account a month before writing the check to her landlord. Her landlord altered the check by changing the amount from \$400 to \$4,000 and then cashed the check at First Bank. May the bank charge Winifred’s account for the check? Why?
4. Assume in Exercise 2 that Winifred had deposited \$5,000 in her account a month before writing the check but the bank misdirected her deposit, with the result that her account showed a balance of \$100. Believing the landlord’s check to be an overdraft, the bank refused to pay it. Was the refusal justified? Why?
5. Assume in Exercise 2 that, after sending the check to the landlord, Winifred decided to stop payment because she wanted to use the \$300 in her account as a down payment on a stereo. She called First Bank and ordered the bank to stop payment. Four days later the bank mistakenly paid the check. Is the bank liable to Winifred? Why?
6. Assume in Exercise 5 that the landlord negotiated the check to a holder in due course, who presented the check to the bank for payment. Is the bank required to pay the holder in due course after the stop payment order? Why?
7. On Wednesday, August 4, Able wrote a \$1,000 check on his account at First Bank. On Saturday, August 7, the check was cashed, but the Saturday activity was not recorded by the bank until Monday, August 9. On that day at 8:00 a.m., Able called in a stop payment order on the check and he was told the check had not cleared; at 9:00 he went to the bank and obtained a printed notice confirming the stop payment, but shortly thereafter the Saturday activity was recorded—Able’s account had been debited. He wants the \$1,000 recredited. Was the stop payment order effective? Explain.
8. Alice wrote a check to Carl’s Contracting for \$190 on April 23, 2011. Alice was not satisfied with Carl’s work. She called, leaving a message for him to return the call to discuss the matter with her. He did not do so, but when she reconciled her checks upon receipt of her bank statement, she noticed the check to Carl did not appear on the April statement. Several months went by. She figured Carl just tore the check up instead of bothering to resolve any dispute with her. The check was presented to Alice’s bank for payment on March 20, 2012, and Alice’s bank paid it. May she recover from the bank?
9. Fitting wrote a check in the amount of \$800. Afterwards, she had second thoughts about the check and contacted the bank about stopping payment. A bank employee told her a stop payment order could not be submitted until the bank opened the next day. She discussed with the employee what would happen if she withdrew enough money from her account that when the \$800 check was presented, there would be insufficient funds to cover it. The employee told her that in such a case the bank would not pay the check. Fitting did withdraw enough money to make the \$800 an overdraft, but the bank paid it anyway, and then sued her for the amount of the overdraft. Who wins and why? Continental Bank v. Fitting, 559 P.2d 218 (1977).
10. Plaintiff’s executive secretary forged plaintiff’s name on number checks by signing his name and by using a rubber facsimile stamp of his signature: of fourteen checks that were drawn on her employer’s account, thirteen were deposited in her son’s account at the defendant bank, and one was deposited elsewhere. Evidence at trial was presented that the bank’s system of comparing its customer’s signature to the signature on checks was the same as other banks in the area. Plaintiff sued the bank to refund the amount of the checks paid out over a forged drawer’s signature. Who wins and why? Read v. South Carolina National Bank, 335 S.E.2d 359 (S.C., 1965).
11. On Tuesday morning, Reggie discovered his credit card was not in his wallet. He realized he had not used it since the previous Thursday when he’d bought groceries. He checked his online credit card account register and saw that some \$1,700 had been charged around the county on his card. He immediately notified his credit union of the lost card and unauthorized charges. For how much is Reggie liable?
self-test questions
1. Article 4 of the UCC permits a bank to pay
1. an overdraft
2. an altered check
3. an item of a deceased person if it has no notice of death
4. all of the above
2. The type of banks covered by Article 4 include
1. depository banks
2. payor banks
3. both of the above
4. none of the above
3. A bank may
1. refuse to pay a check drawn more than six months before being presented
2. refuse to pay a check drawn more than sixty days before being presented
3. not refuse to pay a check drawn more than six months before being presented
4. do none of the above
4. Forms of electronic fund transfer include
1. automated teller machines
2. point of sale terminals
3. preauthorized payment plans
4. all of the above
Answer
1. 4
2. 3
3. 1
4. 4 | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/23%3A_Legal_Aspects_of_Banking/23.5%3A_Summary_and_Exercises.txt |
Learning Objectives
After reading this chapter, you should understand the following:
1. How consumers enter into credit transactions and what protections they are afforded when they do
2. What rights consumers have after they have entered into a consumer transaction
3. What debt collection practices third-party collectors may pursue
This chapter and the three that follow are devoted to debtor-creditor relations. In this chapter, we focus on the consumer credit transaction. Chapter 25 "Secured Transactions and Suretyship" and Chapter 26 "Mortgages and Nonconsensual Liens" explore different types of security that a creditor might require. Chapter 27 "Bankruptcy" examines debtors’ and creditors’ rights under bankruptcy law.
The amount of consumer debt, or household debt, owed by Americans to mortgage lenders, stores, automobile dealers, and other merchants who sell on credit is difficult to ascertain. One reads that the average household credit card debt (not including mortgages, auto loans, and student loans) in 2009 was almost \$16,000.Ben Woolsey and Matt Schulz, Credit Card Statistics, Industry Statistics, Debt Statistics, August 24, 2010, http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php. This is “calculated by dividing the total revolving debt in the U.S. (\$852.6 billion as of March 2010 data, as listed in the Federal Reserve’s May 2010 report on consumer credit) by the estimated number of households carrying credit card debt (54 million).” Or maybe it was \$10,000.Deborah Fowles, “Your Monthly Credit Card Minimum Payments May Double,” About.com Financial Planning, http://financialplan.about.com/od/creditcarddebt/a/CCMinimums.htm. Or maybe it was \$7,300.Index Credit Cards, Credit Card Debt, February 9, 2010, http://www.indexcreditcards.com/creditcarddebt. But probably focusing on the average household debt is not very helpful: 55 percent of households have no credit card debt at all, and the median debt is \$1,900.Liz Pulliam Weston, “The Big Lie about Credit Card Debt,” MSN Money, July 30, 2007.
In 2007, the total household debt owed by Americans was \$13.3 trillion, according to the Federal Reserve Board. That is really an incomprehensible number: suffice it to say, then, that the availability of credit is an important factor in the US economy, and not surprisingly, a number of statutes have been enacted over the years to protect consumers both before and after signing credit agreements.
The statutes tend to fall within three broad categories. First, several statutes are especially important when a consumer enters into a credit transaction. These include laws that regulate credit costs, the credit application, and the applicant’s right to check a credit record. Second, after a consumer has contracted for credit, certain statutes give a consumer the right to cancel the contract and correct billing mistakes. Third, if the consumer fails to pay a debt, the creditor has several traditional debt collection remedies that today are tightly regulated by the government.
24: Consumer Credit Transactions
Learning Objectives
1. Understand what statutes regulate the cost of credit, and the exceptions.
2. Know how the cost of credit is expressed in the Truth in Lending Act.
3. Recognize that there are laws prohibiting discrimination in credit granting.
4. Understand how consumers’ credit records are maintained and may be corrected.
The Cost of Credit
Lenders, whether banks or retailers, are not free to charge whatever they wish for credit. Usury laws establish a maximum rate of lawful interest. The penalties for violating usury laws vary from state to state. The heaviest penalties are loss of both principal and interest, or loss of a multiple of the interest the creditor charged. The courts often interpret these laws stringently, so that even if the impetus for a usurious loan comes from the borrower, the contract can be avoided, as demonstrated in Matter of Dane’s Estate (Section 24.3 "Cases").
Some states have eliminated interest rate limits altogether. In other states, usury law is riddled with exceptions, and indeed, in many cases, the exceptions have pretty much eaten up the general rule. Here are some common exceptions:
• Business loans. In many states, businesses may be charged any interest rate, although some states limit this exception to incorporated businesses.
• Mortgage loans. Mortgage loans are often subject to special usury laws. The allowable interest rates vary, depending on whether a first mortgage or a subordinate mortgage is given, or whether the loan is insured or provided by a federal agency, among other variables.
• Second mortgages and home equity loans by licensed consumer loan companies.
• Credit card and other retail installment debt. The interest rate for these is governed by the law of the state where the credit card company does business. (That’s why the giant Citibank, otherwise headquartered in New York City, runs its credit card division out of South Dakota, which has no usury laws for credit cards.)
• Consumer leasing.
• “Small loans” such as payday loans and pawnshop loans.
• Lease-purchases on personal property. This is the lease-to-own concept.
• Certain financing of mobile homes that have become real property or where financing is insured by the federal government.
• Loans a person takes from her tax-qualified retirement plan.
• Certain loans from stockbrokers and dealers.
• Interest and penalties on delinquent property taxes.
• Deferred payment of purchase price (layaway loans).
• Statutory interest on judgments.
And there are others. Moreover, certain charges are not considered interest, such as fees to record documents in a public office and charges for services such as title examinations, deed preparation, credit reports, appraisals, and loan processing. But a creditor may not use these devices to cloak what is in fact a usurious bargain; it is not the form but the substance of the agreement that controls.
As suggested, part of the difficulty here is that governments at all levels have for a generation attempted to promote consumption to promote production; production is required to maintain politically acceptable levels of employment. If consumers can get what they want on credit, consumerism increases. Also, certainly, tight limits on interest rates cause creditors to deny credit to the less creditworthy, which may not be helpful to the lower classes. That’s the rationale for the usury exceptions related to pawnshop and payday loans.
Disclosure of Credit Costs
Setting limits on what credit costs—as usury laws do—is one thing. Disclosing the cost of credit is another.
The Truth in Lending Act
Until 1969, lenders were generally free to disclose the cost of money loaned or credit extended in any way they saw fit—and they did. Financing and credit terms varied widely, and it was difficult and sometimes impossible to understand what the true cost was of a particular loan, much less to comparison shop. After years of failure, consumer interests finally persuaded Congress to pass a national law requiring disclosure of credit costs in 1968. Officially called the Consumer Credit Protection Act, Title I of the law is more popularly known as the Truth in Lending Act (TILA). The act only applies to consumer credit transactions, and it only protects natural-person debtors—it does not protect business organization debtors.
The act provides what its name implies: lenders must inform borrowers about significant terms of the credit transaction. The TILA does not establish maximum interest rates; these continue to be governed by state law. The two key terms that must be disclosed are the finance charge and the annual percentage rate. To see why, consider two simple loans of \$1,000, each carrying interest of 10 percent, one payable at the end of twelve months and the other in twelve equal installments. Although the actual charge in each is the same—\$100—the interest rate is not. Why? Because with the first loan you will have the use of the full \$1,000 for the entire year; with the second, for much less than the year because you must begin repaying part of the principal within a month. In fact, with the second loan you will have use of only about half the money for the entire year, and so the actual rate of interest is closer to 15 percent. Things become more complex when interest is compounded and stated as a monthly figure, when different rates apply to various portions of the loan, and when processing charges and other fees are stated separately. The act regulates open-end credit (revolving credit, like charge cards) and closed-end credit (like a car loan—extending for a specific period), and—as amended later—it regulates consumer leases and credit card transactions, too.
Figure 24.1 Credit Disclosure Form
By requiring that the finance charge and the annual percentage rate be disclosed on a uniform basis, the TILA makes understanding and comparison of loans much easier. The finance charge is the total of all money paid for credit; it includes the interest paid over the life of the loan and all processing charges. The annual percentage rate is the true rate of interest for money or credit actually available to the borrower. The annual percentage rate must be calculated using the total finance charge (including all extra fees). See Figure 24.1 "Credit Disclosure Form" for an example of a disclosure form used by creditors.
Consumer Leasing Act of 1988
The Consumer Leasing Act (CLA) amends the TILA to provide similar full disclosure for consumers who lease automobiles or other goods from firms whose business it is to lease such goods, if the goods are valued at \$25,000 or less and the lease is for four months or more. All material terms of the lease must be disclosed in writing.
Fair Credit and Charge Card Disclosure
In 1989, the Fair Credit and Charge Card Disclosure Act went into effect. This amends the TILA by requiring credit card issuers to disclose in a uniform manner the annual percentage rate, annual fees, grace period, and other information on credit card applications.
Credit Card Accountability, Responsibility, and Disclosure Act of 2009
The 1989 act did make it possible for consumers to know the costs associated with credit card use, but the card companies’ behavior over 20 years convinced Congress that more regulation was required. In 2009, Congress passed and President Obama signed the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the Credit Card Act). It is a further amendment of the TILA. Some of the salient parts of the act are as follows:
• Restricts all interest rate increases during the first year, with some exceptions. The purpose is to abolish “teaser” rates.
• Increases notice for rate increase on future purchases to 45 days.
• Preserves the ability to pay off on the old terms, with some exceptions.
• Limits fees and penalty interest and requires statements to clearly state the required due date and late payment penalty.
• Requires fair application of payments. Amounts in excess of the minimum payment must be applied to the highest interest rate (with some exceptions).
• Provides sensible due dates and time to pay.
• Protects young consumers. Before issuing a card to a person under the age of twenty-one, the card issuer must obtain an application that contains either the signature of a cosigner over the age of twenty-one or information indicating an independent means of repaying any credit extended.
• Restricts card issuers from providing tangible gifts to students on college campuses in exchange for filling out a credit card application.
• Requires colleges to publicly disclose any marketing contracts made with a card issuer.
• Requires enhanced disclosures.
• Requires issuers to disclose the period of time and the total interest it will take to pay off the card balance if only minimum monthly payments are made.
• Establishes gift card protections. Consumers Union, “Upcoming Credit Card Protections,” www.creditcardreform.org/pdf/dodd-summary-509.pdf.
The Federal Reserve Board is to issue implementing rules.
Creditors who violate the TILA are subject to both criminal and civil sanctions. Of these, the most important are the civil remedies open to consumers. If a creditor fails to disclose the required information, a customer may sue to recover twice the finance charge, plus court costs and reasonable attorneys’ fees, with some limitations. As to the Credit Card Act of 2009, the issuing companies were not happy with the reforms. Before the law went into effect, the companies—as one commentator put it—unleashed a “frenzy of retaliation,” Liz Pulliam Weston, “Credit Card Lenders Go on a Rampage,” MSN Money, November 25, 2009. by repricing customer accounts, changing fixed rates to variable rates, lowering credit limits, and increasing fees.
State Credit Disclosure Laws
The federal TILA is not the only statute dealing with credit disclosures. A uniform state act, the Uniform Consumer Credit Code, as amended in 1974, is now on the books in twelve US jurisdictions, States adopting the Uniform Consumer Credit Code are the following: Colorado, Idaho, Indiana, Iowa, Kansas, Maine, Oklahoma, South Carolina, Utah, Wisconsin, Wyoming, and Guam. Cornell University Law School, “Uniform Laws.” http://www.law.cornell.edu/uniform/vol7.html#concc. though its effect on the development of modern consumer credit law has been significant beyond the number of states adopting it. It is designed to protect consumers who buy goods and services on credit by simplifying, clarifying, and updating legislation governing consumer credit and usury.
Getting Credit
Disclosure of credit costs is a good thing. After discovering how much credit will cost, a person might decide to go for it: get a loan or a credit card. The potential creditor, of course, should want to know if the applicant is a good risk; that requires a credit check. And somebody who knows another person’s creditworthiness has what is usually considered confidential information, the possession of which is subject to abuse, and thus regulation.
Equal Credit Opportunity Act
Through the 1960s, banks and other lending and credit-granting institutions regularly discriminated against women. Banks told single women to find a cosigner for loans. Divorced women discovered that they could not open store charge accounts because they lacked a prior credit history, even though they had contributed to the family income on which previous accounts had been based. Married couples found that the wife’s earnings were not counted when they sought credit; indeed, families planning to buy homes were occasionally even told that the bank would grant a mortgage if the wife would submit to a hysterectomy! In all these cases, the premise of the refusal to treat women equally was the unstated—and usually false—belief that women would quit work to have children or simply to stay home.
By the 1970s, as women became a major factor in the labor force, Congress reacted to the manifest unfairness of the discrimination by enacting (as part of the Consumer Credit Protection Act) the Equal Credit Opportunity Act (ECOA) of 1974. The act prohibits any creditor from discriminating “against any applicant on the basis of sex or marital status with respect to any aspect of a credit transaction.” In 1976, Congress broadened the law to bar discrimination (1) on the basis of race, color, religion, national origin, and age; (2) because all or a part of an applicant’s income is from a public assistance program; or (3) because an applicant has exercised his or her rights under the Consumer Credit Protection Act.
Under the ECOA, a creditor may not ask a credit applicant to state sex, race, national origin, or religion. And unless the applicant is seeking a joint loan or account or lives in a community-property state, the creditor may not ask for a statement of marital status or, if you have voluntarily disclosed that you are married, for information about your spouse, nor may one spouse be required to cosign if the other is deemed independently creditworthy. All questions concerning plans for children are improper. In assessing the creditworthiness of an applicant, the creditor must consider all sources of income, including regularly received alimony and child support payments. And if credit is refused, the creditor must, on demand, tell you the specific reasons for rejection. See Rosa v. Park West Bank & Trust Co. in Section 24.3 "Cases" for a case involving the ECOA.
The Home Mortgage Disclosure Act, 1975, and the Community Reinvestment Act (CRA), 1977, get at another type of discrimination: redlining. This is the practice by a financial institution of refusing to grant home loans or home-improvement loans to people living in low-income neighborhoods. The act requires that financial institutions within its purview report annually by transmitting information from their Loan Application Registers to a federal agency. From these reports it is possible to determine what is happening to home prices in a particular area, whether investment in one neighborhood lags compared with that in others, if the racial or economic composition of borrowers changed over time, whether minorities or women had trouble accessing mortgage credit, in what kinds of neighborhoods subprime loans are concentrated, and what types of borrowers are most likely to receive subprime loans, among others. “Armed with hard facts, users of all types can better execute their work: Advocates can launch consumer education campaigns in neighborhoods being targeted by subprime lenders, planners can better tailor housing policy to market conditions, affordable housing developers can identify gentrifying neighborhoods, and activists can confront banks with poor lending records in low income communities.”Kathryn L.S. Pettit and Audrey E. Droesch, “A Guide to Home Mortgage Disclosure Act Data,” The Urban Institute, December 2008, http://www.urban.org/uploadedpdf/1001247_hdma.pdf. Under the CRA, federal regulatory agencies examine banking institutions for CRA compliance and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions.
Fair Credit Reporting Act of 1970: Checking the Applicant’s Credit Record
It is in the interests of all consumers that people who would be bad credit risks not get credit: if they do and they default (fail to pay their debts), the rest of us end up paying for their improvidence. Because credit is such a big business, a number of support industries have grown up around it. One of the most important is the credit-reporting industry, which addresses this issue of checking creditworthiness. Certain companies—credit bureaus—collect information about borrowers, holders of credit cards, store accounts, and installment purchasers. For a fee, this information—currently held on tens of millions of Americans—is sold to companies anxious to know whether applicants are creditworthy. If the information is inaccurate, it can lead to rejection of a credit application that should be approved, and it can wind up in other files where it can live to do more damage. In 1970, Congress enacted, as part of the Consumer Credit Protection Act, the Fair Credit Reporting Act (FCRA) to give consumers access to their credit files in order to correct errors.
Under this statute, an applicant denied credit has the right to be told the name and address of the credit bureau (called “consumer reporting agency” in the act) that prepared the report on which the denial was based. (The law covers reports used to screen insurance and job applicants as well as to determine creditworthiness.) The agency must list the nature and substance of the information (except medical information) and its sources (unless they contributed to an investigative-type report). A credit report lists such information as name, address, employer, salary history, loans outstanding, and the like. An investigative-type report is one that results from personal interviews and may contain nonfinancial information, like drinking and other personal habits, character, or participation in dangerous sports. Since the investigators rely on talks with neighbors and coworkers, their reports are usually subjective and can often be misleading and inaccurate.
The agency must furnish the consumer the information free if requested within thirty days of rejection and must also specify the name and address of anyone who has received the report within the preceding six months (two years if furnished for employment purposes).
If the information turns out to be inaccurate, the agency must correct its records; if investigative material cannot be verified, it must be removed from the file. Those to whom it was distributed must be notified of the changes. When the agency and the consumer disagree about the validity of the information, the consumer’s version must be placed in the file and included in future distributions of the report. After seven years, any adverse information must be removed (ten years in the case of bankruptcy). A person is entitled to one free copy of his or her credit report from each of the three main national credit bureaus every twelve months. If a reporting agency fails to correct inaccurate information in a reasonable time, it is liable to the consumer for \$1,000 plus attorneys’ fees.
Under the FCRA, any person who obtains information from a credit agency under false pretenses is subject to criminal and civil penalties. The act is enforced by the Federal Trade Commission. See Rodgers v. McCullough in Section 24.3 "Cases" for a case involving use of information from a credit report.
Key Takeaway
Credit is an important part of the US economy, and there are various laws regulating its availability and disclosure. Usury laws prohibit charging excessive interest rates, though the laws are riddled with exceptions. The disclosure of credit costs is regulated by the Truth in Lending Act of 1969, the Consumer Leasing Act of 1988, the Fair Credit and Charge Card Disclosure Act of 1989, and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (these latter three are amendments to the TILA). Some states have adopted the Uniform Consumer Credit Code as well. Two major laws prohibit invidious discrimination in the granting of credit: the Equal Credit Opportunity Act of 1974 and the Home Mortgage Disclosure Act of 1975 (addressing the problem of redlining). The Fair Credit Reporting Act of 1970 governs the collection and use of consumer credit information held by credit bureaus.
Exercises
1. The penalty for usury varies from state to state. What are the two typical penalties?
2. What has the TILA done to the use of interest as a term to describe how much credit costs, and why?
3. What is redlining?
4. What does the Fair Credit Reporting Act do, in general? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/24%3A_Consumer_Credit_Transactions/24.1%3A_Entering_into_a_Credit_Transaction.txt |
Learning Objectives
1. Understand that consumers have the right to cancel some purchases made on credit.
2. Know how billing mistakes may be corrected.
3. Recognize that professional debt collectors are governed by some laws restricting certain practices.
Cancellation Rights
Ordinarily, a contract is binding when signed. But consumer protection laws sometimes provide an escape valve. For example, a Federal Trade Commission (FTC) regulation gives consumers three days to cancel contracts made with door-to-door salespersons. Under this cooling-off provision, the cancellation is effective if made by midnight of the third business day after the date of the purchase agreement. The salesperson must notify consumers of this right and supply them with two copies of a cancellation form, and the sales agreement must contain a statement explaining the right. The purchaser cancels by returning one copy of the cancellation form to the seller, who is obligated either to pick up the goods or to pay shipping costs. The three-day cancellation privilege applies only to sales of twenty-five dollars or more made either in the home or away from the seller’s place of business; it does not apply to sales made by mail or telephone, to emergency repairs and certain other home repairs, or to real estate, insurance, or securities sales.
The Truth in Lending Act (TILA) protects consumers in a similar way. For certain big-ticket purchases (such as installations made in the course of major home improvements), sellers sometimes require a mortgage (which is subordinate to any preexisting mortgages) on the home. The law gives such customers three days to rescind the contract. Many states have laws similar to the FTC’s three-day cooling-off period, and these may apply to transactions not covered by the federal rule (e.g., to purchases of less than twenty-five dollars and even to certain contracts made at the seller’s place of business).
Billing Mistakes
In 1975, Congress enacted the Fair Credit Billing Act as an amendment to the Consumer Credit Protection Act. It was intended to put to an end the phenomenon, by then a standard part of any comedian’s repertoire, of the many ways a computer could insist that you pay a bill, despite errors and despite letters you might have written to complain. The act, which applies only to open-end credit and not to installment sales, sets out a procedure that creditors and customers must follow to rectify claimed errors. The customer has sixty days to notify the creditor of the nature of the error and the amount. Errors can include charges not incurred or those billed with the wrong description, charges for goods never delivered, accounting or arithmetic errors, failure to credit payments or returns, and even charges for which you simply request additional information, including proof of sale. During the time the creditor is replying, you need not pay the questioned item or any finance charge on the disputed amount.
The creditor has thirty days to respond and ninety days to correct your account or explain why your belief that an error has been committed is incorrect. If you do turn out to be wrong, the creditor is entitled to all back finance charges and to prompt payment of the disputed amount. If you persist in disagreeing and notify the creditor within ten days, it is obligated to tell all credit bureaus to whom it sends notices of delinquency that the bill continues to be disputed and to tell you to whom such reports have been sent; when the dispute has been settled, the creditor must notify the credit bureaus of this fact. Failure of the creditor to follow the rules, an explanation of which must be provided to each customer every six months and when a dispute arises, bars it from collecting the first fifty dollars in dispute, plus finance charges, even if the creditor turns out to be correct.
Disputes about the Quality of Goods or Services Purchased
While disputes over the quality of goods are not “billing errors,” the act does apply to unsatisfactory goods or services purchased by credit card (except for store credit cards); the customer may assert against the credit card company any claims or defenses he or she may have against the seller. This means that under certain circumstances, the customer may withhold payments without incurring additional finance charges. However, this right is subject to three limitations: (1) the value of the goods or services charged must be in excess of fifty dollars, (2) the goods or services must have been purchased either in the home state or within one hundred miles of the customer’s current mailing address, and (3) the consumer must make a good-faith effort to resolve the dispute before refusing to pay. If the consumer does refuse to pay, the credit card company would acquiesce: it would credit her account for the disputed amount, pass the loss down to the merchant’s bank, and that bank would debit the merchant’s account. The merchant would then have to deal with the consumer directly.
Debt Collection Practices
Banks, financial institutions, and retailers have different incentives for extending credit—for some, a loan is simply a means of making money, and for others, it is an inducement to buyers. But in either case, credit is a risk because the consumer may default; the creditor needs a means of collecting when the customer fails to pay. Open-end credit is usually given without collateral. The creditor can, of course, sue, but if the consumer has no assets, collection can be troublesome. Historically, three different means of recovering the debt have evolved: garnishment, wage assignment, and confession of judgment.
Garnishment
Garnishment is a legal process by which a creditor obtains a court order directing the debtor’s employer (or any party who owes money to the debtor) to pay directly to the creditor a certain portion of the employee’s wages until the debt is paid. Until 1970, garnishment was regulated by state law, and its effects could be devastating—in some cases, even leading to suicide. In 1970, Title III of the Consumer Credit Protection Act asserted federal control over garnishment proceedings for the first time. The federal wage-garnishment law limits the amount of employee earnings that may be withheld in any one pay date to the lesser of 25 percent of disposable (after-tax) earnings or the amount by which disposable weekly earnings exceed thirty times the highest current federal minimum wage. The federal law covers everyone who receives personal earnings, including wages, salaries, commissions, bonuses, and retirement income (though not tips), but it allows courts to garnish above the federal maximum in cases involving support payments (e.g., alimony), in personal bankruptcy cases, and in cases where the debt owed is for state or federal tax.
The federal wage-garnishment law also prohibits an employer from firing any worker solely because the worker’s pay has been garnished for one debt (multiple garnishments may be grounds for discharge). The penalty for violating this provision is a \$1,000 fine, one-year imprisonment, or both. But the law does not say that an employee fired for having one debt garnished may sue the employer for damages. In a 1980 case, the Fifth Circuit Court of Appeals denied an employee the right to sue, holding that the statute places enforcement exclusively in the hands of the federal secretary of labor. Smith v. Cotton Brothers Baking Co., Inc., 609 F.2d 738 (5th Cir. 1980).
The l970 federal statute is not the only limitation on the garnishment process. Note that the states can also still regulate garnishment so long as the state regulation is not in conflict with federal law: North Carolina, Pennsylvania, South Carolina, and Texas prohibit most garnishments, unless it is the government doing the garnishment. And there is an important constitutional limitation as well. Many states once permitted a creditor to garnish the employee’s wage even before the case came to court: a simple form from the clerk of the court was enough to freeze a debtor’s wages, often before the debtor knew a suit had been brought. In 1969, the US Supreme Court held that this prejudgment garnishment procedure was unconstitutional. Sniadach v. Family Finance Corp., 395 U.S. 337 (1969).
Wage Assignment
A wage assignment is an agreement by an employee that a creditor may take future wages as security for a loan or to pay an existing debt. With a wage assignment, the creditor can collect directly from the employer. However, in some states, wage assignments are unlawful, and an employer need not honor the agreement (indeed, it would be liable to the employee if it did). Other states regulate wage assignments in various ways—for example, by requiring that the assignment be a separate instrument, not part of the loan agreement, and by specifying that no wage assignment is valid beyond a certain period of time (two or three years).
Confession of Judgment
Because suing is at best nettlesome, many creditors have developed forms that allow them to sidestep the courthouse when debtors have defaulted. As part of the original credit agreement, the consumer or borrower waives his right to defend himself in court by signing a confession of judgment. This written instrument recites the debtor’s agreement that a court order be automatically entered against him in the event of default. The creditor’s lawyer simply takes the confession of judgment to the clerk of the court, who enters it in the judgment book of the court without ever consulting a judge. Entry of the judgment entitles the creditor to attach the debtor’s assets to satisfy the debt. Like prejudgment garnishment, a confession of judgment gives the consumer no right to be heard, and it has been banned by statute or court decisions in many states.
Fair Debt Collection Practices Act of 1977
Many stores, hospitals, and other organizations attempt on their own to collect unpaid bills, but thousands of merchants, professionals, and small businesses rely on collection agencies to recover accounts receivable. The debt collection business employed some 216,000 people in 2007 and collected over \$40 billion in debt.PricewaterhouseCoopers LLP, Value of Third-Party Debt Collection to the U.S. Economy in 2007: Survey And Analysis, June 2008, www.acainternational.org/files.aspx?p=/images/12546/pwc2007-final.pdf. For decades, some of these collectors used harassing tactics: posing as government agents or attorneys, calling at the debtor’s workplace, threatening physical harm or loss of property or imprisonment, using abusive language, publishing a deadbeats list, misrepresenting the size of the debt, and telling friends and neighbors about the debt. To provide a remedy for these abuses, Congress enacted, as part of the Consumer Credit Protection Act, the Fair Debt Collection Practices Act (FDCPA) in 1977.
This law regulates the manner by which third-party collection agencies conduct their business. It covers collection of all personal, family, and household debts by collection agencies. It does not deal with collection by creditors themselves; the consumer’s remedy for abusive debt collection by the creditor is in tort law.
Under the FDCPA, the third-party collector may contact the debtor only during reasonable hours and not at work if the debtor’s employer prohibits it. The debtor may write the collector to cease contact, in which case the agency is prohibited from further contact (except to confirm that there will be no further contact). A written denial that money is owed stops the bill collector for thirty days, and he can resume again only after the debtor is sent proof of the debt. Collectors may no longer file suit in remote places, hoping for default judgments; any suit must be filed in a court where the debtor lives or where the underlying contract was signed. The use of harassing and abusive tactics, including false and misleading representations to the debtor and others (e.g., claiming that the collector is an attorney or that the debtor is about to be sued when that is not true), is prohibited. Unless the debtor has given the creditor her cell phone number, calls to cell phones (but not to landlines) are not allowed. Federal Communications Commission, “In the Matter of Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991,” http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-07-232A1.txt. (This document shows up best with Adobe Acrobat.) In any mailings sent to the debtor, the return address cannot indicate that it is from a debt collection agency (so as to avoid embarrassment from a conspicuous name on the envelope that might be read by third parties).
Communication with third parties about the debt is not allowed, except when the collector may need to talk to others to trace the debtor’s whereabouts (though the collector may not tell them that the inquiry concerns a debt) or when the collector contacts a debtor’s attorney, if the debtor has an attorney. The federal statute gives debtors the right to sue the collector for damages for violating the statute and for causing such injuries as job loss or harm to reputation.
Key Takeaway
Several laws regulate practices after consumer credit transactions. The FTC provides consumers with a three-day cooling-off period for some in-home sales, during which time the consumer-purchaser may cancel the sale. The TILA and some state laws also have some cancellation provisions. Billing errors are addressed by the Fair Credit Billing Act, which gives consumers certain rights. Debt collection practices such as garnishment, wage assignments, and confessions of judgment are regulated (and in some states prohibited) by federal and state law. Debt collection practices for third-party debt collectors are constrained by the Fair Debt Collection Practices Act.
Exercises
1. Under what circumstances may a consumer have three days to avoid a contract?
2. How does the Fair Credit Billing Act resolve the problem that occurs when a consumer disputes a bill and “argues” with a computer about it?
3. What is the constitutional problem with garnishment as it was often practiced before 1969?
4. If Joe of Joe’s Garage wants to collect on his own the debts he is owed, he is not constrained by the FDCPA. What limits are there on his debt collection practices? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/24%3A_Consumer_Credit_Transactions/24.2%3A_Consumer_Protection_Laws_and_Debt_Collection_Practices.txt |
Usury
Matter of Dane’s Estate
390 N.Y.S.2d 249 (N.Y.A.D. 1976)
MAHONEY, J.
On December 17, 1968, after repeated requests by decedent [Leland Dane] that appellant [James Rossi] loan him \$10,500 [about \$64,000 in 2010 dollars] the latter drew a demand note in that amount and with decedent’s consent fixed the interest rate at 7 1/2% Per annum, the then maximum annual interest permitted being 7 1/4%. Decedent executed the note and appellant gave him the full amount of the note in cash.…[The estate] moved for summary judgment voiding the note on the ground that it was a usurious loan, the note having been previously rejected as a claim against the estate. The [lower court] granted the motion, voided the note and enjoined any prosecution on it thereafter. Appellant’s cross motion to enforce the claim was denied.
New York’s usury laws are harsh, and courts have been reluctant to extend them beyond cases that fall squarely under the statutes [Citation]. [New York law] makes any note for which more than the legal rate of interests is ‘reserved or taken’ or ‘agreed to be reserved or taken’ void. [The law] commands cancellation of a note in violation of [its provisions]. Here, since both sides concede that the note evidences the complete agreement between the parties, we cannot aid appellant by reliance upon the presumption that he did not make the loan at a usurious rate [Citation]. The terms of the loan are not in dispute. Thus, the note itself establishes, on its face, clear evidence of usury. There is no requirement of a specific intent to violate the usury statute. A general intent to charge more than the legal rate as evidenced by the note, is all that is needed. If the lender intends to take and receive a rate in excess of the legal percentage at the time the note is made, the statute condemns the act and mandates its cancellation [Citation]. The showing, as here, that the note reserves to the lender an illegal rate of interest satisfies respondents’ burden of proving a usurious loan.
Next, where the rate of interest on the face of a note is in excess of the legal rate, it cannot be argued that such a loan may be saved because the borrower prompted the loan or even set the rate. The usury statutes are for the protection of the borrower and [their] purpose would be thwarted if the lender could avoid its consequences by asking the borrower to set the rate. Since the respondents herein asserted the defense of usury, it cannot be said that the decedent waived the defense by setting or agreeing to the 7 1/2% Rate of interest.
Finally, equitable considerations cannot be indulged when, as here, a statute specifically condemns an act. The statute fixes the law, and it must be followed.
The order should be affirmed, without costs.
case questions
1. What is the consequence to the lender of charging usurious rates in New York?
2. The rate charged here was one-half of one percent in excess of the allowable limit. Who made the note, the borrower or the lender? That makes no difference, but should it?
3. What “equitable considerations” were apparently raised by the creditor?
Discrimination under the ECOA
Rosa v. Park West Bank & Trust Co.
214 F.3d 213, C.A.1 (Mass. 2000)
Lynch, J.
Lucas Rosa sued the Park West Bank & Trust Co. under the Equal Credit Opportunity Act (ECOA), 15 U.S.C. §§ 1691–1691f, and various state laws. He alleged that the Bank refused to provide him with a loan application because he did not come dressed in masculine attire and that the Bank’s refusal amounted to sex discrimination under the Act. The district court granted the Bank’s motion to dismiss the ECOA claim…
I.
According to the complaint, which we take to be true for the purpose of this appeal, on July 21, 1998, Mr. Lucas Rosa came to the Bank to apply for a loan. A biological male, he was dressed in traditionally feminine attire. He requested a loan application from Norma Brunelle, a bank employee. Brunelle asked Rosa for identification. Rosa produced three forms of photo identification: (1) a Massachusetts Department of Public Welfare Card; (2) a Massachusetts Identification Card; and (3) a Money Stop Check Cashing ID Card. Brunelle looked at the identification cards and told Rosa that she would not provide him with a loan application until he “went home and changed.” She said that he had to be dressed like one of the identification cards in which he appeared in more traditionally male attire before she would provide him with a loan application and process his loan request.
II.
Rosa sued the Bank for violations of the ECOA and various Massachusetts antidiscrimination statutes. Rosa charged that “[b]y requiring [him] to conform to sex stereotypes before proceeding with the credit transaction, [the Bank] unlawfully discriminated against [him] with respect to an aspect of a credit transaction on the basis of sex.” He claims to have suffered emotional distress, including anxiety, depression, humiliation, and extreme embarrassment. Rosa seeks damages, attorney’s fees, and injunctive relief.
Without filing an answer to the complaint, the Bank moved to dismiss.… The district court granted the Bank’s motion. The court stated:
[T]he issue in this case is not [Rosa’s] sex, but rather how he chose to dress when applying for a loan. Because the Act does not prohibit discrimination based on the manner in which someone dresses, Park West’s requirement that Rosa change his clothes does not give rise to claims of illegal discrimination. Further, even if Park West’s statement or action were based upon Rosa’s sexual orientation or perceived sexual orientation, the Act does not prohibit such discrimination.
Price Waterhouse v. Hopkins (U.S. Supreme Court, 1988), which Rosa relied on, was not to the contrary, according to the district court, because that case “neither holds, nor even suggests, that discrimination based merely on a person’s attire is impermissible.”
On appeal, Rosa says that the district court “fundamentally misconceived the law as applicable to the Plaintiff’s claim by concluding that there may be no relationship, as a matter of law, between telling a bank customer what to wear and sex discrimination.” …The Bank says that Rosa loses for two reasons. First, citing cases pertaining to gays and transsexuals, it says that the ECOA does not apply to crossdressers. Second, the Bank says that its employee genuinely could not identify Rosa, which is why she asked him to go home and change.
III.
…In interpreting the ECOA, this court looks to Title VII case law, that is, to federal employment discrimination law.…The Bank itself refers us to Title VII case law to interpret the ECOA.
The ECOA prohibits discrimination, “with respect to any aspect of a credit transaction[,] on the basis of race, color, religion, national origin, sex or marital status, or age.” 15 U.S.C. § 1691(a). Thus to prevail, the alleged discrimination against Rosa must have been “on the basis of…sex.” See [Citation.] The ECOA’s sex discrimination prohibition “protects men as well as women.”
While the district court was correct in saying that the prohibited bases of discrimination under the ECOA do not include style of dress or sexual orientation, that is not the discrimination alleged. It is alleged that the Bank’s actions were taken, in whole or in part, “on the basis of… [the appellant’s] sex.” The Bank, by seeking dismissal under Rule 12(b)(6), subjected itself to rigorous standards. We may affirm dismissal “only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.” [Citations] Whatever facts emerge, and they may turn out to have nothing to do with sex-based discrimination, we cannot say at this point that the plaintiff has no viable theory of sex discrimination consistent with the facts alleged.
The evidence is not yet developed, and thus it is not yet clear why Brunelle told Rosa to go home and change. It may be that this case involves an instance of disparate treatment based on sex in the denial of credit. See [Citation]; (“‘Disparate treatment’…is the most easily understood type of discrimination. The employer simply treats some people less favorably than others because of their…sex.”); [Citation] (invalidating airline’s policy of weight limitations for female “flight hostesses” but not for similarly situated male “directors of passenger services” as impermissible disparate treatment); [Citation] (invalidating policy that female employees wear uniforms but that similarly situated male employees need wear only business dress as impermissible disparate treatment); [Citation] (invalidating rule requiring abandonment upon marriage of surname that was applied to women, but not to men). It is reasonable to infer that Brunelle told Rosa to go home and change because she thought that Rosa’s attire did not accord with his male gender: in other words, that Rosa did not receive the loan application because he was a man, whereas a similarly situated woman would have received the loan application. That is, the Bank may treat, for credit purposes, a woman who dresses like a man differently than a man who dresses like a woman. If so, the Bank concedes, Rosa may have a claim. Indeed, under Price Waterhouse, “stereotyped remarks [including statements about dressing more ‘femininely’] can certainly be evidence that gender played a part.” [Citation.] It is also reasonable to infer, though, that Brunelle refused to give Rosa the loan application because she thought he was gay, confusing sexual orientation with cross-dressing. If so, Rosa concedes, our precedents dictate that he would have no recourse under the federal Act. See [Citation]. It is reasonable to infer, as well, that Brunelle simply could not ascertain whether the person shown in the identification card photographs was the same person that appeared before her that day. If this were the case, Rosa again would be out of luck. It is reasonable to infer, finally, that Brunelle may have had mixed motives, some of which fall into the prohibited category.
It is too early to say what the facts will show; it is apparent, however, that, under some set of facts within the bounds of the allegations and non-conclusory facts in the complaint, Rosa may be able to prove a claim under the ECOA.…
We reverse and remand for further proceedings in accordance with this opinion.
case questions
1. Could the bank have denied Mr. Rosa a loan because he was gay?
2. If a woman had applied for loan materials dressed in traditionally masculine attire, could the bank have denied her the materials?
3. The Court offers up at least three possible reasons why Rosa was denied the loan application. What were those possible reasons, and which of them would have been valid reasons to deny him the application?
4. To what federal law does the court look in interpreting the application of the ECOA?
5. Why did the court rule in Mr. Rosa’s favor when the facts as to why he was denied the loan application could have been interpreted in several different ways?
Uses of Credit Reports under the FCRA
Rodgers v. McCullough
296 F.Supp.2d 895 (W.D. Tenn. 2003)
Background
This case concerns Defendants’ receipt and use of Christine Rodgers’ consumer report. The material facts do not seem to be disputed. The parties agree that Ms. Rodgers gave birth to a daughter, Meghan, on May 4, 2001. Meghan’s father is Raymond Anthony. Barbara McCullough, an attorney, represented Mr. Anthony in a child custody suit against Ms. Rodgers in which Mr. Anthony sought to obtain custody and child support from Ms. Rodgers. Ms. McCullough received, reviewed, and used Ms. Rodgers’ consumer report in connection with the child custody case.
On September 25, 2001, Ms. McCullough instructed Gloria Christian, her secretary, to obtain Ms. Rodgers’ consumer report. Ms. McCullough received the report on September 27 or 28 of 2001. She reviewed the report in preparation for her examination of Ms. Rodgers during a hearing to be held in juvenile court on October 23, 2001. She also used the report during the hearing, including attempting to move the document into evidence and possibly handing it to the presiding judge.
The dispute in this case centers around whether Ms. McCullough obtained and used Ms. Rodgers’ consumer report for a purpose permitted under the Fair Credit Reporting Act (the “FCRA”). Plaintiff contends that Ms. McCullough, as well as her law firm, Wilkes, McCullough & Wagner, a partnership, and her partners, Calvin J. McCullough and John C. Wagner, are liable for the unlawful receipt and use of Ms. Rodgers’ consumer report in violation 15 U.S.C. §§ 1681 o (negligent failure to comply with the FCRA) and 1681n (willful failure to comply with the FCRA or obtaining a consumer report under false pretenses). Plaintiff has also sued Defendants for the state law tort of unlawful invasion of privacy.…
Analysis
Plaintiff has moved for summary judgment on the questions of whether Defendants failed to comply with the FCRA (i.e. whether Defendants had a permissible purpose to obtain Ms. Rodgers’ credit report), whether Defendants’ alleged failure to comply was willful, and whether Defendants’ actions constituted unlawful invasion of privacy. The Court will address the FCRA claims followed by the state law claim for unlawful invasion of privacy.
A. Permissible Purpose under the FCRA
Pursuant to the FCRA, “A person shall not use or obtain a consumer report for any purpose unless (1) the consumer report is obtained for a purpose for which the consumer report is authorized to be furnished under this section.…” [Citation.] Defendants do not dispute that Ms. McCullough obtained and used Ms. Rodgers’ consumer report.
[The act] provides a list of permissible purposes for the receipt and use of a consumer report, of which the following subsection is at issue in this case:
[A]ny consumer reporting agency may furnish a consumer report under the following circumstances and no other:…
(3) To a person which it has reason to believe-
(A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer…
[Citation.] Defendants concede that Ms. McCullough’s receipt and use of Ms. Rodgers’ consumer report does not fall within any of the other permissible purposes enumerated in [the act].
Ms. Rodgers requests summary judgment in her favor on this point, relying on the plain text of the statute, because she was not in arrears on any child support obligation at the time Ms. McCullough requested the consumer report, nor did she owe Ms. McCullough’s client any debt. She notes that Mr. Anthony did not have custody of Meghan Rodgers and that an award of child support had not even been set at the time Ms. McCullough obtained her consumer report.
Defendants maintain that Ms. McCullough obtained Ms. Rodgers’ consumer report for a permissible purpose, namely to locate Ms. Rodgers’ residence and set and collect child support obligations. Defendants argue that 15 U.S.C. § 1681b(a)(3)(A) permits the use of a credit report in connection with “collection of an account” and, therefore, Ms. McCullough was permitted to use Ms. Rodgers’ credit report in connection with the collection of child support. Defendants also admit that Ms. McCullough used the credit report to portray Ms. Rodgers as irresponsible, financially unstable, and untruthful about her residence and employment history to the Juvenile Court. Defendants do not allege that these constitute permissible purposes under the FCRA.
The cases Defendants have cited in response to the motion for summary judgment are inapplicable to the present facts. In each case cited by Defendants, the person who obtained a credit report did so in order to collect on an outstanding judgment or an outstanding debt. See, e.g., [Citation] (finding that collection of a judgment of arrears in child support is a permissible purpose under [the act]; [Citation] (holding that defendant had a permissible purpose for obtaining a consumer report where plaintiff owed an outstanding debt to the company).
However, no such outstanding debt or judgment existed in this case. At the time Ms. McCullough obtained Ms. Rodgers’ consumer report, Ms. Rodgers’ did not owe money to either Ms. McCullough or her client, Mr. Anthony. Defendants have provided no evidence showing that Ms. McCullough believed Ms. Rodgers owed money to Mr. Anthony at the time she requested the credit report. Indeed, Mr. Anthony had not even been awarded custody of Meghan Rodgers at the time Ms. McCullough obtained and used the credit report. Ms. McCullough acknowledged each of the facts during her deposition. Moreover, in response to Plaintiff’s request for admissions, Ms. McCullough admitted that she did not receive the credit report for the purpose of collecting on an account from Ms. Rodgers.
The evidence before the Court makes clear that Ms. McCullough was actually attempting, on behalf of Mr. Anthony, to secure custody of Meghan Rodgers and obtain a future award of child support payments from Ms. Rodgers by portraying Ms. Rodgers as irresponsible to the court. These are not listed as permissible purposes under [FCRA]. Defendants have offered the Court no reason to depart from the plain language of the statute, which clearly does not permit an individual to obtain a consumer report for the purposes of obtaining child custody and instituting child support payments. Moreover, the fact that the Juvenile Court later awarded custody and child support to Mr. Anthony does not retroactively provide Ms. McCullough with a permissible purpose for obtaining Ms. Rodgers’ consumer report. Therefore, the Court GRANTS Plaintiff’s motion for partial summary judgment on the question of whether Defendants had a permissible purpose to obtain Ms. Rodgers’ credit report.
B. Willful Failure to Comply with the FCRA
Pursuant to [the FCRA], “Any person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer” for the specified damages.
“To show willful noncompliance with the FCRA, [the plaintiff] must show that [the defendant] ‘knowingly and intentionally committed an act in conscious disregard for the rights of others,’ but need not show ‘malice or evil motive.’” [Citation.] “Under this formulation the defendant must commit the act that violates the Fair Credit Reporting Act with knowledge that he is committing the act and with intent to do so, and he must also be conscious that his act impinges on the rights of others.” “The statute’s use of the word ‘willfully’ imports the requirement that the defendant know his or her conduct is unlawful.” [Citation.] A defendant can not be held civilly liable under [the act] if he or she obtained the plaintiff’s credit report “under what is believed to be a proper purpose under the statute but which a court…later rules to be impermissible legally under [Citation].
Ms. McCullough is an attorney who signed multiple service contracts with Memphis Consumer Credit Association indicating that the primary purpose for which credit information would be ordered was “to collect judgments.” Ms. McCullough also agreed in these service contracts to comply with the FCRA. Her deposition testimony indicates that she had never previously ordered a consumer report for purposes of calculating child support. This evidence may give rise to an inference that Ms. McCullough was aware that she did not order Ms. Rodgers’ consumer report for a purpose permitted under the FCRA.
Defendants argue in their responsive memorandum that if Ms. McCullough had suspected that she had obtained Ms. Rodgers’ credit report in violation of the FCRA, it is unlikely that she would have attempted to present the report to the Juvenile Court as evidence during the custody hearing for Meghan Rodgers. Ms. McCullough also testified that she believed she had a permissible purpose for obtaining Ms. Rodgers’ consumer report (i.e. to set and collect child support obligations).
Viewing the evidence in the light most favorable to the nonmoving party, Defendants have made a sufficient showing that Ms. McCullough may not have understood that she lacked a permissible purpose under the FCRA to obtain and use Ms. Rodgers’ credit report.
If Ms. McCullough was not aware that her actions might violate the FCRA at the time she obtained and used Ms. Rodgers’ credit report, she would not have willfully failed to comply with the FCRA. The question of Ms. McCullough’s state of mind at the time she obtained and used Ms. Rodgers’ credit report is an issue best left to a jury. [Citation] (“state of mind is typically not a proper issue for resolution on summary judgment”). The Court DENIES Plaintiff’s motion for summary judgment on the question of willfulness under [the act].
C. Obtaining a Consumer Report under False Pretenses or Knowingly without a Permissible Purpose
…For the same reasons the Court denied Plaintiff’s motion for summary judgment on the question of willfulness, the Court also DENIES Plaintiff’s motion for summary judgment on the question of whether Ms. McCullough obtained and used Ms. Rodgers’ credit report under false pretenses or knowingly without a permissible purpose.
[Discussion of the invasion of privacy claim omitted.]
Conclusion
For the foregoing reasons, the Court GRANTS Plaintiff’s Motion for Partial Summary Judgment Regarding Defendants’ Failure to Comply with the Fair Credit Reporting Act [having no permissible purpose]. The Court DENIES Plaintiff’s remaining motions for partial summary judgment.
case questions
1. Why did the defendant, McCullough, order her secretary to obtain Ms. Rodgers’s credit report? If Ms. McCullough is found liable, why would her law firm partners also be liable?
2. What “permissible purpose” did the defendants contend they had for obtaining the credit report? Why did the court determine that purpose was not permissible?
3. Why did the court deny the plaintiff’s motion for summary judgment on the question of whether the defendant “willfully” failed to comply with the act? Is the plaintiff out of luck on that question, or can it be litigated further? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/24%3A_Consumer_Credit_Transactions/24.3%3A_Cases.txt |
summary
Consumers who are granted credit have long received protection through usury laws (laws that establish a maximum interest rate). The rise in consumer debt in recent years has been matched by an increase in federal regulation of consumer credit transactions. The Truth in Lending Act requires disclosure of credit terms; the Equal Credit Opportunity Act prohibits certain types of discrimination in the granting of credit; the Fair Credit Reporting Act gives consumers access to their credit dossiers and prohibits unapproved use of credit-rating information. After entering into a credit transaction, a consumer has certain cancellation rights and may use a procedure prescribed by the Fair Credit Billing Act to correct billing errors. Traditional debt collection practices—garnishment, wage assignments, and confession of judgment clauses—are now subject to federal regulation, as are the practices of collection agencies under the Fair Debt Collection Practices Act.
Exercises
1. Carlene Consumer entered into an agreement with Rent to Buy, Inc., to rent a computer for \$20 per week. The agreement also provided that if Carlene chose to rent the computer for fifty consecutive weeks, she would own it. She then asserted that the agreement was not a lease but a sale on credit subject to the Truth in Lending Act, and that Rent to Buy, Inc., violated the act by failing to state the annual percentage rate. Is Carlene correct?
2. Carlos, a resident of Chicago, was on a road trip to California when he heard a noise under the hood of his car. He took the car to a mechanic for repair. The mechanic overhauled the power steering unit and billed Carlos \$600, which he charged on his credit card. Later that day—Carlos having driven about fifty miles—the car made the same noise, and Carlos took it to another mechanic, who diagnosed the problem as a loose exhaust pipe connection at the manifold. Carlos was billed \$300 for this repair, with which he was satisfied. Carlos returned to Chicago and examined his credit card statement. What rights has he as to the \$600 charge on his card?
3. Ken was the owner of Scrimshaw, a company that manufactured and sold carvings made on fossilized ivory. He applied for a loan from Bank. Bank found him creditworthy, but seeking additional security for repayment, it required his wife, Linda, to sign a guaranty as well. During a subsequent recession, demand for scrimshaw fell, and Ken’s business went under. Bank filed suit against both Ken and Linda. What defense has Linda?
4. The FCRA requires that credit-reporting agencies “follow reasonable procedures to assure maximum possible accuracy of the information.” In October of 1989, Renie Guimond became aware of, and notified the credit bureau Trans Union about, inaccuracies in her credit report: that she was married (and it listed a Social Security number for this nonexistent spouse), that she was also known as Ruth Guimond, and that she had a Saks Fifth Avenue credit card. About a month later, Trans Union responded to Guimond’s letter, stating that the erroneous information had been removed. But in March of 1990, Trans Union again published the erroneous information it purportedly had removed. Guimond then requested the source of the erroneous information, to which Trans Union responded that it could not disclose the identity of the source because it did not know its source. The disputed information was eventually removed from Guimond’s file in October 1990. When Guimond sued, Trans Union defended that she had no claim because no credit was denied to her as a result of the inaccuracies in her credit file. The lower court dismissed her case; she appealed. To what damages, if any, is Guimond entitled?
5. Plaintiff incurred a medical debt of \$160. She received two or three telephone calls from Defendant, the collection agency; each time she denied any money owing. Subsequently she received this letter:
You have shown that you are unwilling to work out a friendly settlement with us to clear the above debt. Our field investigator has now been instructed to make an investigation in your neighborhood and to personally call on your employer.
The immediate payment of the full amount, or a personal visit to this office, will spare you this embarrassment.
The top of the letter notes the creditor’s name and the amount of the alleged debt. The letter was signed by a “collection agent.” The envelope containing that letter presented a return address that included Defendant’s full name: “Collection Accounts Terminal, Inc.” What violations of the Fair Debt Collection Practices Act are here presented?
6. Eric and Sharaveen Rush filed a claim alleging violations of the Fair Credit Reporting Act arising out of an allegedly erroneous credit report prepared by a credit bureau from information, in part, from Macy’s, the department store. The error causes the Rushes to be denied credit. Macy’s filed a motion to dismiss. Is Macy’s liable? Discuss.
self-test questions
1. An example of a loan that is a common exception to usury law is
1. a business loan
2. a mortgage loan
3. an installment loan
4. all of the above
2. Under the Fair Credit Reporting Act, an applicant denied credit
1. has a right to a hearing
2. has the right to be told the name and address of the credit bureau that prepared the credit report upon which denial was based
3. always must pay a fee for information regarding credit denial
4. none of the above
3. Garnishment of wages
1. is limited by federal law
2. involves special rules for support cases
3. is a legal process where a creditor obtains a court order directing the debtor’s employer to pay a portion of the debtor’s wages directly to the creditor
4. involves all of the above
4. A wage assignment is
1. an example of garnishment
2. an example of confession of judgment
3. an exception to usury law
4. an agreement that a creditor may take future wages as security for a loan
5. The Truth-in-Truth in Lending Act requires disclosure of
1. the annual percentage rate
2. the borrower’s race
3. both of the above
4. neither of the above
Answer
1. 4
2. 2
3. 4
4. 4
5. 1 | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/24%3A_Consumer_Credit_Transactions/24.4%3A_Summary_and_Exercises.txt |
Learning Objectives
After reading this chapter, you should understand the following:
1. The basic concepts of secured transactions
2. The property subject to the security interest
3. Creation and perfection of the security interest
4. Priorities for claims on the security interest
5. Rights of creditors on default
6. The basic concepts of suretyship
7. The relationship between surety and principal
8. Rights among cosureties
25: Secured Transactions and Suretyship
Learning Objectives
1. Recognize, most generally, the two methods by which debtors’ obligations may be secured.
2. Know the source of law for personal property security.
3. Understand the meaning of security interest and other terminology necessary to discuss the issues.
4. Know what property is subject to the security interest.
5. Understand how the security interest is created—”attached”—and perfected.
The Problem of Security
Creditors want assurances that they will be repaid by the debtor. An oral promise to pay is no security at all, and—as it is oral—it is difficult to prove. A signature loan is merely a written promise by the debtor to repay, but the creditor stuck holding a promissory note with a signature loan only—while he may sue a defaulting debtor—will get nothing if the debtor is insolvent. Again, that’s no security at all. Real security for the creditor comes in two forms: by agreement with the debtor or by operation of law without an agreement.
By Agreement with the Debtor
Security obtained through agreement comes in three major types: (1) personal property security (the most common form of security); (2) suretyship—the willingness of a third party to pay if the primarily obligated party does not; and (3) mortgage of real estate.
By Operation of Law
Security obtained through operation of law is known as a lien. Derived from the French for “string” or “tie,” a lien is the legal hold that a creditor has over the property of another in order to secure payment or discharge an obligation.
In this chapter, we take up security interests in personal property and suretyship. In the next chapter, we look at mortgages and nonconsensual liens.
Basics of Secured Transactions
The law of secured transactions consists of five principal components: (1) the nature of property that can be the subject of a security interest; (2) the methods of creating the security interest; (3) the perfection of the security interest against claims of others; (4) priorities among secured and unsecured creditors—that is, who will be entitled to the secured property if more than one person asserts a legal right to it; and (5) the rights of creditors when the debtor defaults. After considering the source of the law and some key terminology, we examine each of these components in turn.
Here is the simplest (and most common) scenario: Debtor borrows money or obtains credit from Creditor, signs a note and security agreement putting up collateral, and promises to pay the debt or, upon Debtor’s default, let Creditor (secured party) take possession of (repossess) the collateral and sell it. Figure 25.1 "The Grasping Hand" illustrates this scenario—the grasping hand is Creditor’s reach for the collateral, but the hand will not close around the collateral and take it (repossess) unless Debtor defaults.
Figure 25.1 The Grasping Hand
Source of Law
Article 9 of the Uniform Commercial Code (UCC) governs security interests in personal property. The UCC defines the scope of the article (here slightly truncated): Uniform Commercial Code, Section 9-109.
This chapter applies to the following:
1. A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
2. An agricultural lien;
3. A sale of accounts, chattel paper, payment intangibles, or promissory notes;
4. A consignment…
Definitions
As always, it is necessary to review some definitions so that communication on the topic at hand is possible. The secured transaction always involves a debtor, a secured party, a security agreement, a security interest, and collateral.
Article 9 applies to any transaction “that creates a security interest.” The UCC in Section 1-201(35) defines security interest as “an interest in personal property or fixtures which secures payment or performance of an obligation.”
Security agreement is “an agreement that creates or provides for a security interest.” It is the contract that sets up the debtor’s duties and the creditor’s rights in event the debtor defaults. Uniform Commercial Code, Section 9-102(a)(73).
Collateral “means the property subject to a security interest or agricultural lien.”Uniform Commercial Code, Section 9-102(12).
Purchase-money security interest (PMSI) is the simplest form of security interest. Section 9-103(a) of the UCC defines “purchase-money collateral” as “goods or software that secures a purchase-money obligation with respect to that collateral.” A PMSI arises where the debtor gets credit to buy goods and the creditor takes a secured interest in those goods. Suppose you want to buy a big hardbound textbook on credit at your college bookstore. The manager refuses to extend you credit outright but says she will take back a PMSI. In other words, she will retain a security interest in the book itself, and if you don’t pay, you’ll have to return the book; it will be repossessed. Contrast this situation with a counteroffer you might make: because she tells you not to mark up the book (in the event that she has to repossess it if you default), you would rather give her some other collateral to hold—for example, your gold college signet ring. Her security interest in the ring is not a PMSI but a pledge; a PMSI must be an interest in the particular goods purchased. A PMSI would also be created if you borrowed money to buy the book and gave the lender a security interest in the book.
Whether a transaction is a lease or a PMSI is an issue that frequently arises. The answer depends on the facts of each case. However, a security interest is created if (1) the lessee is obligated to continue payments for the term of the lease; (2) the lessee cannot terminate the obligation; and (3) one of several economic tests, which are listed in UCC Section 1-201 (37), is met. For example, one of the economic tests is that “the lessee has an option to become owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.”
The issue of lease versus security interest gets litigated because of the requirements of Article 9 that a security interest be perfected in certain ways (as we will see). If the transaction turns out to be a security interest, a lessor who fails to meet these requirements runs the risk of losing his property to a third party. And consider this example. Ferrous Brothers Iron Works “leases” a \$25,000 punch press to Millie’s Machine Shop. Under the terms of the lease, Millie’s must pay a yearly rental of \$5,000 for five years, after which time Millie’s may take title to the machine outright for the payment of \$1. During the period of the rental, title remains in Ferrous Brothers. Is this “lease” really a security interest? Since ownership comes at nominal charge when the entire lease is satisfied, the transaction would be construed as one creating a security interest. What difference does this make? Suppose Millie’s goes bankrupt in the third year of the lease, and the trustee in bankruptcy wishes to sell the punch press to satisfy debts of the machine shop. If it were a true lease, Ferrous Brothers would be entitled to reclaim the machine (unless the trustee assumed the lease). But if the lease is really intended as a device to create a security interest, then Ferrous Brothers can recover its collateral only if it has otherwise complied with the obligations of Article 9—for example, by recording its security interest, as we will see.
Now we return to definitions.
Debtor is “a person (1) having an interest in the collateral other than a security interest or a lien; (2) a seller of accounts, chattel paper, payment intangibles, or promissory notes; or (3) a consignee.”Uniform Commercial Code, Section 9-102(a)(28).
Obligor is “a person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral, (i) owes payment or other performance of the obligation, (ii) has provided property other than the collateral to secure payment or other performance of the obligation, or (iii) is otherwise accountable in whole or in part for payment or other performance of the obligation.”Uniform Commercial Code, Section 9-102 (59). Here is example 1 from the Official Comment to UCC Section 9-102: “Behnfeldt borrows money and grants a security interest in her Miata to secure the debt. Behnfeldt is a debtor and an obligor.”
Behnfeldt is a debtor because she has an interest in the car—she owns it. She is an obligor because she owes payment to the creditor. Usually the debtor is the obligor.
A secondary obligor is “an obligor to the extent that: (A) [the] obligation is secondary; or (b) [the person] has a right of recourse with respect to an obligation secured by collateral against the debtor, another obligor, or property of either.”Uniform Commercial Code, Section 9-102(a)(71). The secondary obligor is a guarantor (surety) of the debt, obligated to perform if the primary obligor defaults. Consider example 2 from the Official Comment to Section 9-102: “Behnfeldt borrows money and grants a security interest in her Miata to secure the debt. Bruno cosigns a negotiable note as maker. As before, Behnfeldt is the debtor and an obligor. As an accommodation party, Bruno is a secondary obligor. Bruno has this status even if the note states that her obligation is a primary obligation and that she waives all suretyship defenses.”
Again, usually the debtor is the obligor, but consider example 3 from the same Official Comment: “Behnfeldt borrows money on an unsecured basis. Bruno cosigns the note and grants a security interest in her Honda to secure her [Behnfeldt’s] obligation. Inasmuch as Behnfeldt does not have a property interest in the Honda, Behnfeldt is not a debtor. Having granted the security interest, Bruno is the debtor. Because Behnfeldt is a principal obligor, she is not a secondary obligor. Whatever the outcome of enforcement of the security interest against the Honda or Bruno’s secondary obligation, Bruno will look to Behnfeldt for her losses. The enforcement will not affect Behnfeldt’s aggregate obligations.”
Secured party is “a person in whose favor a security interest is created or provided for under a security agreement,” and it includes people to whom accounts, chattel paper, payment intangibles, or promissory notes have been sold; consignors; and others under Section 9-102(a)(72).
Chattel mortgage means “a debt secured against items of personal property rather than against land, buildings and fixtures.”Commercial Brokers, Inc., “Glossary of Real Estate Terms,” http://www.cbire.com/index.cfm/fuseaction/terms.list/letter/C/contentid/32302EC3-81D5-47DF-A9CBA32FAE38B22A.
Property Subject to the Security Interest
Now we examine what property may be put up as security—collateral. Collateral is—again—property that is subject to the security interest. It can be divided into four broad categories: goods, intangible property, indispensable paper, and other types of collateral.
Goods
Tangible property as collateral is goods. Goods means “all things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program embedded in goods.”Uniform Commercial Code, Section 9-102(44). Goods are divided into several subcategories; six are taken up here.
Consumer Goods
These are “goods used or bought primarily for personal, family, or household purposes.”Uniform Commercial Code, Section 9-102(a)(48).
Inventory
“Goods, other than farm products, held by a person for sale or lease or consisting of raw materials, works in progress, or material consumed in a business.”Uniform Commercial Code, Section 9-102(a)(48).
Farm Products
“Crops, livestock, or other supplies produced or used in farming operations,” including aquatic goods produced in aquaculture.Uniform Commercial Code, Section 9-102(a)(34).
Equipment
This is the residual category, defined as “goods other than inventory, farm products, or consumer goods.”Uniform Commercial Code, Section 9-102(a)(33).
Fixtures
These are “goods that have become so related to particular real property that an interest in them arises under real property law.”Uniform Commercial Code, Section 9-102(a)(41). Examples would be windows, furnaces, central air conditioning, and plumbing fixtures—items that, if removed, would be a cause for significant reconstruction.
Accession
These are “goods that are physically united with other goods in such a manner that the identity of the original goods is lost.”Uniform Commercial Code, Section 9-102(a)(1). A new engine installed in an old automobile is an accession.
Intangible Property
Two types of collateral are neither goods nor indispensible paper: accounts and general intangibles.
Accounts
This type of intangible property includes accounts receivable (the right to payment of money), insurance policy proceeds, energy provided or to be provided, winnings in a lottery, health-care-insurance receivables, promissory notes, securities, letters of credit, and interests in business entities. Uniform Commercial Code, Section 9-102(a)(2). Often there is something in writing to show the existence of the right—such as a right to receive the proceeds of somebody else’s insurance payout—but the writing is merely evidence of the right. The paper itself doesn’t have to be delivered for the transfer of the right to be effective; that’s done by assignment.
General Intangibles
General intangibles refers to “any personal property, including things in action, other than accounts, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction.” General intangibles include payment intangibles and software. Uniform Commercial Code, Section 9-102(42).
Indispensable Paper
This oddly named category is the middle ground between goods—stuff you can touch—and intangible property. It’s called “indispensable” because although the right to the value—such as a warehouse receipt—is embodied in a written paper, the paper itself is indispensable for the transferee to access the value. For example, suppose Deborah Debtor borrows \$3,000 from Carl Creditor, and Carl takes a security interest in four designer chairs Deborah owns that are being stored in a warehouse. If Deborah defaults, Carl has the right to possession of the warehouse receipt: he takes it to the warehouser and is entitled to take the chairs and sell them to satisfy the obligation. The warehouser will not let Carl have the chairs without the warehouse receipt—it’s indispensable paper. There are four kinds of indispensable paper.
Chattel Paper
Chattel is another word for goods. Chattel paper is a record (paper or electronic) that demonstrates both “a monetary obligation and a security interest either in certain goods or in a lease on certain goods.”Uniform Commercial Code, Section 9-102(11). The paper represents a valuable asset and can itself be used as collateral. For example, Creditor Car Company sells David Debtor an automobile and takes back a note and security agreement (this is a purchase-money security agreement; the note and security agreement is chattel paper). The chattel paper is not yet collateral; the automobile is. Now, though, Creditor Car Company buys a new hydraulic lift from Lift Co., and grants Lift Co. a security interest in Debtor’s chattel paper to secure Creditor Car’s debt to Lift Co. The chattel paper is now collateral. Chattel paper can be tangible (actual paper) or electronic.
Documents
This category includes documents of title—bills of lading and warehouse receipts are examples.
Instruments
An “instrument” here is “a negotiable instrument (checks, drafts, notes, certificates of deposit) or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in the ordinary course of business is transferred by delivery with any necessary indorsement or assignment.” “Instrument” does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card. Uniform Commercial Code, Section 9-102(a)(47).
Investment Property
This includes securities (stock, bonds), security accounts, commodity accounts, and commodity contracts. Uniform Commercial Code, Section 9-102(a)(49). Securities may be certified (represented by a certificate) or uncertified (not represented by a certificate).Uniform Commercial Code, Section 8-102(a)(4) and (a)(18).
Other Types of Collateral
Among possible other types of collateral that may be used as security is the floating lien. This is a security interest in property that was not in the possession of the debtor when the security agreement was executed. The floating lien creates an interest that floats on the river of present and future collateral and proceeds held by—most often—the business debtor. It is especially useful in loans to businesses that sell their collateralized inventory. Without the floating lien, the lender would find its collateral steadily depleted as the borrowing business sells its products to its customers. Pretty soon, there’d be no security at all. The floating lien includes the following:
• After-acquired property. This is property that the debtor acquires after the original deal was set up. It allows the secured party to enhance his security as the debtor (obligor) acquires more property subject to collateralization.
• Sale proceeds. These are proceeds from the disposition of the collateral. Carl Creditor takes a secured interest in Deborah Debtor’s sailboat. She sells the boat and buys a garden tractor. The secured interest attaches to the garden tractor.
• Future advances. Here the security agreement calls for the collateral to stand for both present and future advances of credit without any additional paperwork.
Here are examples of future advances:
• Example 1: A debtor enters into a security agreement with a creditor that contains a future advances clause. The agreement gives the creditor a security interest in a \$700,000 inventory-picking robot to secure repayment of a loan made to the debtor. The parties contemplate that the debtor will, from time to time, borrow more money, and when the debtor does, the machine will stand as collateral to secure the further indebtedness, without new paperwork.
• Example 2: A debtor signs a security agreement with a bank to buy a car. The security agreement contains a future advances clause. A few years later, the bank sends the debtor a credit card. Two years go by: the car is paid for, but the credit card is in default. The bank seizes the car. “Whoa!” says the debtor. “I paid for the car.” “Yes,” says the bank, “but it was collateral for all future indebtedness you ran up with us. Check out your loan agreement with us and UCC Section 9-204(c), especially Comment 5.”
See Figure 25.2 "Tangibles and Intangibles as Collateral".
Figure 25.2 Tangibles and Intangibles as Collateral
In General
Attachment is the term used to describe when a security interest becomes enforceable against the debtor with respect to the collateral. In Figure 25.1 "The Grasping Hand", ”Attachment” is the outreached hand that is prepared, if the debtor defaults, to grasp the collateral. Uniform Commercial Code, Section 9-203(a).
Requirements for Attachment
There are three requirements for attachment: (1) the secured party gives value; (2) the debtor has rights in the collateral or the power to transfer rights in it to the secured party; (3) the parties have a security agreement “authenticated” (signed) by the debtor, or the creditor has possession of the collateral.
Creditor Gives Value
The creditor, or secured party, must give “value” for the security interest to attach. The UCC, in Section 1-204, provides that
a person gives ‘value’ for rights if he acquires them
(1) in return for a binding commitment to extend credit or for the extension of immediately available credit whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection; or
(2) as security for or in total or partial satisfaction of a pre-existing claim; or
(3) by accepting delivery pursuant to a pre-existing contract for purchase; or
(4) generally, in return for any consideration sufficient to support a simple contract.
Suppose Deborah owes Carl \$3,000. She cannot repay the sum when due, so she agrees to give Carl a security interest in her automobile to the extent of \$3,000 in return for an extension of the time to pay. That is sufficient value.
Debtor’s Rights in Collateral
The debtor must have rights in the collateral. Most commonly, the debtor owns the collateral (or has some ownership interest in it). The rights need not necessarily be the immediate right to possession, but they must be rights that can be conveyed. Uniform Commercial Code, Section 9-203(b)(2). A person can’t put up as collateral property she doesn’t own.
Security Agreement (Contract) or Possession of Collateral by Creditor
The debtor most often signs the written security agreement, or contract. The UCC says that “the debtor [must have] authenticated a security agreement that provides a description of the collateral.…” “Authenticating” (or “signing,” “adopting,” or “accepting”) means to sign or, in recognition of electronic commercial transactions, “to execute or otherwise adopt a symbol, or encrypt or similarly process a record…with the present intent of the authenticating person to identify the person and adopt or accept a record.” The “record” is the modern UCC’s substitution for the term “writing.” It includes information electronically stored or on paper. Uniform Commercial Code, Section 9-102, Official Comment 9. Here is a free example of a security agreement online: Docstoc, “Free Business Templates—Sample Open-Ended Security Agreement,” http://www.docstoc.com/docs/271920/Free-Business-Templates—-Sample-Open-Ended-Security-Agreement.
The “authenticating record” (the signed security agreement) is not required in some cases. It is not required if the debtor makes a pledge of the collateral—that is, delivers it to the creditor for the creditor to possess. For example, upon a creditor’s request of a debtor for collateral to secure a loan of \$3,000, the debtor offers up his stamp collection. The creditor says, “Fine, have it appraised (at your expense) and show me the appraisal. If it comes in at \$3,000 or more, I’ll take your stamp collection and lock it in my safe until you’ve repaid me. If you don’t repay me, I’ll sell it.” A creditor could take possession of any goods and various kinds of paper, tangible or intangible. In commercial transactions, it would be common for the creditor to have possession of—actually or virtually—certified securities, deposit accounts, electronic chattel paper, investment property, or other such paper or electronic evidence of value. Uniform Commercial Code, Section 9-203(b)(3)(B-D).
Again, Figure 25.1 "The Grasping Hand" diagrams the attachment, showing the necessary elements: the creditor gives value, the debtor has rights in collateral, and there is a security agreement signed (authenticated) by the debtor. If the debtor defaults, the creditor’s “hand” will grab (repossess) the collateral.
Perfection of the Security Interest
As between the debtor and the creditor, attachment is fine: if the debtor defaults, the creditor will repossess the goods and—usually—sell them to satisfy the outstanding obligation. But unless an additional set of steps is taken, the rights of the secured party might be subordinated to the rights of other secured parties, certain lien creditors, bankruptcy trustees, and buyers who give value and who do not know of the security interest. Perfection is the secured party’s way of announcing the security interest to the rest of the world. It is the secured party’s claim on the collateral.
There are five ways a creditor may perfect a security interest: (1) by filing a financing statement, (2) by taking or retaining possession of the collateral, (3) by taking control of the collateral, (4) by taking control temporarily as specified by the UCC, or (5) by taking control automatically.
Perfection by Filing
“Except as otherwise provided…a financing statement must be filed to perfect all security agreements.” Uniform Commercial Code, Section 9-310(a).
The Financing Statement
A financing statement is a simple notice showing the creditor’s general interest in the collateral. It is what’s filed to establish the creditor’s “dibs.”
Contents of the Financing Statement
It may consist of the security agreement itself, as long as it contains the information required by the UCC, but most commonly it is much less detailed than the security agreement: it “indicates merely that a person may have a security interest in the collateral[.]…Further inquiry from the parties concerned will be necessary to disclose the full state of affairs.”Uniform Commercial Code, Section 9-502, Official Comment 2. The financing statement must provide the following information:
• The debtor’s name. Financing statements are indexed under the debtor’s name, so getting that correct is important. Section 9-503 of the UCC describes what is meant by “name of debtor.”
• The secured party’s name.
• An “indication” of what collateral is covered by the financing statement.Uniform Commercial Code, Section 9-502(a). It may describe the collateral or it may “indicate that the financing statement covers all assets or all personal property” (such generic references are not acceptable in the security agreement but are OK in the financing statement). Uniform Commercial Code, Section 9-504. If the collateral is real-property-related, covering timber to be cut or fixtures, it must include a description of the real property to which the collateral is related.Uniform Commercial Code, Section 9-502(b).
The form of the financing statement may vary from state to state, but see Figure 25.3 "UCC-1 Financing Statement" for a typical financing statement. Minor errors or omissions on the form will not make it ineffective, but the debtor’s signature is required unless the creditor is authorized by the debtor to make the filing without a signature, which facilitates paperless filing.Uniform Commercial Code, Section 9-506; Uniform Commercial Code, Section, 9-502, Comment 3.
Figure 25.3 UCC-1 Financing Statement
Duration of the Financing Statement
Generally, the financing statement is effective for five years; a continuation statement may be filed within six months before the five-year expiration date, and it is good for another five years. Uniform Commercial Code, Section 9-515. Manufactured-home filings are good for thirty years. When the debtor’s obligation is satisfied, the secured party files a termination statement if the collateral was consumer goods; otherwise—upon demand—the secured party sends the debtor a termination statement. Uniform Commercial Code, Section 9-513.
Debtor Moves out of State
The UCC also has rules for continued perfection of security interests when the debtor—whether an individual or an association (corporation)—moves from one state to another. Generally, an interest remains perfected until the earlier of when the perfection would have expired or for four months after the debtor moves to a new jurisdiction. Uniform Commercial Code, Section 9-316.
Where to File the Financing Statement
For most real-estate-related filings—ore to be extracted from mines, agricultural collateral, and fixtures—the place to file is with the local office that files mortgages, typically the county auditor’s office. Uniform Commercial Code, Section 9-501. For other collateral, the filing place is as duly authorized by the state. In some states, that is the office of the Secretary of State; in others, it is the Department of Licensing; or it might be a private party that maintains the state’s filing system. Uniform Commercial Code, Section 9-501(a)(2). The filing should be made in the state where the debtor has his or her primary residence for individuals, and in the state where the debtor is organized if it is a registered organization. Uniform Commercial Code, Section 9-307(b). The point is, creditors need to know where to look to see if the collateral offered up is already encumbered. In any event, filing the statement in more than one place can’t hurt. The filing office will provide instructions on how to file; these are available online, and electronic filing is usually available for at least some types of collateral.
Exemptions
Some transactions are exempt from the filing provision. The most important category of exempt collateral is that covered by state certificate of title laws. For example, many states require automobile owners to obtain a certificate of title from the state motor vehicle office. Most of these states provide that it is not necessary to file a financing statement in order to perfect a security interest in an automobile. The reason is that the motor vehicle regulations require any security interests to be stated on the title, so that anyone attempting to buy a car in which a security interest had been created would be on notice when he took the actual title certificate. Uniform Commercial Code, Section 9-303.
Temporary Perfection
The UCC provides that certain types of collateral are automatically perfected but only for a while: “A security interest in certificated securities, or negotiable documents, or instruments is perfected without filing or the taking of possession for a period of twenty days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement.”Uniform Commercial Code, Section 9-312(e). Similar temporary perfection covers negotiable documents or goods in possession of a bailee, and when a security certificate or instrument is delivered to the debtor for sale, exchange, presentation, collection, enforcement, renewal, or registration. Uniform Commercial Code, Section 9-312(f) and (g). After the twenty-day period, perfection would have to be by one of the other methods mentioned here.
Perfection by Possession
A secured party may perfect the security interest by possession where the collateral is negotiable documents, goods, instruments, money, tangible chattel paper, or certified securities. Uniform Commercial Code, Section 9-313. This is a pledge of assets (mentioned in the example of the stamp collection). No security agreement is required for perfection by possession.
A variation on the theme of pledge is field warehousing. When the pawnbroker lends money, he takes possession of the goods—the watch, the ring, the camera. But when large manufacturing concerns wish to borrow against their inventory, taking physical possession is not necessarily so easy. The bank does not wish to have shipped to its Wall Street office several tons of copper mined in Colorado. Bank employees perhaps could go west to the mine and take physical control of the copper, but banks are unlikely to employ people and equipment necessary to build a warehouse on the spot. Thus this so-called field pledge is rare.
More common is the field warehouse. The field warehouse can take one of two forms. An independent company can go to the site and put up a temporary structure—for example, a fence around the copper—thus establishing physical control of the collateral. Or the independent company can lease the warehouse facilities of the debtor and post signs indicating that the goods inside are within its sale custody. Either way, the goods are within the physical possession of the field warehouse service. The field warehouse then segregates the goods secured to the particular bank or finance company and issues a warehouse receipt to the lender for those goods. The lender is thus assured of a security interest in the collateral.
Perfection by Control
“A security interest in investment property, deposit accounts, letter-of-credit rights, or electronic chattel paper may be perfected by control of the collateral.” Uniform Commercial Code, Section 9-314. “Control” depends on what the collateral is. If it’s a checking account, for example, the bank with which the deposit account is maintained has “control”: the bank gets a security interest automatically because, as Official Comment 3 to UCC Section 9-104 puts it, “all actual and potential creditors of the debtor are always on notice that the bank with which the debtor’s deposit account is maintained may assert a claim against the deposit account.” “Control” of electronic chattel paper of investment property, and of letter-of-credit rights is detailed in Sections 9-105, 9-106, and 9-107. Obtaining “control” means that the creditor has taken whatever steps are necessary, given the manner in which the items are held, to place itself in a position where it can have the items sold, without further action by the owner. Uniform Commercial Code, Section 8-106, Official Comment 1.
Automatic Perfection
The fifth mechanism of perfection is addressed in Section 9-309 of the UCC: there are several circumstances where a security interest is perfected upon mere attachment. The most important here is automatic perfection of a purchase-money security interest given in consumer goods. If a seller of consumer goods takes a PMSI in the goods sold, then perfection of the security interest is automatic. But the seller may file a financial statement and faces a risk if he fails to file and the consumer debtor sells the goods. Under Section 9-320(b), a buyer of consumer goods takes free of a security interest, even though perfected, if he buys without knowledge of the interest, pays value, and uses the goods for his personal, family, or household purposes—unless the secured party had first filed a financing statement covering the goods.
Figure 25.4 Attachment and Perfection
Key Takeaway
A creditor may be secured—allowed to take the debtor’s property upon debtor’s default—by agreement between the parties or by operation of law. The law governing agreements for personal property security is Article 9 of the UCC. The creditor’s first step is to attach the security interest. This is usually accomplished when the debtor, in return for value (a loan or credit) extended from the creditor, puts up as collateral some valuable asset in which she has an interest and authenticates (signs) a security agreement (the contract) giving the creditor a security interest in collateral and allowing that the creditor may take it if the debtor defaults. The UCC lists various kinds of assets that can be collateralized, ranging from tangible property (goods), to assets only able to be manifested by paper (indispensable paper), to intangible assets (like patent rights). Sometimes no security agreement is necessary, mostly if the creditor takes possession of the collateral. After attachment, the prudent creditor will want to perfect the security interest to make sure no other creditors claim an interest in the collateral. Perfection is most often accomplished by filing a financing statement in the appropriate place to put the world on notice of the creditor’s interest. Perfection can also be achieved by a pledge (possession by the secured creditor) or by “control” of certain assets (having such control over them as to be able to sell them if the debtor defaults). Perfection is automatic temporarily for some items (certified securities, instruments, and negotiable documents) but also upon mere attachment to purchase-money security interests in consumer goods.
Exercises
1. Why is a creditor ill-advised to be unsecured?
2. Elaine bought a computer for her use as a high school teacher, the school contributing one-third of its cost. Elaine was compelled to file for bankruptcy. The computer store claimed it had perfected its interest by mere attachment, and the bankruptcy trustee claimed the computer as an asset of Elaine’s bankruptcy estate. Who wins, and why?
3. What is the general rule governing where financing statements should be filed?
4. If the purpose of perfection is to alert the world to the creditor’s claim in the collateral, why is perfection accomplishable by possession alone in some cases?
5. Contractor pawned a power tool and got a \$200 loan from Pawnbroker. Has there been a perfection of a security interest? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/25%3A_Secured_Transactions_and_Suretyship/25.1%3A_Introduction_to_Secured_Transactions.txt |
Learning Objectives
1. Understand the general rule regarding who gets priority among competing secured parties.
2. Know the immediate exceptions to the general rule—all involving PMSIs.
3. Understand the basic ideas behind the other exceptions to the general rule.
Priorities: this is the money question. Who gets what when a debtor defaults? Depending on how the priorities in the collateral were established, even a secured creditor may walk away with the collateral or with nothing. Here we take up the general rule and the exceptions.
General Rule
The general rule regarding priorities is, to use a quotation attributed to a Southern Civil War general, the one who wins “gets there firstest with the mostest.” The first to do the best job of perfecting wins. The Uniform Commercial Code (UCC) creates a race of diligence among competitors.
Application of the Rule
If both parties have perfected, the first to perfect wins. If one has perfected and one attached, the perfected party wins. If both have attached without perfection, the first to attach wins. If neither has attached, they are unsecured creditors. Let’s test this general rule against the following situations:
1. Rosemary, without having yet lent money, files a financing statement on February 1 covering certain collateral owned by Susan—Susan’s fur coat. Under UCC Article 9, a filing may be made before the security interest attaches. On March 1, Erika files a similar statement, also without having lent any money. On April 1, Erika loans Susan \$1,000, the loan being secured by the fur coat described in the statement she filed on March 1. On May 1, Rosemary also loans Susan \$1,000, with the same fur coat as security. Who has priority? Rosemary does, since she filed first, even though Erika actually first extended the loan, which was perfected when made (because she had already filed). This result is dictated by the rule even though Rosemary may have known of Erika’s interest when she subsequently made her loan.
2. Susan cajoles both Rosemary and Erika, each unknown to the other, to loan her \$1,000 secured by the fur coat, which she already owns and which hangs in her coat closet. Erika gives Susan the money a week after Rosemary, but Rosemary has not perfected and Erika does not either. A week later, they find out they have each made a loan against the same coat. Who has priority? Whoever perfects first: the rule creates a race to the filing office or to Susan’s closet. Whoever can submit the financing statement or actually take possession of the coat first will have priority, and the outcome does not depend on knowledge or lack of knowledge that someone else is claiming a security interest in the same collateral. But what of the rule that in the absence of perfection, whichever security interest first attached has priority? This is “thought to be of merely theoretical interest,” says the UCC commentary, “since it is hard to imagine a situation where the case would come into litigation without [either party] having perfected his interest.” And if the debtor filed a petition in bankruptcy, neither unperfected security interest could prevail against the bankruptcy trustee.
To rephrase: An attached security interest prevails over other unsecured creditors (unsecured creditors lose to secured creditors, perfected or unperfected). If both parties are secured (have attached the interest), the first to perfect wins. Uniform Commercial Code, Section 9-322(a)(2). If both parties have perfected, the first to have perfected wins. Uniform Commercial Code, Section 9-322(a)(1).
Exceptions to the General Rule
There are three immediate exceptions to the general rule, and several other exceptions, all of which—actually—make some straightforward sense even if it sounds a little complicated to explain them.
Immediate Exceptions
We call the following three exceptions “immediate” ones because they allow junior filers immediate priority to take their collateral before the debtor’s other creditors get it. They all involve purchase-money security interests (PMSIs), so if the debtor defaults, the creditor repossesses the very goods the creditor had sold the debtor.
(1) Purchase-money security interest in goods (other than inventory or livestock). The UCC provides that “a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods…if the purchase-money security interest is perfected when debtor receives possession of the collateral or within 20 days thereafter.”Uniform Commercial Code, Section 9-324(a). The Official Comment to this UCC section observes that “in most cases, priority will be over a security interest asserted under an after-acquired property clause.”
Suppose Susan manufactures fur coats. On February 1, Rosemary advances her \$10,000 under a security agreement covering all Susan’s machinery and containing an after-acquired property clause. Rosemary files a financing statement that same day. On March 1, Susan buys a new machine from Erika for \$5,000 and gives her a security interest in the machine; Erika files a financing statement within twenty days of the time that the machine is delivered to Susan. Who has priority if Susan defaults on her loan payments? Under the PMSI rule, Erika has priority, because she had a PMSI. Suppose, however, that Susan had not bought the machine from Erika but had merely given her a security interest in it. Then Rosemary would have priority, because her filing was prior to Erika’s.
What would happen if this kind of PMSI in noninventory goods (here, equipment) did not get priority status? A prudent Erika would not extend credit to Susan at all, and if the new machine is necessary for Susan’s business, she would soon be out of business. That certainly would not inure to the benefit of Rosemary. It is, mostly, to Rosemary’s advantage that Susan gets the machine: it enhances Susan’s ability to make money to pay Rosemary.
(2) Purchase-money security interest in inventory. The UCC provides that a perfected PMSI in inventory has priority over conflicting interests in the same inventory, provided that the PMSI is perfected when the debtor receives possession of the inventory, the PMSI-secured party sends an authenticated notification to the holder of the conflicting interest and that person receives the notice within five years before the debtor receives possession of the inventory, and the notice states that the person sending it has or expects to acquire a PMSI in the inventory and describes the inventory. Uniform Commercial Code, Section 9-324(b). The notice requirement is aimed at protecting a secured party in the typical situation in which incoming inventory is subject to a prior agreement to make advances against it. If the original creditor gets notice that new inventory is subject to a PMSI, he will be forewarned against making an advance on it; if he does not receive notice, he will have priority. It is usually to the earlier creditor’s advantage that her debtor is able to get credit to “floor” (provide) inventory, without selling which, of course, the debtor cannot pay back the earlier creditor.
(3) Purchase-money security interest in fixtures. Under UCC Section 9-334(e), a perfected security in fixtures has priority over a mortgage if the security interest is a PMSI and the security interest is perfected by a fixture filing before the goods become fixtures or within twenty days after. A mortgagee is usually a bank (the mortgagor is the owner of the real estate, subject to the mortgagee’s interest). The bank’s mortgage covers the real estate and fixtures, even fixtures added after the date of the mortgage (after-acquired property clause). In accord with the general rule, then, the mortgagee/bank would normally have priority if the mortgage is recorded first, as would a fixture filing if made before the mortgage was recorded. But with the exception noted, the bank’s interest is subordinate to the fixture-seller’s later-perfected PMSI. Example: Susan buys a new furnace from Heating Co. to put in her house. Susan gave a bank a thirty-year mortgage on the house ten years before. Heating Co. takes back a PMSI and files the appropriate financing statement before or within twenty days of installation. If Susan defaults on her loan to the bank, Heating Co. would take priority over the bank. And why not? The mortgagee has, in the long run, benefited from the improvement and modernization of the real estate. (Again, there are further nuances in Section 9-334 beyond our scope here.) A non-PMSI in fixtures or PMSIs perfected more than twenty days after goods become a fixture loses out to prior recorded interests in the realty.
Other Exceptions
We have noted the three immediate exceptions to the general rule that “the firstest with the mostest” prevails. There are some other exceptions.
Think about how these other exceptions might arise: who might want to take property subject to a security agreement (not including thieves)? That is, Debtor gives Creditor a security interest in, say, goods, while retaining possession. First, buyers of various sorts might want the goods if they paid for them; they usually win. Second, lien creditors might want the goods (a lien creditor is one whose claim is based on operation of law—involuntarily against Debtor, and including a trustee in bankruptcy—as opposed to one whose claim is based on agreement); lien creditors may be statutory (landlords, mechanics, bailees) or judicial. Third, a bankruptcy trustee representing Debtor’s creditors (independent of the trustee’s role as a lien creditor) might want to take the goods to sell and satisfy Debtor’s obligations to the creditors. Fourth, unsecured creditors; fifth, secured creditors; and sixth, secured and perfected creditors. We will examine some of the possible permutations but are compelled to observe that this area of law has many fine nuances, not all of which can be taken up here.
First we look at buyers who take priority over, or free of, unperfected security interests. Buyers who take delivery of many types of collateral covered by an unperfected security interest win out over the hapless secured party who failed to perfect if they give value and don’t know of the security interest or agricultural lien.Uniform Commercial Code, Section 9-317(b). A buyer who doesn’t give value or who knows of the security interest will not win out, nor will a buyer prevail if the seller’s creditor files a financing statement before or within twenty days after the debtor receives delivery of the collateral.
Now we look at buyers who take priority over perfected security interests. Sometimes people who buy things even covered by a perfected security interest win out (the perfected secured party loses).
• Buyers in the ordinary course of business. “A buyer in the ordinary course of business, other than [one buying farm products from somebody engaged in farming] takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows [it].”Uniform Commercial Code, Section 9-320(a). Here the buyer is usually purchasing inventory collateral, and it’s OK if he knows the inventory is covered by a security interest, but it’s not OK if he knows “that the sale violates a term in an agreement with the secured party.” Uniform Commercial Code, Section 9-320, Comment 3. It would not be conducive to faith in commercial transactions if buyers of inventory generally had to worry whether their seller’s creditors were going to repossess the things the buyers had purchased in good faith. For example (based on example 1 to the same comment, UCC 9-320, Official Comment 3), Manufacturer makes appliances and owns manufacturing equipment covered by a perfected security agreement in favor of Lender. Manufacturer sells the equipment to Dealer, whose business is buying and selling used equipment; Dealer, in turn, sells the stuff to Buyer, a buyer in the ordinary course. Does Buyer take free of the security interest? No, because Dealer didn’t create it; Manufacturer did.
• Buyers of consumer goods purchased for personal, family, or household use take free of security interests, even if perfected, so long as they buy without knowledge of the security interest, for value, for their own consumer uses, and before the filing of a financing statement covering the goods. This—again—is the rub when a seller of consumer goods perfects by “mere attachment” (automatic perfection) and the buyer of the goods turns around and sells them. For example, Tom buys a new refrigerator from Sears, which perfects by mere attachment. Tom has cash flow problems and sells the fridge to Ned, his neighbor. Ned doesn’t know about Sears’s security interest and pays a reasonable amount for it. He puts it in his kitchen for home use. Sears cannot repossess the fridge from Ned. If it wanted to protect itself fully, Sears would have filed a financing statement; then Ned would be out the fridge when the repo men came. Uniform Commercial Code, Section 9-320(b). The “value” issue is interestingly presented in the Nicolosi case (Section 25.5 "Cases").
• Buyers of farm products. The UCC itself does not protect buyers of farm products from security interests created by “the person engaged in farming operations who is in the business of selling farm products,” and the result was that sometimes the buyer had to pay twice: once to the farmer and again to the lender whom the farmer didn’t pay. As a result, Congress included in its 1985 Farm Security Act, 7 USC 1631, Section 1324, this language: “A buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest.”
There are some other exceptions, beyond our scope here.
Lien Creditors
Persons (including bankruptcy trustees) who become lien creditors before the security interest is perfected win out—the unperfected security interest is subordinate to lien creditors. Persons who become lien creditors after the security interest is perfected lose (subject to some nuances in situations where the lien arises between attachment by the creditor and the filing, and depending upon the type of security interest and the type of collateral). Uniform Commercial Code, Section 9-317(a)(2)(B) and 9-317(e). More straightforwardly, perhaps, a lien securing payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of business has priority over other security interests (unless a statute provides otherwise). Uniform Commercial Code, Section 9-333. This is the bailee or “material man” (one who supplies materials, as to build a house) with a lien situation. Garage Mechanic repairs a car in which Owner has previously given a perfected security interest to Bank. Owner doesn’t pay Bank. Bank seeks to repossess the car from Mechanic. It will have to pay the Mechanic first. And why not? If the car was not running, Bank would have to have it repaired anyway.
Bankruptcy Trustee
To what extent can the bankruptcy trustee take property previously encumbered by a security interest? It depends. If the security interest was not perfected at the time of filing for bankruptcy, the trustee can take the collateral.11 United States Code, Section 544 (Bankruptcy Act). If it was perfected, the trustee can’t take it, subject to rules on preferential transfers: the Bankruptcy Act provides that the trustee can avoid a transfer of an interest of the debtor in property—including a security interest—(1) to or for the benefit of a creditor, (2) on or account of an antecedent debt, (3) made while the debtor was insolvent, (4) within ninety days of the bankruptcy petition date (or one year, for “insiders”—like relatives or business partners), (5) which enables the creditor to receive more than it would have in the bankruptcy. United States Code, Section 547. There are further bankruptcy details beyond our scope here, but the short of it is that sometimes creditors who think they have a valid, enforceable security interest find out that the bankruptcy trustee has snatched the collateral away from them.
Deposit accounts perfected by control. A security interest in a deposit account (checking account, savings account, money-market account, certificate of deposit) takes priority over security interests in the account perfected by other means, and under UCC Section 9-327(3), a bank with which the deposit is made takes priority over all other conflicting security agreements. Uniform Commercial Code, Section 9-327(1). For example, a debtor enters into a security agreement with his sailboat as collateral. The creditor perfects. The debtor sells the sailboat and deposits the proceeds in his account with a bank; normally, the creditor’s interest would attach to the proceeds. The debtor next borrows money from the bank, and the bank takes a security interest in the debtor’s account by control. The debtor defaults. Who gets the money representing the sailboat’s proceeds? The bank does. The rationale: “this…enables banks to extend credit to their depositors without the need to examine [records] to determine whether another party might have a security interest in the deposit account.”Uniform Commercial Code, Section 9-328, Official Comment 3 and 4.
Key Takeaway
Who among competing creditors gets the collateral if the debtor defaults? The general rule on priorities is that the first to secure most completely wins: if all competitors have perfected, the first to do so wins. If one has perfected and the others have not, the one who perfects wins. If all have attached, the first to attach wins. If none have attached, they’re all unsecured creditors. To this general rule there are a number of exceptions. Purchase-money security interests in goods and inventory prevail over previously perfected secured parties in the same goods and inventory (subject to some requirements); fixture financers who file properly have priority over previously perfected mortgagees. Buyers in the ordinary course of business take free of a security interest created by their seller, so long as they don’t know their purchase violates a security agreement. Buyers of consumer goods perfected by mere attachment win out over the creditor who declined to file. Buyers in the ordinary course of business of farm products prevail over the farmer’s creditors (under federal law, not the UCC). Lien creditors who become such before perfection win out; those who become such after perfection usually lose. Bailees in possession and material men have priority over previous perfected claimants. Bankruptcy trustees win out over unperfected security interests and over perfected ones if they are considered voidable transfers from the debtor to the secured party. Deposit accounts perfected by control prevail over previously perfected secured parties in the same deposit accounts.
Exercises
1. What is the general rule regarding priorities for the right to repossess goods encumbered by a security interest when there are competing creditors clamoring for that right?
2. Why does it make good sense to allow purchase-money security creditors in (1) inventory, (2) equipment, and (3) fixtures priority over creditors who perfected before the PMSI was perfected?
3. A buyer in the ordinary course of business is usually one buying inventory. Why does it make sense that such a buyer should take free of a security interest created by his seller? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/25%3A_Secured_Transactions_and_Suretyship/25.2%3A_Priorities.txt |
Learning Objectives
1. Understand that the creditor may sue to collect the debt.
2. Recognize that more commonly the creditor will realize on the collateral—repossess it.
3. Know how collateral may be disposed of upon repossession: by sale or by strict foreclosure.
Rights of Creditor on Default
Upon default, the creditor must make an election: to sue, or to repossess.
Resort to Judicial Process
After a debtor’s default (e.g., by missing payments on the debt), the creditor could ignore the security interest and bring suit on the underlying debt. But creditors rarely resort to this remedy because it is time-consuming and costly. Most creditors prefer to repossess the collateral and sell it or retain possession in satisfaction of the debt.
Repossession
Section 9-609 of the Uniform Commercial Code (UCC) permits the secured party to take possession of the collateral on default (unless the agreement specifies otherwise):
(a) After default, a secured party may (1) take possession of the collateral; and (2) without removal, may render equipment unusable and dispose of collateral on a debtor’s premises.
(b) A secured party may proceed under subsection (a): (1) pursuant to judicial process; or (2) without judicial process, if it proceeds without breach of the peace.
This language has given rise to the flourishing business of professional “repo men” (and women). “Repo” companies are firms that specialize in repossession collateral. They have trained car-lock pickers, in-house locksmiths, experienced repossession teams, damage-free towing equipment, and the capacity to deliver repossessed collateral to the client’s desired destination. Some firms advertise that they have 360-degree video cameras that record every aspect of the repossession. They have “skip chasers”—people whose business it is to track down those who skip out on their obligations, and they are trained not to breach the peace. Here is an example of sophisticated online advertising for a repossession firm: SSR, “Southern & Central Coast California Repossession Services,” http://www.simonsrecovery.com/index.htm. See Pantoja-Cahue v. Ford Motor Credit Co., a case discussing repossession, in Section 25.5 "Cases".
The reference in Section 9-609(a)(2) to “render equipment unusable and dispose of collateral on a debtor’s premises” gets to situations involving “heavy equipment [when] the physical removal from the debtor’s plant and the storage of collateral pending disposition may be impractical or unduly expensive.… Of course…all aspects of the disposition must be commercially reasonable.”Uniform Commercial Code, Section 9-609(a)(2), Official Comment 6. Rendering the equipment unusable would mean disassembling some critical part of the machine—letting it sit there until an auction is set up on the premises.
The creditor’s agents—the repo people—charge for their service, of course, and if possible the cost of repossession comes out of the collateral when it’s sold. A debtor would be better off voluntarily delivering the collateral according to the creditor’s instructions, but if that doesn’t happen, “self-help”—repossession—is allowed because, of course, the debtor said it would be allowed in the security agreement, so long as the repossession can be accomplished without breach of peace. “Breach of peace” is language that can cover a wide variety of situations over which courts do not always agree. For example, some courts interpret a creditor’s taking of the collateral despite the debtor’s clear oral protest as a breach of the peace; other courts do not.
Disposition after Repossession
After repossession, the creditor has two options: sell the collateral or accept it in satisfaction of the debt (see Figure 25.5 "Disposition after Repossession").
Figure 25.5 Disposition after Repossession
Sale
Sale is the usual method of recovering the debt. Section 9-610 of the UCC permits the secured creditor to “sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.” The collateral may be sold as a whole or in parcels, at one time or at different times. Two requirements limit the creditor’s power to resell: (1) it must send notice to the debtor and secondary obligor, and (unless consumer goods are sold) to other secured parties; and (2) all aspects of the sale must be “commercially reasonable.” Uniform Commercial Code, Section 9-611; Uniform Commercial Code, Section 9-610. Most frequently the collateral is auctioned off.
Section 9-615 of the UCC describes how the proceeds are applied: first, to the costs of the repossession, including reasonable attorney’s fees and legal expenses as provided for in the security agreement (and it will provide for that!); second, to the satisfaction of the obligation owed; and third, to junior creditors. This again emphasizes the importance of promptly perfecting the security interest: failure to do so frequently subordinates the tardy creditor’s interest to junior status. If there is money left over from disposing of the collateral—a surplus—the debtor gets that back. If there is still money owing—a deficiency—the debtor is liable for that. In Section 9-616, the UCC carefully explains how the surplus or deficiency is calculated; the explanation is required in a consumer goods transaction, and it has to be sent to the debtor after the disposition.
Strict Foreclosure
Because resale can be a bother (or the collateral is appreciating in value), the secured creditor may wish simply to accept the collateral in full satisfaction or partial satisfaction of the debt, as permitted in UCC Section 9-620(a). This is known as strict foreclosure. The debtor must consent to letting the creditor take the collateral without a sale in a “record authenticated after default,” or after default the creditor can send the debtor a proposal for the creditor to accept the collateral, and the proposal is effective if not objected to within twenty days after it’s sent.
The strict foreclosure provisions contain a safety feature for consumer goods debtors. If the debtor has paid at least 60 percent of the debt, then the creditor may not use strict foreclosure—unless the debtor signs a statement after default renouncing his right to bar strict foreclosure and to force a sale. Uniform Commercial Code, 9-620(e); Uniform Commercial Code, Section 9-624. A consumer who refuses to sign such a statement thus forces the secured creditor to sell the collateral under Section 9-610. Should the creditor fail to sell the goods within ninety days after taking possession of the goods, he is liable to the debtor for the value of the goods in a conversion suit or may incur the liabilities set forth in Section 9-625, which provides for minimum damages for the consumer debtor. Recall that the UCC imposes a duty to act in good faith and in a commercially reasonable manner, and in most cases with reasonable notification. Uniform Commercial Code, Section 1-203. See Figure 25.5 "Disposition after Repossession".
Foreclosure on Intangible Collateral
A secured party’s repossession of inventory or equipment can disrupt or even close a debtor’s business. However, when the collateral is intangible—such as accounts receivable, general intangibles, chattel paper, or instruments—collection by a secured party after the debtor’s default may proceed without interrupting the business. Section 9-607 of the UCC provides that on default, the secured party is entitled to notify the third party—for example, a person who owes money on an account—that payment should be made to him. The secured party is accountable to the debtor for any surplus, and the debtor is liable for any deficiency unless the parties have agreed otherwise.
As always in parsing the UCC here, some of the details and nuances are necessarily omitted because of lack of space or because a more detailed analysis is beyond this book’s scope.
Key Takeaway
Upon default, the creditor may bring a lawsuit against the debtor to collect a judgment. But the whole purpose of secured transactions is to avoid this costly and time-consuming litigation. The more typical situation is that the creditor repossesses the collateral and then either auctions it off (sale) or keeps it in satisfaction of the debt (strict foreclosure). In the former situation, the creditor may then proceed against the debtor for the deficiency. In consumer cases, the creditor cannot use strict foreclosure if 60 percent of the purchase price has been paid.
Exercises
1. Although a creditor could sue the debtor, get a judgment against it, and collect on the judgment, usually the creditor repossesses the collateral. Why is repossession the preferred method of realizing on the security?
2. Why is repossession allowed so long as it can be done without a breach of the peace?
3. Under what circumstances is strict foreclosure not allowed? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/25%3A_Secured_Transactions_and_Suretyship/25.3%3A_Rights_of_Creditor_on_Default_and_Disposition_after_Repossession.txt |
Learning Objectives
1. Understand what a surety is and why sureties are used in commercial transactions.
2. Know how suretyships are created.
3. Recognize the general duty owed by the surety to the creditor, and the surety’s defenses.
4. Recognize the principal obligor’s duty to the surety, and the surety’s rights against the surety.
5. Understand the rights among cosureties.
Definition
Suretyship is the second of the three major types of consensual security arrangements noted at the beginning of this chapter (personal property security, suretyship, real property security)—and a common one. Creditors frequently ask the owners of small, closely held companies to guarantee their loans to the company, and parent corporations also frequently are guarantors of their subsidiaries’ debts. The earliest sureties were friends or relatives of the principal debtor who agreed—for free—to lend their guarantee. Today most sureties in commercial transaction are insurance companies (but insurance is not the same as suretyship).
A surety is one who promises to pay or perform an obligation owed by the principal debtor, and, strictly speaking, the surety is primarily liable on the debt: the creditor can demand payment from the surety when the debt is due. The creditor is the person to whom the principal debtor (and the surety, strictly speaking) owes an obligation. Very frequently, the creditor requires first that the debtor put up collateral to secure indebtedness, and—in addition—that the debtor engage a surety to make extra certain the creditor is paid or performance is made. For example, David Debtor wants Bank to loan his corporation, David Debtor, Inc., \$100,000. Bank says, “Okay, Mr. Debtor, we’ll loan the corporation money, but we want its computer equipment as security, and we want you personally to guarantee the debt if the corporation can’t pay.” Sometimes, though, the surety and the principal debtor may have no agreement between each other; the surety might have struck a deal with the creditor to act as surety without the consent or knowledge of the principal debtor.
A guarantor also is one who guarantees an obligation of another, and for practical purposes, therefore, guarantor is usually synonymous with surety—the terms are used pretty much interchangeably. But here’s the technical difference: a surety is usually a party to the original contract and signs her (or his, or its) name to the original agreement along with the surety; the consideration for the principal’s contract is the same as the surety’s consideration—she is bound on the contract from the very start, and she is also expected to know of the principal debtor’s default so that the creditor’s failure to inform her of it does not discharge her of any liability. On the other hand, a guarantor usually does not make his agreement with the creditor at the same time the principal debtor does: it’s a separate contract requiring separate consideration, and if the guarantor is not informed of the principal debtor’s default, the guarantor can claim discharge on the obligation to the extent any failure to inform him prejudices him. But, again, as the terms are mostly synonymous, surety is used here to encompass both.
Figure 25.6 Defenses of Principal Debtor and Surety
Types of Suretyship
Where there is an interest, public or private, that requires protection from the possibility of a default, sureties are engaged. For example, a landlord might require that a commercial tenant not only put up a security deposit but also show evidence that it has a surety on line ready to stand for three months’ rent if the tenant defaults. Often, a municipal government will want its road contractor to show it has a surety available in case, for some reason, the contractor cannot complete the project. Many states require general contractors to have bonds, purchased from insurance companies, as a condition of getting a contractor’s license; the insurance company is the surety—it will pay out if the contractor fails to complete work on the client’s house. These are types of a performance bond. A judge will often require that a criminal defendant put up a bond guaranteeing his appearance in court—that’s a type of suretyship where the bail-bonder is the surety—or that a plaintiff put up a bond indemnifying the defendant for the costs of delays caused by the lawsuit—a judicial bond. A bank will take out a bond on its employees in case they steal money from the bank—the bank teller, in this case, is the principal debtor (a fidelity bond). However, as we will see, sureties do not anticipate financial loss like insurance companies do: the surety expects, mostly, to be repaid if it has to perform. The principal debtor goes to an insurance company and buys the bond—the suretyship policy. The cost of the premium depends on the surety company, the type of bond applied for, and the applicant’s financial history. A sound estimate of premium costs is 1 percent to 4 percent, but if a surety company classifies an applicant as high risk, the premium falls between 5 percent and 20 percent of the bond amount. When the purchaser of real estate agrees to assume the seller’s mortgage (promises to pay the mortgage debt), the seller then becomes a surety: unless the mortgagee releases the seller (not likely), the seller has to pay if the buyer defaults.
Creation of the Suretyship
Suretyship can arise only through contract. The general principles of contract law apply to suretyship. Thus a person with the general capacity to contract has the power to become a surety. Consideration is required for a suretyship contract: if Debtor asks a friend to act as a surety to induce Creditor to make Debtor a loan, the consideration Debtor gives Creditor also acts as the consideration Friend gives. Where the suretyship arises after Creditor has already extended credit, new consideration would be required (absent application of the doctrine of promissory estoppelAmerican Druggists’ Ins. Co. v. Shoppe, 448 N.W.2d 103, Minn. App. (1989).). You may recall from the chapters on contracts that the promise by one person to pay or perform for the debts or defaults of another must be evidenced by a writing under the statute of frauds (subject to the “main purpose” exception).
Suretyship contracts are affected to some extent by government regulation. Under a 1985 Federal Trade Commission Credit Practices Rule, creditors are prohibited from misrepresenting a surety’s liability. Creditors must also give the surety a notice that explains the nature of the obligation and the potential liability that can arise if a person cosigns on another’s debt. Here is an example of the required notice: Federal Trade Commission, “Facts for Consumers: The Credit Practices Rule,” http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre12.shtm.
Duties of the Surety
Upon the principal debtor’s default, the surety is contractually obligated to perform unless the principal herself or someone on her behalf discharges the obligation. When the surety performs, it must do so in good faith. Because the principal debtor’s defenses are generally limited, and because—as will be noted—the surety has the right to be reimbursed by the debtor, debtors not infrequently claim the surety acted in bad faith by doing things like failing to make an adequate investigation (to determine if the debtor really defaulted), overpaying claims, interfering with the contact between the surety and the debtor, and making unreasonable refusals to let the debtor complete the project. The case Fidelity and Deposit Co. of Maryland v. Douglas Asphalt Co., in Section 25.5 "Cases", is typical.
Rights of the Surety
The surety has four main rights stemming from its obligation to answer for the debt or default of the principal debtor.
Exoneration
If, at the time a surety’s obligation has matured, the principal can satisfy the obligation but refuses to do so, the surety is entitled to exoneration—a court order requiring the principal to perform. It would be inequitable to force the surety to perform and then to have to seek reimbursement from the principal if all along the principal is able to perform.
Reimbursement
If the surety must pay the creditor because the principal has defaulted, the principal is obligated to reimburse the surety. The amount required to be reimbursed includes the surety’s reasonable, good-faith outlays, including interest and legal fees.
Subrogation
Suppose the principal’s duty to the creditor is fully satisfied and that the surety has contributed to this satisfaction. Then the surety is entitled to be subrogated to the rights of the creditor against the principal. In other words, the surety stands in the creditor’s shoes and may assert against the principal whatever rights the creditor could have asserted had the duty not been discharged. The right of subrogation includes the right to take secured interests that the creditor obtained from the principal to cover the duty. Sarah’s Pizzeria owes Martha \$5,000, and Martha has taken a security interest in Sarah’s Chevrolet. Eva is surety for the debt. Sarah defaults, and Eva pays Martha the \$5,000. Eva is entitled to have the security interest in the car transferred to her.
Contribution
Two or more sureties who are bound to answer for the principal’s default and who should share between them the loss caused by the default are known as cosureties. A surety who in performing its own obligation to the creditor winds up paying more than its proportionate share is entitled to contribution from the cosureties.
Defenses of the Parties
The principal and the surety may have defenses to paying.
Defenses of the Principal
The principal debtor may avail itself of any standard contract defenses as against the creditor, including impossibility, illegality, incapacity, fraud, duress, insolvency, or bankruptcy discharge. However, the surety may contract with the creditor to be liable despite the principal’s defenses, and a surety who has undertaken the suretyship with knowledge of the creditor’s fraud or duress remains obligated, even though the principal debtor will be discharged. When the surety turns to the principal debtor and demands reimbursement, the latter may have defenses against the surety—as noted—for acting in bad faith.
One of the main reasons creditors want the promise of a surety is to avoid the risk that the principal debtor will go bankrupt: the debtor’s bankruptcy is a defense to the debtor’s liability, certainly, but that defense cannot be used by the surety. The same is true of the debtor’s incapacity: it is a defense available to the principal debtor but not to the surety.
Defenses of the Surety
Generally, the surety may exercise defenses on a contract that would have been available to the principal debtor (e.g., creditor’s breach; impossibility or illegality of performance; fraud, duress, or misrepresentation by creditor; statute of limitations; refusal of creditor to accept tender or performance from either debtor or surety.) Beyond that, the surety has some defenses of its own. Common defenses raised by sureties include the following:
• Release of the principal. Whenever a creditor releases the principal, the surety is discharged, unless the surety consents to remain liable or the creditor expressly reserves her rights against the surety. The creditor’s release of the surety, though, does not release the principal debtor because the debtor is liable without regard to the surety’s liability.
• Modification of the contract. If the creditor alters the instrument sufficiently to discharge the principal, the surety is discharged as well. Likewise, when the creditor and principal modify their contract, a surety who has not consented to the modification is discharged if the surety’s risk is materially increased (but not if it is decreased). Modifications include extension of the time of payment, release of collateral (this releases the surety to the extent of the impairment), change in principal debtor’s duties, and assignment or delegation of the debtor’s obligations to a third party. The surety may consent to modifications.
• Creditor’s failure to perfect. A creditor who fails to file a financing statement or record a mortgage risks losing the security for the loan and might also inadvertently release a surety, but the failure of the creditor to resort first to collateral is no defense.
• Statute of frauds. Suretyship contracts are among those required to be evidenced by some writing under the statute of frauds, and failure to do so may discharge the surety from liability.
• Creditor’s failure to inform surety of material facts within creditor’s knowledge affecting debtor’s ability to perform (e.g., that debtor has defaulted several times before).
• General contract defenses. The surety may raise common defenses like incapacity (infancy), lack of consideration (unless promissory estoppel can be substituted or unless no separate consideration is necessary because the surety’s and debtor’s obligations arise at the same time), and creditor’s fraud or duress on surety. However, fraud by the principal debtor on the surety to induce the suretyship will not release the surety if the creditor extended credit in good faith; if the creditor knows of the fraud perpetrated by the debtor on the surety, the surety may avoid liability. See Figure 25.6 "Defenses of Principal Debtor and Surety".
The following are defenses of principal debtor only:
• Death or incapacity of principal debtor
• Bankruptcy of principal debtor
• Principal debtor’s setoffs against creditor
The following are defenses of both principal debtor and surety:
• Material breach by creditor
• Lack of mutual assent, failure of consideration
• Creditor’s fraud, duress, or misrepresentation of debtor
• Impossibility or illegality of performance
• Material and fraudulent alteration of the contract
• Statute of limitations
The following are defenses of surety only:
• Fraud or duress by creditor on surety
• Illegality of suretyship contract
• Surety’s incapacity
• Failure of consideration for surety contract (unless excused)
• Statute of frauds
• Acts of creditor or debtor materially affecting surety’s obligations:
• Refusal by creditor to accept tender of performance
• Release of principal debtor without surety’s consent
• Release of surety
• Release, surrender, destruction, or impairment of collateral
• Extension of time on principal debtor’s obligation
• Modification of debtor’s duties, place, amount, or manner of debtor’s obligations
Key Takeaway
Creditors often require not only the security of collateral from the debtor but also that the debtor engage a surety. A contract of suretyship is a type of insurance policy, where the surety (insurance company) promises the creditor that if the principal debtor fails to perform, the surety will undertake good-faith performance instead. A difference between insurance and suretyship, though, is that the surety is entitled to reimbursement by the principal debtor if the surety pays out. The surety is also entitled, where appropriate, to exoneration, subrogation, and contribution. The principal debtor and the surety both have some defenses available: some are personal to the debtor, some are joint defenses, and some are personal to the surety.
Exercises
1. Why isn’t collateral put up by the debtor sufficient security for the creditor—why is a surety often required?
2. How can it be said that sureties do not anticipate financial losses like insurance companies do? What’s the difference, and how does the surety avoid losses?
3. Why does the creditor’s failure to perfect a security interest discharge the surety from liability? Why doesn’t failure of the creditor to resort first to perfected collateral discharge the surety?
4. What is the difference between a guarantor and a surety? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/25%3A_Secured_Transactions_and_Suretyship/25.4%3A_Suretyship.txt |
Perfection by Mere Attachment; Priorities
In re NICOLOSI
4 UCC Rep. 111 (Ohio 1966)
Preliminary Statement and Issues
This matter is before the court upon a petition by the trustee to sell a diamond ring in his possession free of liens.…Even though no pleadings were filed by Rike-Kumler Company, the issue from the briefs is whether or not a valid security interest was perfected in this chattel as consumer goods, superior to the statutory title and lien of the trustee in bankruptcy.
Findings of Fact
The [debtor] purchased from the Rike-Kumler Company, on July 7, 1964, the diamond ring in question, for \$1237.35 [about \$8,500 in 2010 dollars], as an engagement ring for his fiancée. He executed a purchase money security agreement, which was not filed. Also, no financing statement was filed. The chattel was adequately described in the security agreement.
The controversy is between the trustee in bankruptcy and the party claiming a perfected security interest in the property. The recipient of the property has terminated her relationship with the [debtor], and delivered the property to the trustee.
Conclusion of Law, Decision, and Order
If the diamond ring, purchased as an engagement ring by the bankrupt, cannot be categorized as consumer goods, and therefore exempted from the notice filing requirements of the Uniform Commercial Code as adopted in Ohio, a perfected security interest does not exist.
No judicial precedents have been cited in the briefs.
Under the commercial code, collateral is divided into tangible, intangible, and documentary categories. Certainly, a diamond ring falls into the tangible category. The classes of tangible goods are distinguished by the primary use intended. Under [the UCC] the four classes [include] “consumer goods,” “equipment,” “farm products” and “inventory.”
The difficulty is that the code provisions use terms arising in commercial circles which have different semantical values from legal precedents. Does the fact that the purchaser bought the goods as a special gift to another person signify that it was not for his own “personal, family or household purposes”? The trustee urges that these special facts control under the express provisions of the commercial code.
By a process of exclusion, a diamond engagement ring purchased for one’s fiancée is not “equipment” bought or used in business, “farm products” used in farming operations, or “inventory” held for sale, lease or service contracts. When the [debtor] purchased the ring, therefore, it could only have been “consumer goods” bought “primarily for personal use.” There could be no judicial purpose to create a special class of property in derogation of the statutory principles.
Another problem is implicit, although not covered by the briefs.
By the foregoing summary analysis, it is apparent that the diamond ring, when the interest of the debtor attached, was consumer goods since it could have been no other class of goods. Unless the fiancée had a special status under the code provision protecting a bona fide buyer, without knowledge, for value, of consumer goods, the failure to file a financing statement is not crucial. No evidence has been adduced pertinent to the scienter question.
Is a promise, as valid contractual consideration, included under the term “value”? In other words, was the ring given to his betrothed in consideration of marriage (promise for a promise)? If so, and “value” has been given, the transferee is a “buyer” under traditional concepts.
The Uniform Commercial Code definition of “value”…very definitely covers a promise for a promise. The definition reads that “a person gives ‘value’ for rights if he acquires them…generally in return for any consideration sufficient to support a simple contract.”
It would seem unrealistic, nevertheless, to apply contract law concepts historically developed into the law of marriage relations in the context of new concepts developed for uniform commercial practices. They are not, in reality, the same juristic manifold. The purpose of uniformity of the code should not be defeated by the obsessions of the code drafters to be all inclusive for secured creditors.
Even if the trustee, on behalf of the unsecured creditors, would feel inclined to insert love, romance and morals into commercial law, he is appearing in the wrong era, and possibly the wrong court.
Ordered, that the Rike-Kumler Company holds a perfected security interest in the diamond engagement ring, and the security interest attached to the proceeds realized from the sale of the goods by the trustee in bankruptcy.
case questions
1. Why didn’t the jewelry store, Rike-Kumler, file a financing statement to protect its security interest in the ring?
2. How did the bankruptcy trustee get the ring?
3. What argument did the trustee make as to why he should be able to take the ring as an asset belonging to the estate of the debtor? What did the court determine on this issue?
Repossession and Breach of the Peace
Pantoja-Cahue v. Ford Motor Credit Co.
872 N.E.2d 1039 (Ill. App. 2007)
Plaintiff Mario Pantoja-Cahue filed a six-count complaint seeking damages from defendant Ford Motor Credit Company for Ford’s alleged breach of the peace and “illegal activities” in repossessing plaintiff’s automobile from his locked garage.…
In August 2000, plaintiff purchased a 2000 Ford Explorer from auto dealer Webb Ford. Plaintiff, a native Spanish speaker, negotiated the purchase with a Spanish-speaking salesperson at Webb. Plaintiff signed what he thought was a contract for the purchase and financing of the vehicle, with monthly installment payments to be made to Ford. The contract was in English. Some years later, plaintiff discovered the contract was actually a lease, not a purchase agreement. Plaintiff brought suit against Ford and Webb on August 22, 2003, alleging fraud. Ford brought a replevin action against plaintiff asserting plaintiff was in default on his obligations under the lease. In the late night/early morning hours of March 11–12, 2004, repossession agents [from Doe Repossession Services] entered plaintiff’s locked garage and removed the car…
Plaintiff sought damages for Ford and Doe’s “unlawful activities surrounding the wrongful repossession of Plaintiff’s vehicle.” He alleged Ford and Doe’s breaking into plaintiff’s locked garage to effectuate the repossession and Ford’s repossession of the vehicle knowing that title to the car was the subject of ongoing litigation variously violated section 2A-525(3) of the [Uniform Commercial] Code (count I against Ford), the [federal] Fair Debt Collection Practices Act (count II against Doe),…Ford’s contract with plaintiff (count V against Ford) and section 2A-108 of the Code (count VI against Ford and Doe).…
Uniform Commercial Code Section 2A-525(3)
In count I, plaintiff alleged “a breach of the peace occurred as [Ford]’s repossession agent broke into Plaintiff’s locked garage in order to take the vehicle” and Ford’s agent “repossessed the subject vehicle by, among other things, breaking into Plaintiff’s locked garage and causing substantial damage to Plaintiff’s personal property in violation of [section 2A-525(3)]”:
“After a default by the lessee under the lease contract * * * or, if agreed, after other default by the lessee, the lessor has the right to take possession of the goods. * * *
The lessor may proceed under subsection (2) without judicial process if it can be done without breach of the peace or the lessor may proceed by action.” [emphasis added.]
[U]pon a lessee’s default, a lessor has the right to repossess the leased goods in one of two ways: by using the judicial process or, if repossession could be accomplished without a breach of the peace, by self-help [UCC Section 2A-525(3)]. “If a breach of the peace is likely, a properly instituted civil action is the appropriate remedy.” [Citation] (interpreting the term “breach of the peace” in the context of section 9-503 of the Code, which provides for the same self-help repossession as section 2A-525 but for secured creditors rather than lessors).
Taking plaintiff’s well-pleaded allegations as true, Ford resorted to self-help, by employing an agent to repossess the car and Ford’s agent broke into plaintiff’s locked garage to effectuate the repossession. Although plaintiff’s count I allegations are minimal, they are sufficient to plead a cause of action for a violation of section 2A-525(3) if breaking into a garage to repossess a car is, as plaintiff alleged, a breach of the peace. Accordingly, the question here is whether breaking into a locked garage to effectuate a repossession is a breach of the peace in violation of section 2A-525(3).
There are no Illinois cases analyzing the meaning of the term “breach of the peace” as used in the lessor repossession context in section 2A-525(3). However, there are a few Illinois cases analyzing the term as used in section 9-503 of the Code, which contains a similar provision providing that a secured creditor may, upon default by a debtor, repossess its collateral either “(1) pursuant to judicial process; or (2) without judicial process, if it proceeds without breach of the peace.” The seminal case, and the only one of any use in resolving the issue, is Chrysler Credit Corp. v. Koontz, 277 Ill.App.3d 1078, 214 Ill.Dec. 726, 661 N.E.2d 1171 (1996).
In Koontz, Chrysler, the defendant creditor, sent repossession agents to repossess the plaintiff’s car after the plaintiff defaulted on his payments. The car was parked in the plaintiff’s front yard. The plaintiff heard the repossession in progress and ran outside in his underwear shouting “Don’t take it” to the agents. The agents did not respond and proceeded to take the car. The plaintiff argued the repossession breached the peace and he was entitled to the statutory remedy for violation of section 9-503, denial of a deficiency judgment to the secured party, Chrysler.…
After a thorough analysis of the term “breach of the peace,” the court concluded the term “connotes conduct which incites or is likely to incite immediate public turbulence, or which leads to or is likely to lead to an immediate loss of public order and tranquility. Violent conduct is not a necessary element. The probability of violence at the time of or immediately prior to the repossession is sufficient.”…[The Koontz court] held the circumstances of the repossession did not amount to a breach the peace.
The court then considered the plaintiff’s argument that Chrysler breached the peace by repossessing the car under circumstances constituting criminal trespass to property. Looking to cases in other jurisdictions, the court determined that, “in general, a mere trespass, standing alone, does not automatically constitute a breach of the peace.” [Citation] (taking possession of car from private driveway does not, without more, constitute breach of the peace), [Citation] (no breach of the peace occurred where car repossessed from debtor’s driveway without entering “any gates, doors, or other barricades to reach” car), [Citation] (no breach of the peace occurred where car was parked partially under carport and undisputed that no door, “not even one to a garage,” on the debtor’s premises was opened, much less broken, to repossess the car), [Citation] (although secured party may not break into or enter homes or buildings or enclosed spaces to effectuate a repossession, repossession of vehicle from parking lot of debtor’s apartment building was not breach of the peace), [Citation] (repossession of car from debtor’s driveway without entering any gates, doors or other barricades was accomplished without breach of the peace).…
Although the evidence showed the plaintiff notified Chrysler prior to the repossession that it was not permitted onto his property, the court held Chrysler’s entry onto the property to take the car did not constitute a breach of the peace because there was no evidence Chrysler entered through a barricade or did anything other than drive the car away. [Citation] “Chrysler enjoyed a limited privilege to enter [the plaintiff’s] property for the sole and exclusive purpose of effectuating the repossession. So long as the entry was limited in purpose (repossession), and so long as no gates, barricades, doors, enclosures, buildings, or chains were breached or cut, no breach of the peace occurred by virtue of the entry onto his property.”
…[W]e come to essentially the same conclusion: where a repossession is effectuated by an actual breaking into the lessee/debtor’s premises or breaching or cutting of chains, gates, barricades, doors or other barriers designed to exclude trespassers, the likelihood that a breach of the peace occurred is high.
Davenport v. Chrysler Credit Corp., [Citation] (Tenn.App.1991), a case analyzing Tennessee’s version of section 9-503 is particularly helpful, holding that “‘[a] breach of the peace is almost certain to be found if the repossession is accompanied by the unauthorized entry into a closed or locked garage.’”…This is so because “public policy favors peaceful, non-trespassory repossessions when the secured party has a free right of entry” and “forced entries onto the debtor’s property or into the debtor’s premises are viewed as seriously detrimental to the ordinary conduct of human affairs.” Davenport held that the creditor’s repossession of a car by entering a closed garage and cutting a chain that would have prevented it from removing the car amounted to a breach of the peace, “[d]espite the absence of violence or physical confrontation” (because the debtor was not at home when the repossession occurred). Davenport recognized that the secured creditors’ legitimate interest in obtaining possession of collateral without having to resort to expensive and cumbersome judicial procedures must be balanced against the debtors’ legitimate interest in being free from unwarranted invasions of their property and privacy interests.
“Repossession is a harsh procedure and is, essentially, a delegation of the State’s exclusive prerogative to resolve disputes. Accordingly, the statutes governing the repossession of collateral should be construed in a way that prevents abuse and discourages illegal conduct which might otherwise go unchallenged because of the debtor’s lack of knowledge of legally proper repossession techniques” [Citation].
We agree with [this] analysis of the term “breach of the peace” in the context of repossession and hold, with regard to section 2A-525(3) of the Code, that breaking into a locked garage to effectuate a repossession may constitute a breach of the peace.
Here, plaintiff alleges more than simply a trespass. He alleges Ford, through Doe, broke into his garage to repossess the car. Given our determination that breaking into a locked garage to repossess a car may constitute a breach of the peace, plaintiff’s allegation is sufficient to state a cause of action under section 2A-525(3) of the Code. The court erred in dismissing count I of plaintiff’s second amended complaint and we remand for further proceedings.
Uniform Commercial Code Section 2A-108
In count VI, plaintiff alleged the lease agreement was unconscionable because it was formed in violation of [the Illinois Consumer Fraud Statute, requiring that the customer verify that the negotiations were conducted in the consumer’s native language and that the document was translated so the customer understood it.]…Plaintiff does not quote [this] or explain how the agreement violates [it]. Instead, he quotes UCC section 2A-108 of the Code, as follows:
“With respect to a consumer lease, if the court as a matter of law finds that a lease contract or any clause of a lease contract has been induced by unconscionable conduct or that unconscionable conduct has occurred in the collection of a claim arising from a lease contract, the court may grant appropriate relief.
Before making a finding of unconscionability under subsection (1) or (2), the court, on its own motion or that of a party, shall afford the parties a reasonable opportunity to present evidence as to the setting, purpose, and effect of the lease contract or clause thereof, or of the conduct.”
He then, in “violation one” under count VI, alleges the lease was made in violation of [the Illinois Consumer Fraud Statute] because it was negotiated in Spanish but he was only given a copy of the contract in English; he could not read the contract and, as a result, Webb Ford was able to trick him into signing a lease, rather than a purchase agreement; such contract was induced by unconscionable conduct; and, because it was illegal, the contract was unenforceable.
This allegation is insufficient to state a cause of action against Ford under section 2A-108.… First, Ford is an entirely different entity than Webb Ford and plaintiff does not assert otherwise. Nor does plaintiff assert that Webb Ford was acting as Ford’s agent in inducing plaintiff to sign the lease. Plaintiff asserts no basis on which Ford can be found liable for something Webb Ford did. Second, there is no allegation as to how the contract violates [the statute], merely the legal conclusion that it does, as well as the unsupported legal conclusion that a violation of [it] is necessarily unconscionable.…[Further discussion omitted.]
For the reasons stated above, we affirm the trial court’s dismissal of counts IV, V and VI of plaintiff’s second amended complaint. We reverse the court’s dismissal of count I and remand for further proceedings. Affirmed in part and reversed in part; cause remanded.
case questions
1. Under what circumstances, if any, would breaking into a locked garage to repossess a car not be considered a breach of the peace?
2. The court did not decide that a breach of the peace had occurred. What would determine that such a breach had occurred?
3. Why did the court dismiss the plaintiff’s claim (under UCC Article 2A) that it was unconscionable of Ford to trick him into signing a lease when he thought he was signing a purchase contract? Would that section of Article 2A make breaking into his garage unconscionable?
4. What alternatives had Ford besides taking the car from the plaintiff’s locked garage?
5. If it was determined on remand that a breach of the peace had occurred, what happens to Ford?
Defenses of the Principal Debtor as against Reimbursement to Surety
Fidelity and Deposit Co. of Maryland v. Douglas Asphalt Co.
338 Fed.Appx. 886, 11th Cir. Ct. (2009)
Per Curium: Latin for “by the court.” A decision of an appeals court as a whole in which no judge is identified as the specific author.
The Georgia Department of Transportation (“GDOT”) contracted with Douglas Asphalt Company to perform work on an interstate highway. After Douglas Asphalt allegedly failed to pay its suppliers and subcontractors and failed to perform under the contract, GDOT defaulted and terminated Douglas Asphalt. Fidelity and Deposit Company of Maryland and Zurich American Insurance Company had executed payment and performance bonds in connection with Douglas Asphalt’s work on the interstate, and after Douglas Asphalt’s default, Fidelity and Zurich spent \$15,424,798 remedying the default.
Fidelity and Zurich, seeking to recover their losses related to their remedy of the default, brought this suit against Douglas Asphalt, Joel Spivey, and Ronnie Spivey. The Spiveys and Douglas Asphalt had executed a General Indemnity Agreement in favor of Fidelity and Zurich. They promised to reimburse the surety for its expenses and hold it harmless for further liability.
After a bench trial, the district court entered judgment in favor of Fidelity and Zurich for \$16,524,798. Douglas Asphalt and the Spiveys now appeal.
Douglas Asphalt and the Spiveys argue that the district court erred in entering judgment in favor of Fidelity and Zurich because Fidelity and Zurich acted in bad faith in three ways.
First, Douglas Asphalt and the Spiveys argue that the district court erred in not finding that Fidelity and Zurich acted in bad faith because they claimed excessive costs to remedy the default. Specifically, Douglas Asphalt and the Spiveys argue that they introduced evidence that the interstate project was 98% complete, and that only approximately \$3.6 million was needed to remedy any default. But, the district court found that the interstate project was only 90%–92% complete and that approximately \$2 million needed to be spent to correct defective work already done by Douglas Asphalt. Douglas Asphalt and the Spiveys have not shown that the district court’s finding was clearly erroneous, and accordingly, their argument that Fidelity and Zurich showed bad faith in claiming that the project was only 90% complete and therefore required over \$15 million to remedy the default fails.
Second, Douglas Asphalt and the Spiveys argue that Fidelity and Zurich acted in bad faith by failing to contest the default. However, the district court concluded that the indemnity agreement required Douglas Asphalt and the Spiveys to request a contest of the default, and to post collateral security to pay any judgment rendered in the course of contesting the default. The court’s finding that Douglas Asphalt and the Spiveys made no such request and posted no collateral security was not clearly erroneous, and the sureties had no independent duty to investigate a default. Accordingly, Fidelity and Zurich’s failure to contest the default does not show bad faith.
Finally, Douglas Asphalt and the Spiveys argue that Fidelity and Zurich’s refusal to permit them to remain involved with the interstate project, either as a contractor or consultant, was evidence of bad faith. Yet, Douglas Asphalt and the Spiveys did not direct the district court or this court to any case law that holds that the refusal to permit a defaulting contractor to continue working on a project is bad faith. As the district court concluded, Fidelity and Zurich had a contractual right to take possession of all the work under the contract and arrange for its completion. Fidelity and Zurich exercised that contractual right, and, as the district court noted, the exercise of a contractual right is not evidence of bad faith.
Finding no error, we affirm the judgment of the district court.
case questions
1. Why were Douglas Asphalt and the Spiveys supposed to pay the sureties nearly \$15.5 million?
2. What did the plaintiffs claim the defendant sureties did wrong as relates to how much money they spent to cure the default?
3. What is a “contest of the default”?
4. Why would the sureties probably not want the principal involved in the project? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/25%3A_Secured_Transactions_and_Suretyship/25.5%3A_Cases.txt |
summary
The law governing security interests in personal property is Article 9 of the UCC, which defines a security interest as an interest in personal property or fixtures that secures payment or performance of an obligation. Article 9 lumps together all the former types of security devices, including the pledge, chattel mortgage, and conditional sale.
Five types of tangible property may serve as collateral: (1) consumer goods, (2) equipment, (3) farm products, (4) inventory, and (5) fixtures. Five types of intangibles may serve as collateral: (1) accounts, (2) general intangibles (e.g., patents), (3) documents of title, (4) chattel paper, and (5) instruments. Article 9 expressly permits the debtor to give a security interest in after-acquired collateral.
To create an enforceable security interest, the lender and borrower must enter into an agreement establishing the interest, and the lender must follow steps to ensure that the security interest first attaches and then is perfected. There are three general requirements for attachment: (1) there must be an authenticated agreement (or the collateral must physically be in the lender’s possession), (2) the lender must have given value, and (3) the debtor must have some rights in the collateral. Once the interest attaches, the lender has rights in the collateral superior to those of unsecured creditors. But others may defeat his interest unless he perfects the security interest. The three common ways of doing so are (1) filing a financing statement, (2) pledging collateral, and (3) taking a purchase-money security interest (PMSI) in consumer goods.
A financing statement is a simple notice, showing the parties’ names and addresses, the signature of the debtor, and an adequate description of the collateral. The financing statement, effective for five years, must be filed in a public office; the location of the office varies among the states.
Security interests in instruments and negotiable documents can be perfected only by the secured party’s taking possession, with twenty-one-day grace periods applicable under certain circumstances. Goods may also be secured through pledging, which is often done through field warehousing. If a seller of consumer goods takes a PMSI in the goods sold, then perfection is automatic and no filing is required, although the lender may file and probably should, to avoid losing seniority to a bona fide purchaser of consumer goods without knowledge of the security interest, if the goods are used for personal, family, or household purposes.
The general priority rule is “first in time, first in right.” Priority dates from the earlier of two events: (1) filing a financing statement covering the collateral or (2) other perfection of the security interest. Several exceptions to this rule arise when creditors take a PMSI, among them, when a buyer in the ordinary course of business takes free of a security interest created by the seller.
On default, a creditor may repossess the collateral. For the most part, self-help private repossession continues to be lawful but risky. After repossession, the lender may sell the collateral or accept it in satisfaction of the debt. Any excess in the selling price above the debt amount must go to the debtor.
Suretyship is a legal relationship that is created when one person contracts to be responsible for the proper fulfillment of another’s obligation, in case the latter (the principal debtor) fails to fulfill it. The surety may avail itself of the principal’s contract defenses, but under various circumstances, defenses may be available to the one that are not available to the other. One general defense often raised by sureties is alteration of the contract. If the surety is required to perform, it has rights for reimbursement against the principal, including interest and legal fees; and if there is more than one surety, each standing for part of the obligation, one who pays a disproportionate part may seek contribution from the others.
Exercises
1. Kathy Knittle borrowed \$20,000 from Bank to buy inventory to sell in her knit shop and signed a security agreement listing as collateral the entire present and future inventory in the shop, including proceeds from the sale of inventory. Bank filed no financing statement. A month later, Knittle borrowed \$5,000 from Creditor, who was aware of Bank’s security interest. Knittle then declared bankruptcy. Who has priority, Bank or Creditor?
2. Assume the same facts as in Exercise 1, except Creditor—again, aware of Bank’s security interest—filed a financing statement to perfect its interest. Who has priority, Bank or Creditor?
3. Harold and Wilma are married. First Bank has a mortgage on their house, and it covers after-acquired property. Because Harold has a new job requiring travel to neighboring cities, they purchase a second car for Wilma’s normal household use, financed by Second Bank. They sign a security agreement; Second Bank files nothing. If they were to default on their house payments, First Bank could repossess the house; could it repossess the car, too?
1. Kathy Knittle borrowed \$20,000 from Bank to buy inventory to sell in her knit shop and signed a security agreement listing her collateral—present and future—as security for the loan. Carlene Customer bought yarn and a tabletop loom from Knittle. Shortly thereafter, Knittle declared bankruptcy. Can Bank get the loom from Customer?
2. Assume that the facts are similar to those in Exercise 4a, except that the loom that Knittle sold had been purchased from Larry Loomaker, who had himself given a secured interest in it (and the other looms he manufactured) from Fine Lumber Company (FLC) to finance the purchase of the lumber to make the looms. Customer bought the loom from Knittle (unaware of Loomaker’s situation); Loomaker failed to pay FLC. Why can FLC repossess the loom from Customer?
3. What recourse does Customer have now?
4. Creditor loaned Debtor \$30,000 with the provision that the loan was callable by Creditor with sixty days’ notice to Debtor. Debtor, having been called for repayment, asked for a ninety-day extension, which Creditor assented to, provided that Debtor would put up a surety to secure repayment. Surety agreed to serve as surety. When Debtor defaulted, Creditor turned to Surety for payment. Surety asserted that Creditor had given no consideration for Surety’s promise, and therefore Surety was not bound. Is Surety correct?
1. Mrs. Ace said to University Bookstore: “Sell the books to my daughter. I’ll pay for them.” When University Bookstore presented Mrs. Ace a statement for \$900, she refused to pay, denying she’d ever promised to do so, and she raised the statute of frauds as a defense. Is this a good defense?
2. Defendant ran a stop sign and crashed into Plaintiff’s car, causing \$8,000 damage. Plaintiff’s attorney orally negotiated with Defendant’s insurance company, Goodhands Insurance, to settle the case. Subsequently, Goodhands denied liability and refused to pay, and it raised the statute of frauds as a defense, asserting that any promise by it to pay for its insured’s negligence would have to be in writing to be enforceable under the statute’s suretyship clause. Is Goodhands’s defense valid?
1. First Bank has a security interest in equipment owned by Kathy Knittle in her Knit Shop. If Kathy defaults on her loan and First Bank lawfully repossesses, what are the bank’s options? Explain.
2. Suppose, instead, that First Bank had a security interest in Kathy’s home knitting machine, worth \$10,000. She paid \$6,200 on the machine and then defaulted. Now what are the bank’s options?
self-test questions
1. Creditors may obtain security
1. by agreement with the debtor
2. through operation of law
3. through both of the above
4. through neither of the above
2. Under UCC Article 9, when the debtor has pledged collateral to the creditor, what other condition is required for attachment of the security interest?
1. A written security agreement must be authenticated by the debtor.
2. There must be a financing statement filed by or for the creditor.
3. The secured party received consideration.
4. The debtor must have rights in the collateral.
3. To perfect a security interest, one may
1. file a financing statement
2. pledge collateral
3. take a purchase-money security interest in consumer goods
4. do any of the above
4. Perfection benefits the secured party by
1. keeping the collateral out of the debtor’s reach
2. preventing another creditor from getting a secured interest in the collateral
3. obviating the need to file a financing statement
4. establishing who gets priority if the debtor defaults
5. Creditor filed a security interest in inventory on June 1, 2012. Creditor’s interest takes priority over which of the following?
1. a purchaser in the ordinary course of business who bought on June 5
2. mechanic’s lien filed on May 10
3. purchase-money security interest in after-acquired property who filed on May 15
4. judgment lien creditor who filed the judgment on June 10
Answer
1. 3
2. 4
3. 4
4. 4
5. 4 | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/25%3A_Secured_Transactions_and_Suretyship/25.6%3A_Summary_and_Exercises.txt |
Learning Objectives
After reading this chapter, you should understand the following:
1. The basic concepts of mortgages
2. How the mortgage is created
3. Priorities with mortgages as security devices
4. Termination of the mortgage
5. Other methods of using real estate as security
6. Nonconsensual liens
26: Mortgages and Non-consensual Liens
Learning Objectives
1. Understand the terminology used in mortgage transactions, and how mortgages are used as security devices.
2. Know a bit about the history of mortgages.
3. Understand how the mortgage is created.
Having discussed in Chapter 25 "Secured Transactions and Suretyship" security interests in personal property and suretyship—two of the three common types of consensual security arrangements—we turn now to the third type of consensual security arrangement, the mortgage. We also discuss briefly various forms of nonconsensual liens (see Figure 26.1 "Security Arrangements").
Figure 26.1 Security Arrangements
Definitions
A mortgage is a means of securing a debt with real estate. A long time ago, the mortgage was considered an actual transfer of title, to become void if the debt was paid off. The modern view, held in most states, is that the mortgage is but a lien, giving the holder, in the event of default, the right to sell the property and repay the debt from the proceeds. The person giving the mortgage is the mortgagor, or borrower. In the typical home purchase, that’s the buyer. The buyer needs to borrow to finance the purchase; in exchange for the money with which to pay the seller, the buyer “takes out a mortgage” with, say, a bank. The lender is the mortgagee, the person or institution holding the mortgage, with the right to foreclose on the property if the debt is not timely paid. Although the law of real estate mortgages is different from the set of rules in Article 9 of the Uniform Commercial Code (UCC) that we examined in Chapter 25 "Secured Transactions and Suretyship", the circumstances are the same, except that the security is real estate rather than personal property (secured transactions) or the promise of another (suretyship).
The Uses of Mortgages
Most frequently, we think of a mortgage as a device to fund a real estate purchase: for a homeowner to buy her house, or for a commercial entity to buy real estate (e.g., an office building), or for a person to purchase farmland. But the value in real estate can be mortgaged for almost any purpose (a home equity loan): a person can take out a mortgage on land to fund a vacation. Indeed, during the period leading up to the recession in 2007–08, a lot of people borrowed money on their houses to buy things: boats, new cars, furniture, and so on. Unfortunately, it turned out that some of the real estate used as collateral was overvalued: when the economy weakened and people lost income or their jobs, they couldn’t make the mortgage payments. And, to make things worse, the value of the real estate sometimes sank too, so that the debtors owed more on the property than it was worth (that’s called being underwater). They couldn’t sell without taking a loss, and they couldn’t make the payments. Some debtors just walked away, leaving the banks with a large number of houses, commercial buildings, and even shopping centers on their hands.
Short History of Mortgage Law
The mortgage has ancient roots, but the form we know evolved from the English land law in the Middle Ages. Understanding that law helps to understand modern mortgage law. In the fourteenth century, the mortgage was a deed that actually transferred title to the mortgagee. If desired, the mortgagee could move into the house, occupy the property, or rent it out. But because the mortgage obligated him to apply to the mortgage debt whatever rents he collected, he seldom ousted the mortgagor. Moreover, the mortgage set a specific date (the “law day”) on which the debt was to be repaid. If the mortgagor did so, the mortgage became void and the mortgagor was entitled to recover the property. If the mortgagor failed to pay the debt, the property automatically vested in the mortgagee. No further proceedings were necessary.
This law was severe. A day’s delay in paying the debt, for any reason, forfeited the land, and the courts strictly enforced the mortgage. The only possible relief was a petition to the king, who over time referred these and other kinds of petitions to the courts of equity. At first fitfully, and then as a matter of course (by the seventeenth century), the equity courts would order the mortgagee to return the land when the mortgagor stood ready to pay the debt plus interest. Thus a new right developed: the equitable right of redemption, known for short as the equity of redemption. In time, the courts held that this equity of redemption was a form of property right; it could be sold and inherited. This was a powerful right: no matter how many years later, the mortgagor could always recover his land by proffering a sum of money.
Understandably, mortgagees did not warm to this interpretation of the law, because their property rights were rendered insecure. They tried to defeat the equity of redemption by having mortgagors waive and surrender it to the mortgagees, but the courts voided waiver clauses as a violation of public policy. Hence a mortgage, once a transfer of title, became a security for debt. A mortgage as such can never be converted into a deed of title.
The law did not rest there. Mortgagees won a measure of relief in the development of the foreclosure. On default, the mortgagee would seek a court order giving the mortgagor a fixed time—perhaps six months or a year—within which to pay off the debt; under the court decree, failure meant that the mortgagor was forever foreclosed from asserting his right of redemption. This strict foreclosure gave the mortgagee outright title at the end of the time period.
In the United States today, most jurisdictions follow a somewhat different approach: the mortgagee forecloses by forcing a public sale at auction. Proceeds up to the amount of the debt are the mortgagee’s to keep; surplus is paid over to the mortgagor. Foreclosure by sale is the usual procedure in the United States. At bottom, its theory is that a mortgage is a lien on land. (Foreclosure issues are further discussed in Section 26.2 "Priority, Termination of the Mortgage, and Other Methods of Using Real Estate as Security".)
Under statutes enacted in many states, the mortgagor has one last chance to recover his property, even after foreclosure. This statutory right of redemption extends the period to repay, often by one year.
Statutory Regulation
The decision whether to lend money and take a mortgage is affected by several federal and state regulations.
Consumer Credit Statutes Apply
Statutes dealing with consumer credit transactions (as discussed in Chapter 24 "Consumer Credit Transactions") have a bearing on the mortgage, including state usury statutes, and the federal Truth in Lending Act and Equal Credit Opportunity Act.
Real Estate Settlement Procedures Act
Other federal statutes are directed more specifically at mortgage lending. One, enacted in 1974, is the Real Estate Settlement Procedures Act (RESPA), aimed at abuses in the settlement process—the process of obtaining the mortgage and purchasing a residence. The act covers all federally related first mortgage loans secured by residential properties for one to four families. It requires the lender to disclose information about settlement costs in advance of the closing day: it prohibits the lender from “springing” unexpected or hidden costs onto the borrower. The RESPA is a US Department of Housing and Urban Development (HUD) consumer protection statute designed to help home buyers be better shoppers in the home-buying process, and it is enforced by HUD. It also outlaws what had been a common practice of giving and accepting kickbacks and referral fees. The act prohibits lenders from requiring mortgagors to use a particular company to obtain insurance, and it limits add-on fees the lender can demand to cover future insurance and tax charges.
Redlining. Several statutes are directed to the practice of redlining—the refusal of lenders to make loans on property in low-income neighborhoods or impose stricter mortgage terms when they do make loans there. (The term derives from the supposition that lenders draw red lines on maps around ostensibly marginal neighborhoods.) The most important of these is the Community Reinvestment Act (CRA) of 1977.12 United States Code, Section 2901. The act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation. To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions. The information is compiled under the authority of the Home Mortgage Disclosure Act of 1975, which requires financial institutions within its purview to report annually by transmitting information from their loan application registers to a federal agency.
The Note and the Mortgage Documents
The note and the mortgage documents are the contracts that set up the deal: the mortgagor gets credit, and the mortgagee gets the right to repossess the property in case of default.
The Note
If the lender decides to grant a mortgage, the mortgagor signs two critical documents at the closing: the note and the mortgage. We cover notes in Chapter 19 "Nature and Form of Commercial Paper". It is enough here to recall that in a note (really a type of IOU), the mortgagor promises to pay a specified principal sum, plus interest, by a certain date or dates. The note is the underlying obligation for which the mortgage serves as security. Without the note, the mortgagee would have an empty document, since the mortgage would secure nothing. Without a mortgage, a note is still quite valid, evidencing the debtor’s personal obligation.
One particular provision that usually appears in both mortgages and the underlying notes is the acceleration clause. This provides that if a debtor should default on any particular payment, the entire principal and interest will become due immediately at the lender’s option. Why an acceleration clause? Without it, the lender would be powerless to foreclose the entire mortgage when the mortgagor defaulted but would have to wait until the expiration of the note’s term. Although the acceleration clause is routine, it will not be enforced unless the mortgagee acts in an equitable and fair manner. The problem arises where the mortgagor’s default was the result of some unconscionable conduct of the mortgagee, such as representing to the mortgagee that she might take a sixty-day “holiday” from having to make payments. In Paul H. Cherry v. Chase Manhattan Mortgage Group (Section 26.4 "Cases"), the equitable powers of the court were invoked to prevent acceleration.
The Mortgage
Under the statute of frauds, the mortgage itself must be evidenced by some writing to be enforceable. The mortgagor will usually make certain promises and warranties to the mortgagee and state the amount and terms of the debt and the mortgagor’s duties concerning taxes, insurance, and repairs. A sample mortgage form is presented in Figure 26.2 "Sample Mortgage Form".
Figure 26.2 Sample Mortgage Form
Key Takeaway
As a mechanism of security, a mortgage is a promise by the debtor (mortgagor) to repay the creditor (mortgagee) for the amount borrowed or credit extended, with real estate put up as security. If the mortgagor doesn’t pay as promised, the mortgagee may repossess the real estate. Mortgage law has ancient roots and brings with it various permutations on the theme that even if the mortgagor defaults, she may nevertheless have the right to get the property back or at least be reimbursed for any value above that necessary to pay the debt and the expenses of foreclosure. Mortgage law is regulated by state and federal statute.
Exercises
1. What role did the right of redemption play in courts of equity changing the substance of a mortgage from an actual transfer of title to the mortgagee to a mere lien on the property?
2. What abuses did the federal RESPA address?
3. What are the two documents most commonly associated with mortgage transactions? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/26%3A_Mortgages_and_Non-consensual_Liens/26.1%3A_Uses_History_and_Creation_of_Mortgages.txt |
Learning Objectives
1. Understand why it is important that the mortgagee (creditor) record her interest in the debtor’s real estate.
2. Know the basic rule of priority—who gets an interest in the property first in case of default—and the exceptions to the rule.
3. Recognize the three ways mortgages can be terminated: payment, assumption, and foreclosure.
4. Be familiar with other methods (besides mortgages) by which real property can be used as security for a creditor.
Priorities in Real Property Security
You may recall from Chapter 25 "Secured Transactions and Suretyship" how important it is for a creditor to perfect its secured interest in the goods put up as collateral. Absent perfection, the creditor stands a chance of losing out to another creditor who took its interest in the goods subsequent to the first creditor. The same problem is presented in real property security: the mortgagee wants to make sure it has first claim on the property in case the mortgagor (debtor) defaults.
The General Rule of Priorities
The general rule of priority is the same for real property security as for personal property security: the first in time to give notice of the secured interest is first in right. For real property, the notice is by recording the mortgage. Recording is the act of giving public notice of changes in interests in real estate. Recording was created by statute; it did not exist at common law. The typical recording statute calls for a transfer of title or mortgage to be placed in a particular county office, usually the auditor, recorder, or register of deeds.
A mortgage is valid between the parties whether or not it is recorded, but a mortgagee might lose to a third party—another mortgagee or a good-faith purchaser of the property—unless the mortgage is recorded.
Exceptions to the General Rule
There are exceptions to the general rule; two are taken up here.
Fixture Filing
The fixture-filing provision in Article 9 of the UCC is one exception to the general rule. As noted in Chapter 25 "Secured Transactions and Suretyship", the UCC gives priority to purchase-money security interests in fixtures if certain requirements are met.
Future Advances
A bank might make advances to the debtor after accepting the mortgage. If the future advances are obligatory, then the first-in-time rule applies. For example: Bank accepts Debtor’s mortgage (and records it) and extends a line of credit on which Debtor draws, up to a certain limit. (Or, as in the construction industry, Bank might make periodic advances to the contractors as work progresses, backed by the mortgage.) Second Creditor loans Debtor money—secured by the same property—before Debtor began to draw against the first line of credit. Bank has priority: by searching the mortgage records, Second Creditor should have been on notice that the first mortgage was intended as security for the entire line of credit, although the line was doled out over time.
However, if the future advances are not obligatory, then priority is determined by notice. For example, a bank might take a mortgage as security for an original loan and for any future loans that the bank chooses to make. A later creditor can achieve priority by notifying the bank with the first mortgage that it is making an advance. Suppose Jimmy mortgages his property to a wealthy dowager, Mrs. Calabash, in return for an immediate loan of \$20,000 and they agree that the mortgage will serve as security for future loans to be arranged. The mortgage is recorded. A month later, before Mrs. Calabash loans him any more money, Jimmy gives a second mortgage to Louella in return for a loan of \$10,000. Louella notifies Mrs. Calabash that she is loaning Jimmy the money. A month later, Mrs. Calabash loans Jimmy another \$20,000. Jimmy then defaults, and the property turns out to be worth only \$40,000. Whose claims will be honored and in what order? Mrs. Calabash will collect her original \$20,000, because it was recited in the mortgage and the mortgage was recorded. Louella will collect her \$10,000 next, because she notified the first mortgage holder of the advance. That leaves Mrs. Calabash in third position to collect what she can of her second advance. Mrs. Calabash could have protected herself by refusing the second loan.
Termination of the Mortgage
The mortgagor’s liability can terminate in three ways: payment, assumption (with a novation), or foreclosure.
Payment
Unless they live in the home for twenty-five or thirty years, the mortgagors usually pay off the mortgage when the property is sold. Occasionally, mortgages are paid off in order to refinance. If the mortgage was taken out at a time of high interest rates and rates later drop, the homeowner might want to obtain a new mortgage at the lower rates. In many mortgages, however, this entails extra closing costs and penalties for prepaying the original mortgage. Whatever the reason, when a mortgage is paid off, the discharge should be recorded. This is accomplished by giving the mortgagor a copy of, and filing a copy of, a Satisfaction of Mortgage document. In the Paul H. Cherry v. Chase Manhattan Mortgage Group case (Section 26.4 "Cases"), the bank mistakenly filed the Satisfaction of Mortgage document, later discovered its mistake, retracted the satisfaction, accelerated the loan because the mortgagor stopped making payments (the bank, seeing no record of an outstanding mortgage, refused to accept payments), and then tried to foreclose on the mortgage, meanwhile having lost the note and mortgage besides.
Assumption
The property can be sold without paying off the mortgage if the mortgage is assumed by the new buyer, who agrees to pay the seller’s (the original mortgagor’s) debt. This is a novation if, in approving the assumption, the bank releases the old mortgagor and substitutes the buyer as the new debtor.
The buyer need not assume the mortgage. If the buyer purchases the property without agreeing to be personally liable, this is a sale “subject to” the mortgage (see Figure 26.3 "Subject to” Sales versus Assumption"). In the event of the seller’s subsequent default, the bank can foreclose the mortgage and sell the property that the buyer has purchased, but the buyer is not liable for any deficiency.
Figure 26.3 “Subject to” Sales versus Assumption
What if mortgage rates are high? Can buyers assume an existing low-rate mortgage from the seller rather than be forced to obtain a new mortgage at substantially higher rates? Banks, of course, would prefer not to allow that when interest rates are rising, so they often include in the mortgage a due-on-sale clause, by which the entire principal and interest become due when the property is sold, thus forcing the purchaser to get financing at the higher rates. The clause is a device for preventing subsequent purchasers from assuming loans with lower-than-market interest rates. Although many state courts at one time refused to enforce the due-on-sale clause, Congress reversed this trend when it enacted the Garn–St. Germain Depository Institutions Act in 1982.12 United States Code, Section 1701-j. The act preempts state laws and upholds the validity of due-on-sale clauses. When interest rates are low, banks have no interest in enforcing such clauses, and there are ways to work around the due-on-sale clause.
Foreclosure
The third method of terminating the mortgage is by foreclosure when a mortgagor defaults. Even after default, the mortgagor has the right to exercise his equity of redemption—that is, to redeem the property by paying the principal and interest in full. If he does not, the mortgagee may foreclose the equity of redemption. Although strict foreclosure is used occasionally, in most cases the mortgagee forecloses by one of two types of sale (see Figure 26.4 "Foreclosure").
The first type is judicial sale. The mortgagee seeks a court order authorizing the sale to be conducted by a public official, usually the sheriff. The mortgagor is entitled to be notified of the proceeding and to a hearing. The second type of sale is that conducted under a clause called a power of sale, which many lenders insist be contained in the mortgage. This clause permits the mortgagee to sell the property at public auction without first going to court—although by custom or law, the sale must be advertised, and typically a sheriff or other public official conducts the public sale or auction.
Figure 26.4 Foreclosure
Once the property has been sold, it is deeded to the new purchaser. In about half the states, the mortgagor still has the right to redeem the property by paying up within six months or a year—the statutory redemption period. Thereafter, the mortgagor has no further right to redeem. If the sale proceeds exceed the debt, the mortgagor is entitled to the excess unless he has given second and third mortgages, in which case the junior mortgagees are entitled to recover their claims before the mortgagor. If the proceeds are less than the debt, the mortgagee is entitled to recover the deficiency from the mortgagor. However, some states have statutorily abolished deficiency judgments.
Other Methods of Using Real Estate as Security
Besides the mortgage, there are other ways to use real estate as security. Here we take up two: the deed of trust and the installment or land contract.
Deed of Trust
The deed of trust is a device for securing a debt with real property; unlike the mortgage, it requires three parties: the borrower, the trustee, and the lender. Otherwise, it is at base identical to a mortgage. The borrower conveys the land to a third party, the trustee, to hold in trust for the lender until the borrower pays the debt. (The trustee’s interest is really a kind of legal fiction: that person is expected to have no interest in the property.) The primary benefit to the deed of trust is that it simplifies the foreclosure process by containing a provision empowering the trustee to sell the property on default, thus doing away with the need for any court filings. The disinterested third party making sure things are done properly becomes the trustee, not a judge. In thirty states and the District of Columbia—more than half of US jurisdictions—the deed of trust is usually used in lieu of mortgages. The states using the deed of trust system are as follows: Alabama, Alaska, Arkansas, Arizona, California, Colorado, District of Columbia, Georgia, Hawaii, Idaho, Iowa, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, North Carolina, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
But the deed of trust may have certain disadvantages as well. For example, when the debt has been fully paid, the trustee will not release the deed of trust until she sees that all notes secured by it have been marked canceled. Should the borrower have misplaced the canceled notes or failed to keep good records, he will need to procure a surety bond to protect the trustee in case of a mistake. This can be an expensive procedure. In many jurisdictions, the mortgage holder is prohibited from seeking a deficiency judgment if the holder chooses to sell the property through nonjudicial means.
Alpha Imperial Building, LLC v. Schnitzer Family Investment, LLC, Section 26.4 "Cases", discusses several issues involving deeds of trust.
Installment or Land Contract
Under the installment contract or land contract, the purchaser takes possession and agrees to pay the seller over a period of years. Until the final payment, title belongs to the seller. The contract will specify the type of deed to be conveyed at closing, the terms of payment, the buyer’s duty to pay taxes and insure the premises, and the seller’s right to accelerate on default. The buyer’s particular concern in this type of sale is whether the seller in fact has title. The buyers can protect themselves by requiring proof of title and title insurance when the contract is signed. Moreover, the buyer should record the installment contract to protect against the seller’s attempt to convey title to an innocent third-party purchaser while the contract is in effect.
The benefit to the land contract is that the borrower need not bank-qualify, so the pool of available buyers is larger, and buyers who have inadequate resources at the time of contracting but who have the expectation of a rising income in the future are good candidates for the land contract. Also, the seller gets all the interest paid by the buyer, instead of the bank getting it in the usual mortgage. The obvious disadvantage from the seller’s point is that she will not get a big lump sum immediately: the payments trickle in over years (unless she can sell the contract to a third party, but that would be at a discount).
Key Takeaway
The general rule on priority in real property security is that the first creditor to record its interest prevails over subsequent creditors. There are some exceptions; the most familiar is that the seller of a fixture on a purchase-money security interest has priority over a previously recorded mortgagee. The mortgage will terminate by payment, assumption by a new buyer (with a novation releasing the old buyer), and foreclosure. In a judicial-sale foreclosure, a court authorizes the property’s sale; in a power-of-sale foreclosure, no court approval is required. In most states, the mortgagor whose property was foreclosed is given some period of time—six months or a year—to redeem the property; otherwise, the sale is done, but the debtor may be liable for the deficiency, if any. The deed of trust avoids any judicial involvement by having the borrower convey the land to a disinterested trustee for the benefit of the lender; the trustee sells it upon default, with the proceeds (after expenses) going to the lender. Another method of real property security is a land contract: title shifts to the buyer only at the end of the term of payments.
Exercises
1. A debtor borrowed \$350,000 to finance the purchase of a house, and the bank recorded its interest on July 1. On July 15, the debtor bought \$10,000 worth of replacement windows from Window Co.; Window Co. recorded its purchase-money security interest that day, and the windows were installed. Four years later, the debtor, in hard financial times, declared bankruptcy. As between the bank and Windows Co., who will get paid first?
2. Under what interest rate circumstances would banks insist on a due-on-sale clause? Under what interest rate circumstance would banks not object to a new person assuming the mortgage?
3. What is the primary advantage of the deed of trust? What is the primary advantage of the land contract?
4. A debtor defaulted on her house payments. Under what circumstances might a court not allow the bank’s foreclosure on the property? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/26%3A_Mortgages_and_Non-consensual_Liens/26.2%3A_Priority_Termination_of_the_Mortgage_and_Other_Methods_of_Using_Real_Estate_as_Security.txt |
Learning Objectives
1. Understand the nonconsensual liens issued by courts—attachment liens and judgment liens—and how they are created.
2. Recognize other types of nonconsensual liens: mechanic’s lien, possessory lien, and tax lien.
The security arrangements discussed so far—security interests, suretyship, mortgages—are all obtained by the creditor with the debtor’s consent. A creditor may obtain certain liens without the debtor’s consent.
Court-Decreed Liens
Some nonconsensual liens are issued by courts.
Attachment Lien
An attachment lien is ordered against a person’s property—real or personal—to prevent him from disposing of it during a lawsuit. To obtain an attachment lien, the plaintiff must show that the defendant likely will dispose of or hide his property; if the court agrees with the plaintiff, she must post a bond and the court will issue a writ of attachment to the sheriff, directing the sheriff to seize the property. Attachments of real property should be recorded. Should the plaintiff win her suit, the court issues a writ of execution, directing the sheriff to sell the property to satisfy the judgment.
Judgment Lien
A judgment lien may be issued when a plaintiff wins a judgment in court if an attachment lien has not already been issued. Like the attachment lien, it provides a method by which the defendant’s property may be seized and sold.
Overview
The most common nonconsensual lien on real estate is the mechanic’s lien. A mechanic’s lien can be obtained by one who furnishes labor, services, or materials to improve real estate: this is statutory, and the statute must be carefully followed. The “mechanic” here is one who works with his or her hands, not specifically one who works on machines. An automobile mechanic could not obtain a mechanic’s lien on a customer’s house to secure payment of work he did on her car. (The lien to which the automobile mechanic is entitled is a “possessory lien” or “artisan’s lien,” considered in Section 26.3.3 "Possessory Lien") To qualify for a mechanic’s lien, the claimant must file a sworn statement describing the work done, the contract made, or the materials furnished that permanently improved the real estate.
A particularly difficult problem crops up when the owner has paid the contractor, who in turn fails to pay his subcontractors. In many states, the subcontractors can file a lien on the owner’s property, thus forcing the owner to pay them (see Figure 26.5 "Subcontractors’ Lien")—and maybe twice. To protect themselves, owners can demand a sworn statement from general contractors listing the subcontractors used on the job, and from them, owners can obtain a waiver of lien rights before paying the general contractor.
Figure 26.5 Subcontractors’ Lien
Procedure for Obtaining a Mechanic’s Lien
Anyone claiming a lien against real estate must record a lien statement stating the amount due and the nature of the improvement. The lienor has a specified period of time (e.g., ninety days) to file from the time the work is finished. Recording as such does not give the lienor an automatic right to the property if the debt remains unpaid. All states specify a limited period of time, usually one year, within which the claimant must file suit to enforce the lien. Only if the court decides the lien is valid may the property be sold to satisfy the debt. Difficult questions sometimes arise when a lien is filed against a landlord’s property as a result of improvements and services provided to a tenant, as discussed in F & D Elec. Contractors, Inc. v. Powder Coaters, Inc., Section 26.4 "Cases".
Mechanic’s Liens Priorities
A mechanic’s lien represents a special risk to the purchaser of real estate or to lenders who wish to take a mortgage. In most states, the mechanic’s lien is given priority not from the date when the lien is recorded but from an earlier date—either the date the contractor was hired or the date construction began. Thus a purchaser or lender might lose priority to a creditor with a mechanic’s lien who filed after the sale or mortgage. A practical solution to this problem is to hold back part of the funds (purchase price or loan) or place them in escrow until the period for recording liens has expired.
Possessory Lien
The most common nonconsensual lien on personal property (not real estate) is the possessory lien. This is the right to continue to keep the goods on which work has been performed or for which materials have been supplied until the owner pays for the labor or materials. The possessory lien arises both under common law and under a variety of statutes. Because it is nonconsensual, the possessory lien is not covered by Article 9 of the UCC, which is restricted to consensual security interests. Nor is it governed by the law of mechanic’s liens, which are nonpossessory and relate only to work done to improve real property.
The common-law rule is that anyone who, under an express or implied contract, adds value to another’s chattel (personal property) by labor, skill, or materials has a possessory lien for the value of the services. Moreover, the lienholder may keep the chattel until her services are paid. For example, the dry cleaner shop is not going to release the wool jacket that you took in for cleaning unless you make satisfactory arrangements to pay for it, and the chain saw store won’t let you take the chain saw that you brought in for a tune-up until you pay for the labor and materials for the tune-up.
Tax Lien
An important statutory lien is the federal tax lien. Once the government assesses a tax, the amount due constitutes a lien on the owner’s property, whether real or personal. Until it is filed in the appropriate state office, others take priority, including purchasers, mechanics’ lienors, judgment lien creditors, and holders of security interests. But once filed, the tax lien takes priority over all subsequently arising liens. Federal law exempts some property from the tax lien; for example, unemployment benefits, books and tools of a trade, workers’ compensation, judgments for support of minor children, minimum amounts of wages and salary, personal effects, furniture, fuel, and provisions are exempt.
Local governments also can assess liens against real estate for failure to pay real estate taxes. After some period of time, the real estate may be sold to satisfy the tax amounts owing.
Key Takeaway
There are four types of nonconsensual liens: (1) court-decreed liens are attachment liens, which prevent a person from disposing of assets pending a lawsuit, and judgment liens, which allow the prevailing party in a lawsuit to take property belonging to the debtor to satisfy the judgment; (2) mechanics’ liens are authorized by statute, giving a person who has provided labor or material to a landowner the right to sell the property to get paid; (3) possessory liens on personal property allow one in possession of goods to keep them to satisfy a claim for work done or storage of them; and (4) tax liens are enforced by the government to satisfy outstanding tax liabilities and may be assessed against real or personal property.
Exercises
1. The mortgagor’s interests are protected in a judicial foreclosure by a court’s oversight of the process; how is the mortgagor’s interest protected when a deed of trust is used?
2. Why is the deed of trust becoming increasingly popular?
3. What is the rationale for the common-law possessory lien?
4. Mike Mechanic repaired Alice Ace’s automobile in his shop, but Alice didn’t have enough money to pay for the repairs. May Mike have a mechanic’s lien on the car? A possessory lien?
5. Why does federal law exempt unemployment benefits, books and tools of a trade, workers’ compensation, minimum amounts of wages and salary, personal effects, furniture, fuel, and other such items from the sweep of a tax lien? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/26%3A_Mortgages_and_Non-consensual_Liens/26.3%3A_Nonconsensual_Lien.txt |
Denial of Mortgagee’s Right to Foreclose; Erroneous Filings; Lost Instruments
Paul H. Cherry v. Chase Manhattan Mortgage Group
190 F.Supp.2d 1330 (Fed. Dist. Ct. FL 2002)
Background
[Paul Cherry filed a complaint suing Chase for Fair Debt Collection Practices Act violations and slander of credit.]…Chase counter-claimed for foreclosure and reestablishment of the lost note.…
…Chase held a mortgage on Cherry’s home to which Cherry made timely payments until August 2000. Cherry stopped making payments on the mortgage after he received a letter from Chase acknowledging his satisfaction of the mortgage. Cherry notified Chase of the error through a customer service representative. Cherry, however, received a check dated August 15, 2000, as an escrow refund on the mortgage. Chase subsequently recorded a Satisfaction of Mortgage into the Pinellas County public records on October 19, 2000. On November 14, 2000, Chase sent Cherry a “Loan Reactivation” letter with a new loan number upon which to make the payments. During this time, Cherry was placing his mortgage payments into a bank account, which subsequently were put into an escrow account maintained by his attorney. These payments were not, and have not, been tendered to Chase. As a result of the failure to tender, Chase sent Cherry an acceleration warning on November 17, 2000, and again on March 16, 2001. Chase notified the credit bureaus as to Cherry’s default status and moved for foreclosure. In a letter addressed to Cherry’s attorney, dated April 24, 2001, Chase’s attorney advised Cherry to make the mortgage payments to Chase. Chase recorded a “vacatur, revocation, and cancellation of satisfaction of mortgage” (vacatur) [vacatur: an announcement filed in court that something is cancelled or set aside; an annulment] in the Pinellas County public records on May 3, 2001. Chase signed the vacatur on March 21, 2001, and had it notarized on March 27, 2001. Chase has also been unable to locate the original note, dated October 15, 1997, and deems it to be lost.…
Foreclosure
Chase accelerated Cherry’s mortgage debt after determining he was in a default status under the mortgage provisions. Chase claims that the right to foreclose under the note and mortgage is “absolute,” [Citation], and that this Court should enforce the security interest in the mortgage though Chase made an administrative error in entering a Satisfaction of Mortgage into the public records.…
Mortgage
…Chase relies on the Florida Supreme Court decision in United Service Corp. v. Vi-An Const. Corp., [Citation] (Fla.1955), which held that a Satisfaction of Mortgage “made through a mistake may be canceled” and a mortgage reestablished as long as no other innocent third parties have “acquired an interest in the property.” Generally the court looks to the rights of any innocent third parties, and if none exist, equity will grant relief to a mortgagee who has mistakenly satisfied a mortgage before fully paid. [Citation]. Both parties agree that the mortgage was released before the debt was fully paid. Neither party has presented any facts to this Court that implies the possibility nor existence of a third party interest. Although Cherry argues under Biggs v. Smith, 184 So. 106, 107 (1938), that a recorded satisfaction of mortgage is “prima facie evidence of extinguishment of a mortgage lien,” Biggs does not apply this standard to mortgage rights affected by a mistake in the satisfaction.
Therefore, on these facts, this Court acknowledges that a vacatur is a proper remedy for Chase to correct its unilateral mistake since “equity will grant relief to those who have through mistake released a mortgage.” [Citation.] Accordingly, this Court holds that an equity action is required to make a vacatur enforceable unless the parties consent to the vacatur or a similar remedy during the mortgage negotiation.…
Tender
Cherry has not made a mortgage payment to Chase since August 2000, but claims to have made these payments into an escrow account, which he claims were paid to the escrow account because Chase recorded a satisfaction of his mortgage and, therefore, no mortgage existed. Cherry also claims that representatives of Chase rejected his initial attempts to make payments because of a lack of a valid loan number. Chase, however, correctly argues that payments made to an escrow account are not a proper tender of payment. Matthews v. Lindsay, [Citation] (1884) (requiring tender to be made to the court). Nor did Cherry make the required mortgage payments to the court as provided by [relevant court rules], allowing for a “deposit with the court all or any part of such sum or thing, whether that party claims all or any part of the sum or thing.” Further, Chase also correctly argues that Cherry’s failure to tender the payments from the escrow account or make deposits with the court is more than just a “technical breach” of the mortgage and note. [Citation.]
Chase may, therefore, recover the entire amount of the mortgage indebtedness, unless the court finds a “limited circumstance” upon which the request may be denied. [Citation.] Although not presented by Chase in its discussion of this case, the Court may refuse foreclosure, notwithstanding that the defendant established a foreclosure action, if the acceleration was unconscionable and the “result would be inequitable and unjust.” This Court will analyze the inequitable result test and the limited circumstances by which the court may deny foreclosure.
First, this Court does not find the mortgage acceleration unconscionable by assuming arguendo [for the purposes of argument] that the mortgage was valid during the period that the Satisfaction of Mortgage was entered into the public records. Chase did not send the first acceleration warning until November 14, 2000, the fourth month of non-payment, followed by the second acceleration letter on March 16, 2001, the eighth month of non-payment. Although Cherry could have argued that a foreclosure action was an “inequitable” and “unjust” result after the Satisfaction of Mortgage was entered on his behalf, the result does not rise to an unconscionable level since Cherry could have properly tendered the mortgage payments to the court.
Second, the following “limited circumstances” will justify a court’s denial of foreclosure: 1) waiver of right to accelerate; 2) mortgagee estopped from asserting foreclosure because mortgagor reasonably assumed the mortgagee would not foreclose; 3) mortgagee failed to perform a condition precedent for acceleration; 4) payment made after default but prior to receiving intent to foreclose; or, 5) where there was intent to make to make timely payment, and it was attempted, or steps taken to accomplish it, but nevertheless the payment was not made due to a misunderstanding or excusable neglect, coupled with some conduct of the mortgagee which in a measure contributed to the failure to pay when due or within the grace period. [Citations.]
Chase fails to address this fifth circumstance in its motion, an apparent obfuscation of the case law before the court. This Court acknowledges that Cherry’s facts do not satisfy the first four limited circumstances. Chase at no time advised Cherry that the acceleration right was being waived; nor is Chase estopped from asserting foreclosure on the mortgage because of the administrative error, and Cherry has not relied on this error to his detriment; and since Chase sent the acceleration letter to Cherry and a request for payment to his attorney, there can be no argument that Cherry believed Chase would not foreclose. Chase has performed all conditions precedent required by the mortgage provisions prior to notice of the acceleration; sending acceleration warnings on November 17, 2000, and March 16, 2001. Cherry also has no argument for lack of notice of intent to accelerate after default since he has not tendered a payment since July 2000, thus placing him in default of the mortgage provisions, and he admits receiving the acceleration notices.
This Court finds, however, that this claim fails squarely into the final limited circumstance regarding intent to make timely payments. Significant factual issues exist as to the intent of Cherry to make or attempt to make timely mortgage payments to Chase. Cherry claims that he attempted to make the payments, but was told by a representative of Chase that there was no mortgage loan number upon which to apply the payments. As a result, the mortgage payments were placed into an account and later into his counsel’s trust account as a mortgage escrow. Although these payments should have, at a minimum, been placed with the court to ensure tender during the resolution of the mortgage dispute, Cherry did take steps to accomplish timely mortgage payments. Although Cherry, through excusable neglect or a misunderstanding as to what his rights were after the Satisfaction of Mortgage was entered, failed to tender the payments, Chase is also not without fault; its conduct in entering a Satisfaction of Mortgage into the Pinellas County public records directly contributed to Cherry’s failure to tender timely payments. Cherry’s attempt at making the mortgage payments, coupled with Chase’s improper satisfaction of mortgage fits squarely within the limited circumstance created to justify a court’s denial of a foreclosure. Equity here requires a balancing between Chase’s right to the security interest encumbered by the mortgage and Cherry’s attempts to make timely payments. As such, these limited circumstances exist to ensure that a foreclosure remains an action in equity. In applying this analysis, this Court finds that equity requires that Chase’s request for foreclosure be denied at this juncture.…
Reestablishment of the Lost Note and Mortgage
Chase also requests, as part of the foreclosure counterclaim, the reestablishment of the note initially associated with the mortgage, as it is unable to produce the original note and provide by affidavit evidence of its loss. Chase has complied with the [necessary statutory] requirements[.]…This Court holds the note to be reestablished and that Chase has the lawful right to enforce the note upon the issuance of this order.
This Court also agrees that Chase may reestablish the mortgage through a vacatur, revocation, and cancellation of satisfaction of mortgage. [Citation] (allowing the Equity Court to reestablish a mortgage that was improperly canceled due to a mistake). However, this Court will deem the vacatur effective as of the date of this order. This Court leaves the status of the vacatur during the disputed period, and specifically since May 3, 2001, to be resolved in subsequent proceedings.… Accordingly, it is:
ORDERED that [Chase cannot foreclose and] the request to reestablish the note and mortgage is hereby granted and effective as of the date of this order. Cherry will tender all previously escrowed mortgage payments to the Court, unless the parties agree otherwise, within ten days of this order and shall henceforth, tender future monthly payments to Chase as set out in the reestablished note and mortgage.
case questions
1. When Chase figured out that it had issued a Satisfaction of Mortgage erroneously, what did it file to rectify the error?
2. Cherry had not made any mortgage payments between the time Chase sent the erroneous Satisfaction of Mortgage notice to him and the time of the court’s decision in this case. The court listed five circumstances in which a mortgagee (Chase here) might be denied the right to foreclose on a delinquent account: which one applied here? The court said Chase had engaged in “an apparent obfuscation of the case law before the court”? What obfuscation did it engage in?
3. What did Cherry do with the mortgage payments after Chase erroneously told him the mortgage was satisfied? What did the court say he should have done with the payments?
Mechanic’s Lien Filed against Landlord for Payment of Tenant’s Improvements
F & D Elec. Contractors, Inc. v. Powder Coaters, Inc.
567 S.E.2d 842 (S.C. 2002)
Factual/ Procedural Background
BG Holding f/k/a Colite Industries, Inc. (“BG Holding”) is a one-third owner of about thirty acres of real estate in West Columbia, South Carolina. A warehouse facility is located on the property. In September 1996, Powder Coaters, Inc. (“Powder Coaters”) agreed to lease a portion of the warehouse to operate its business. Powder Coaters was engaged in the business of electrostatically painting machinery parts and equipment and then placing them in an oven to cure. A signed lease was executed between Powder Coaters and BG Holding. Prior to signing the lease, Powder Coaters negotiated the terms with Mark Taylor, (“Taylor”) who was the property manager for the warehouse facility and an agent of BG Holding.
The warehouse facility did not have a sufficient power supply to support Powder Coaters’ machinery. Therefore, Powder Coaters contracted with F & D Electrical (“F & D”) to perform electrical work which included installing two eight-foot strip light fixtures and a two hundred amp load center. Powder Coaters never paid F & D for the services. Powder Coaters was also unable to pay rent to BG Holding and was evicted in February 1997. Powder Coaters is no longer a viable company.
In January 1997, F & D filed a Notice and Certificate of Mechanic’s Lien and Affidavit of Mechanic’s Lien. In February 1997, F & D filed this action against BG Holding foreclosing on its mechanic’s lien pursuant to S.C. [statute].…
A jury trial was held on September 2nd and 3rd, 1998. At the close of F & D’s evidence, and at the close of all evidence, BG Holding made motions for directed verdicts, which were denied. The jury returned a verdict for F & D in the amount of \$8,264.00. The court also awarded F & D attorneys’ fees and cost in the amount of \$8,264.00, for a total award of \$16,528.00.
BG Holding appealed. The Court of Appeals, in a two to one decision, reversed the trial court, holding a directed verdict should have been granted to BG Holding on the grounds BG Holding did not consent to the electrical upgrade, as is required by the Mechanic’s Lien Statute. This Court granted F & D’s petition for certiorari, and the issue before this Court is:
Did the trial court err in denying BG Holding’s motion for directed verdict because the record was devoid of any evidence of owner’s consent to materialman’s performance of work on its property as required by [the S.C. statute]?
Law/Analysis
F & D argues the majority of the Court of Appeals erred in holding the facts of the case failed to establish that BG Holding consented to the work performed by F & D, as is required by the [South Carolina] Mechanic’s Lien Statute. We agree.…
South Carolina’s Mechanic’s Lien Statute provides:
A person to whom a debt is due for labor performed or furnished or for materials furnished and actually used in the erection, alteration, or repair of a building…by virtue of an agreement with, or by consent of, the owner of the building or structure, or a person having authority from, or rightfully acting for, the owner in procuring or furnishing the labor or materials shall have a lien upon the building or structure and upon the interest of the owner of the building or structure …to secure the payment of the debt due. [emphasis added.]
Both parties in this case concede there was no express “agreement” between F & D and BG Holding. Therefore, the issue in this appeal turns on the meaning of the word “consent” in the statute, as applied in the landlord-tenant context. This is a novel issue in South Carolina.
This Court must decide who must give the consent, who must receive consent, and what type of consent (general, specific, oral, written) must be given in order to satisfy the statute. Finally, the Court must decide whether the evidence in this case shows BG Holding gave the requisite consent.
A. Who Must Receive the Consent.
The Court of Appeals’ opinion in this case contemplates the consent must be between the materialman (lien claimant) and the landlord (owner). “It is only logical…that consent under [the relevant section] must…be between the owner and the entity seeking the lien…” [Citation from Court of Appeals]. As stated previously, applying the Mechanic’s Lien Statute in the landlord-tenant context presents a novel issue. We find the consent required by the statute does not have to be between the landlord/owner and the materialman, as the Court of Appeals’ opinion indicates. A determination that the required consent must come from the owner to the materialman means the materialman can only succeed if he can prove an agreement with the owner. Such an interpretation would render meaningless the language of the statute that provides: “…by virtue of an agreement with, or by consent of the owner.…"
Therefore, it is sufficient for the landlord/owner or his agent to give consent to his tenant. The landlord/owner should be able to delegate to his tenant the responsibility for making the requested improvements. The landlord/owner may not want to have direct involvement with the materialman or sub-contractors, but instead may wish to allow the tenant to handle any improvements or upgrades himself. In addition, the landlord/owner may be located far away and may own many properties, making it impractical for him to have direct involvement with the materialman. We find the landlord/owner or his agent is free to enter into a lease or agreement with a tenant which allows the tenant to direct the modifications to the property which have been specifically consented to by the landlord/owner or his agent.
We hold a landlord/owner or his agent can give his consent to the lessee/tenant, as well as directly to the lien claimant, to make modifications to the leased premises.
B. What Kind of Consent Is Necessary.
This Court has already clearly held the consent required by [the relevant section] is “something more than a mere acquiescence in a state of things already in existence. It implies an agreement to that which, but for the consent, could not exist, and which the party consenting has a right to forbid.” [Citations.] However, our Mechanics Lien Statute has never been applied in the landlord-tenant context where a third party is involved.
Other jurisdictions have addressed this issue. The Court of Appeals cited [a Connecticut case, 1987] in support of its holding. We agree with the Court of Appeals that the Connecticut court’s reasoning is persuasive, especially since Connecticut has a similar mechanics lien statute.…
The Connecticut courts have stated “the consent required from the owner or one acting under the owner’s authority is more than the mere granting of permission for work to be conducted on one’s property; or the mere knowledge that work was being performed on one’s land.” Furthermore, although the Connecticut courts have stated the statute does not require an express contract, the courts have required “consent that indicates an agreement that the owner of…the land shall be, or may be, liable for the materials or labor.”…
The reasoning of [Connecticut and other states that have decided this issue] is persuasive. F & D’s brief appears to argue that mere knowledge by the landowner that the work needed to be done, coupled with the landlord’s general “permission” to perform the work, is enough to establish consent under the statute. Under this interpretation, a landlord who knew a tenant needed to improve, upgrade, or add to the leased premises would be liable to any contractor and/or subcontractor who performed work on his land. Under F & D’s interpretation the landlord would not be required to know the scope, cost, etc. of the work, but would only need to give the tenant general permission to perform upgrades or improvements.
Clearly, if the landlord/owner or his agent gives consent directly to the materialman, a lien can be established. Consent can also be given to the tenant, but the consent needs to be specific. The landlord/owner or his agent must know the scope of the project (for instance, as the lease provided in the instant case, the landlord could approve written plans submitted by the tenant). The consent needs to be more than “mere knowledge” that the tenant will perform work on the property. There must be some kind of express or implied agreement that the landlord may be held liable for the work or material. The landlord/owner or his agent may delegate the project or work to his tenant, but there must be an express or implied agreement about the specific work to be done. A general provision in a lease which allows tenant to make repairs or improvements is not enough.
C. Evidence There Was No Consent
• The record is clear that no contract, express or implied, existed between BG Holding and F & G. BG Holding had no knowledge F & G would be performing the work.
• F & G’s supervisor, David Weatherington, and Ray Dutton, the owner of F & D, both testified they never had a conversation with anyone from BG Holding. In fact, until Powder Coaters failed to pay under the contract, F & D did not know BG Holding was the owner of the building.
• Mark Taylor, BG Holding’s agent, testified he never authorized any work by F & D, nor did he see any work being performed by them on the site.
• The lease specifically provided that all work on the property was to be approved in writing by BG Holding.
• David Weatherington of F & D testified he was looking to Powder Coaters, not BG Holding, for payment.
• Powder Coaters acknowledged it was not authorized to bind BG Holding to pay for the modifications.
• The lease states, “[i]f the Lessee should make any [alterations, modification, additions, or installations], the Lessee hereby agrees to indemnify, defend, and save harmless the Lessor from any liability…”
D. Evidence There Was Consent
• Bruce Houston, owner of Powder Coaters testified that during the lease negotiations, he informed Mark Taylor, BG Holding’s property manager and agent, that electrical and gas upgrading would be necessary for Powder Coaters to perform their work.
• Houston testified Mark Taylor was present at the warehouse while F & D performed their work. [However, Taylor testified he did not see F & D performing any work on the premises.]
• Houston testified he would not have entered into the lease if he was not authorized to upgrade the electrical since the existing power source was insufficient to run the machinery needed for Powder Coaters to operate.
• Houston testified Mark Taylor, BG Holding’s agent, showed him the power source for the building so Taylor could understand the extent of the work that was going to be required.
• Houston testified Paragraph 5 of the addendum to the lease was specifically negotiated. He testified the following language granted him the authority to perform the electrical upfit, so that he was not required to submit the plans to BG Holding as required by a provision in the lease: “Lessor shall allow Lessee to put Office Trailer in Building. All Utilities necessary to handle Lessee’s equipment shall be paid for by the Lessee including, but not limited to electricity, water, sewer, and gas.” (We note that BG Holding denies this interpretation, but insists it just requires the Lessee to pay for all utility bills.)
• Powder Coaters no longer occupies the property, and BG Holding possibly benefits from the work done.
In the instant case, there is some evidence of consent. However, it does not rise to the level required under the statute.…
Viewing the evidence in the light most favorable to F & D, whether BG Holding gave their consent is a close question. However, we agree with the Court of Appeals, that F & D has not presented enough evidence to show: (1) BG Holding gave anything more than general consent to make improvements (as the lease could be interpreted to allow); or (2) BG Holding had anything more that “mere knowledge” that the work was to be done. Powder Coaters asserted the lease’s addendum evidenced BG Holding’s consent to perform the modifications; however, there is no evidence BG Holding expressly or implicitly agreed that it might be liable for the work. In fact, the lease between Powder Coaters and BG Holding expressly provided Powder Coaters was responsible for any alterations made to the property. Even Powder Coaters acknowledged it was not authorized to bind BG Holding.…Therefore, it is impossible to see how the very general provision requiring Powder Coaters to pay for water, sewer, and gas can be interpreted to authorize Powder Coaters to perform an electrical upgrade. Furthermore, we agree with the Court of Appeals that the mere presence of BG Holding’s agent at the work site is not enough to establish consent.
Conclusion
We hold consent, as required by the Mechanic’s Lien Statute, is something more than mere knowledge work will be or could be done on the property. The landlord/owner must do more than grant the tenant general permission to make repairs or improvements to the leased premises. The landlord/owner or his agent must give either his tenant or the materialman express or implied consent acknowledging he may be held liable for the work.
The Court of Appeals’ opinion is affirmed as modified.
case questions
1. Why did the lienor want to go after the landlord instead of the tenant?
2. Did the landlord here know that there were electrical upgrades needed by the tenant?
3. What kind of knowledge or acceptance did the court determine the landlord-owner needed to have or give before a material man could have a lien on the real estate?
4. What remedy has F & D (the material man) now?
Deeds of Trust; Duties of Trustee
Alpha Imperial Building, LLC v. Schnitzer Family Investment, LLC, II (SFI).
2005 WL 715940, (Wash. Ct. App. 2005)
Applewick, J.
Alpha Imperial LLC challenges the validity of a non-judicial foreclosure sale on multiple grounds. Alpha was the holder of a third deed of trust on the building sold, and contests the location of the sale and the adequacy of the sale price. Alpha also claims that the trustee had a duty to re-open the sale, had a duty to the junior lienholder, chilled the bidding, and had a conflict of interest. We find that the location of the sale was proper, the price was adequate, bidding was not chilled, and that the trustee had no duty to re-open the sale, [and] no duty to the junior lienholder.…We affirm.
Facts
Mayur Sheth and another individual formed Alpha Imperial Building, LLC in 1998 for the purpose of investing in commercial real estate. In February 2000 Alpha sold the property at 1406 Fourth Avenue in Seattle (the Property) to Pioneer Northwest, LLC (Pioneer). Pioneer financed this purchase with two loans from [defendant Schnitzer Family Investment, LLC, II (SFI)]. Pioneer also took a third loan from Alpha at the time of the sale for \$1.3 million. This loan from Alpha was junior to the two [other] loans[.]
Pioneer defaulted and filed for bankruptcy in 2002.… In October 2002 defendant Blackstone Corporation, an entity created to act as a non-judicial foreclosure trustee, issued a Trustee’s Notice of Sale. Blackstone is wholly owned by defendant Witherspoon, Kelley, Davenport & Toole (Witherspoon). Defendant Michael Currin, a shareholder at Witherspoon, was to conduct the sale on January 10, 2003. Currin and Witherspoon represented SFI and 4th Avenue LLC. Sheth received a copy of the Notice of Sale through his attorney.
On January 10, 2003, Sheth and his son Abhi arrived at the Third Avenue entrance to the King County courthouse between 9:30 and 9:45 a.m. They waited for about ten minutes. They noticed two signs posted above the Third Avenue entrance. One sign said that construction work was occurring at the courthouse and ‘all property auctions by the legal and banking communities will be moved to the 4th Avenue entrance of the King County Administration Building.’ The other sign indicated that the Third Avenue entrance would remain open during construction. Sheth and Abhi asked a courthouse employee about the sign, and were told that all sales were conducted at the Administration Building.
Sheth and Abhi then walked to the Administration Building, and asked around about the sale of the Property. [He was told Michael Currin, one of the shareholders of Blackstone—the trustee—was holding the sale, and was advised] to call Currin’s office in Spokane. Sheth did so, and was told that the sale was at the Third Avenue entrance. Sheth and Abhi went back to the Third Avenue entrance.
In the meantime, Currin had arrived at the Third Avenue entrance between 9:35 and 9:40 a.m. The head of SFI, Danny Schnitzer (Schnitzer), and his son were also present. Currin was surprised to notice that no other foreclosure sales were taking place, but did not ask at the information desk about it. Currin did not see the signs directing auctions to occur at the Administration Building. Currin conducted the auction, Schnitzer made the only bid, for \$2.1 million, and the sale was complete. At this time, the debt owed on the first two deeds of trust totaled approximately \$4.1 million. Currin then left the courthouse, but when he received a call from his assistant telling him about Sheth, he arranged to meet Sheth back at the Third Avenue entrance. When they met, Sheth told Currin that the sales were conducted at the Administration Building. Currin responded that the sale had already been conducted, and he was not required to go to the Administration Building. Currin told Sheth that the notice indicated the sale was to be at the Third Avenue entrance, and that the sale had been held at the correct location. Sheth did not ask to re-open the bidding.…
Sheth filed the current lawsuit, with Alpha as the sole plaintiff, on February 14, 2003. The lawsuit asked for declaratory relief, restitution, and other damages. The trial court granted the defendants’ summary judgment motion on August 8, 2003. Alpha appeals.
Location of the Sale
Alpha argues that the sale was improper because it was at the Third Avenue entrance, not the Administration Building. Alpha points to a letter from a King County employee stating that auctions are held at the Administration Building. The letter also stated that personnel were instructed to direct bidders and trustees to that location if asked. In addition, Alpha argues that the Third Avenue entrance was not a ‘public’ place, as required by [the statute], since auction sales were forbidden there. We disagree. Alpha has not shown that the Third Avenue entrance was an improper location. The evidence shows that the county had changed its policy as to where auctions would be held and had posted signs to that effect. However, the county did not exclude people from the Third Avenue entrance or prevent auctions from being held there. Street, who frequented sales, stated that auctions were being held in both locations. The sale was held where the Notice of Sale indicated it would be. In addition, Alpha has not introduced any evidence to show that the Third Avenue entrance was not a public place at the time of the sale. The public was free to come and go at that location, and the area was ‘open and available for all to use.’ Alpha relies on Morton v. Resolution Trust (S.D. Miss. 1995) to support its contention that the venue of the sale was improper. [But] Morton is not on point.
Duty to Re-Open Sale
Alpha argues that Currin should have re-opened the sale. However, it is undisputed that Sheth did not request that Currin re-open it. The evidence indicates that Currin may have known about Sheth’s interest in bidding prior to the day of the sale, due to a conversation with Sheth’s attorney about Sheth’s desire to protect his interest in the Property. But, this knowledge did not create in Currin any affirmative duty to offer to re-open the sale.
In addition, Alpha cites no Washington authority to support the contention that Currin would have been obligated to re-open the sale if Sheth had asked him to. The decision to continue a sale appears to be fully within the discretion of the trustee: “[t]he trustee may for any cause the trustee deems advantageous, continue the sale.” [Citation.] Alpha’s citation to Peterson v. Kansas City Life Ins. Co., Missouri (1936) to support its contention that Currin should have re-opened the sale is unavailing. In Peterson, the Notice of Sale indicated that the sale would be held at the ‘front’ door of the courthouse. But, the courthouse had four doors, and the customary door for sales was the east door. The sheriff, acting as the trustee, conducted the sale at the east door, and then re-opened the sale at the south door, as there had been some sales at the south door. Alpha contends this shows that Currin should have re-opened the sale when learning of the Administration Building location, akin to what the sheriff did in Peterson. However, Peterson does not indicate that the sheriff had an affirmative duty to re-sell the property at the south door. This case is not on point.
Chilled Bidding
Alpha contends that Currin chilled the bidding on the Property by telling bidders that he expected a full credit sale price and by holding the sale at the courthouse. Chilled bidding can be grounds for setting aside a sale. Country Express Stores, Inc. v. Sims, [Washington Court of Appeals] (1997). The Country Express court explained the two types of chilled bidding:
The first is intentional, occurring where there is collusion for the purpose of holding down the bids. The second consists of inadvertent and unintentional acts by the trustee that have the effect of suppressing the bidding. To establish chilled bidding, the challenger must establish the bidding was actually suppressed, which can sometimes be shown by an inadequate sale price.
We hold that there was no chilling. Alpha has not shown that Currin engaged in intentional chilling. There is no evidence that Currin knew about the signs indicating auctions were occurring at the Administration Building when he prepared the Notice of Sale, such that he intentionally held the sale at a location from which he knew bidders would be absent. Additionally, Currin’s statement to [an interested person who might bid on the property] that a full credit sale price was expected and that the opening bid would be \$4.1 million did not constitute intentional chilling. SFI was owed \$4.1 million on the Property. SFI could thus bid up to that amount at no cost to itself, as the proceeds would go back to SFI. Currin confirmed that SFI was prepared to make a full-credit bid. [It is common for trustees to] disclose the full-credit bid amount to potential third party bidders, and for investors to lose interest when they learn of the amount of indebtedness on property. It was therefore not a misrepresentation for Currin to state \$4.1 million as the opening bid, due to the indebtedness on the Property. Currin’s statements had no chilling effect—they merely informed [interested persons] of the minimum amount necessary to prevail against SFI. Thus, Currin did not intentionally chill the bidding by giving Street that information.
Alpha also argues that the chilled bidding could have been unintended by Currin.… [But the evidence is that] Currin’s actions did not intentionally or unintentionally chill the bidding, and the sale will not be set aside.
Adequacy of the Sale Price
Alpha claims that the sale price was ‘greatly inadequate’ and that the sale should thus be set aside. Alpha submitted evidence that the property had an ‘as is’ value of \$4.35 million in December 2002, and an estimated 2004 value of \$5.2 million. The debt owed to SFI on the property was \$4.1 million. SFI bought the property for \$2.1 million. These facts do not suggest that the sale must be set aside.
Washington case law suggests that the price the property is sold for must be ‘grossly inadequate’ for a trustee’s sale to be set aside on those grounds alone. In Cox [Citation, 1985], the property was worth between \$200,000 and \$300,000, and was sold to the beneficiary for \$11,873. The Court held that amount to be grossly inadequate In Steward [Citation, 1988] the property had been purchased for approximately \$64,000, and then was sold to a third party at a foreclosure sale for \$4,870. This court held that \$4,870 was not grossly inadequate. In Miebach [Citation] (1984), the Court noted that a sale for less than two percent of the property’s fair market value was grossly inadequate. The Court in Miebach also noted prior cases where the sale had been voided due to grossly inadequate purchase price; the properties in those cases had been sold for less than four percent of the value and less than three percent of the value. In addition, the Restatement indicates that gross inadequacy only exists when the sale price is less than 20 percent of the fair market value—without other defects, sale prices over 20 percent will not be set aside. [Citation.] The Property was sold for between 40 and 48 percent of its value. These facts do not support a grossly inadequate purchase price.
Alpha cites Miebach for the proposition that ‘where the inadequacy of price is great the sale will be set aside with slight indications of fraud or unfairness,’ arguing that such indications existed here. However, the cases cited by the Court in Miebach to support this proposition involved properties sold for less than three and four percent of their value. Alpha has not demonstrated the slightest indication of fraud, nor shown that a property that sold for 40 to 48 percent of its value sold for a greatly inadequate price.
Duty to a Junior Lienholder
Alpha claims that Currin owed a duty to Alpha, the junior lienholder. Alpha cites no case law for this proposition, and, indeed, there is none—Division Two specifically declined to decide this issue in Country Express [Citation]. Alpha acknowledges the lack of language in RCW 61.24 (the deed of trust statute) regarding fiduciary duties of trustees to junior lienholders. But Alpha argues that since RCW 61.24 requires that the trustee follow certain procedures in conducting the sale, and allows for sales to be restrained by anyone with an interest, a substantive duty from the trustee to a junior lienholder can be inferred.
Alpha’s arguments are unavailing. The procedural requirements in RCW 61.24 do not create implied substantive duties. The structure of the deed of trust sale illustrates that no duty is owed to the junior lienholder. The trustee and the junior lienholder have no relationship with each other. The sale is pursuant to a contract between the grantor, the beneficiary and the trustee. The junior lienholder is not a party to that contract. The case law indicates only that the trustee owes a fiduciary duty to the debtor and beneficiary: “a trustee of a deed of trust is a fiduciary for both the mortgagee and mortgagor and must act impartially between them.” Cox [Citation]. The fact that a sale in accordance with that contract can extinguish the junior lienholder’s interest further shows that the grantor’s and beneficiary’s interest in the deed of trust being foreclosed is adverse to the junior lienholder. We conclude the trustee, while having duties as fiduciary for the grantor and beneficiary, does not have duties to another whose interest is adverse to the grantor or beneficiary. Thus, Alpha’s claim of a special duty to a junior lienholder fails.…
Attorney Fees
…Defendants claim they are entitled to attorney fees for opposing a frivolous claim, pursuant to [the Washington statute]. An appeal is frivolous ‘if there are no debatable issues upon which reasonable minds might differ and it is so totally devoid of merit that there was no reasonable possibility of reversal.’ [Citation] Alpha has presented several issues not so clearly resolved by case law as to be frivolous, although Alpha’s arguments ultimately fail. Thus, Respondents’ request for attorney fees under [state law] is denied.
Affirmed.
case questions
1. Why did the plaintiff (Alpha) think the sale should have been set aside because of the location problems?
2. Why did the court decide the trustee had no duty to reopen bidding?
3. What is meant by “chilling bidding”? What argument did the plaintiff make to support its contention that bidding was chilled?
4. The court notes precedent to the effect that a “grossly inadequate” bid price has some definition. What is the definition? What percentage of the real estate’s value in this case was the winning bid?
5. A trustee is one who owes a fiduciary duty of the utmost loyalty and good faith to another, the beneficiary. Who was the beneficiary here? What duty is owed to the junior lienholder (Alpha here)—any duty?
6. Why did the defendants not get the attorneys’ fee award they wanted? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/26%3A_Mortgages_and_Non-consensual_Liens/26.4%3A_Cases.txt |
summary
A mortgage is a means of securing a debt with real estate. The mortgagor, or borrower, gives the mortgage. The lender is the mortgagee, who holds the mortgage. On default, the mortgagee may foreclose the mortgage, convening the security interest into title. In many states, the mortgagor has a statutory right of redemption after foreclosure.
Various statutes regulate the mortgage business, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, which together prescribe a code of fair practices and require various disclosures to be made before the mortgage is created.
The mortgagor signs both a note and the mortgage at the closing. Without the note, the mortgage would secure nothing. Most notes and mortgages contain an acceleration clause, which calls for the entire principal and interest to be due, at the mortgagee’s option, if the debtor defaults on any payment.
In most states, mortgages must be recorded for the mortgagee to be entitled to priority over third parties who might also claim an interest in the land. The general rule is “First in time, first in right,” although there are exceptions for fixture filings and nonobligatory future advances. Mortgages are terminated by repayment, novation, or foreclosure, either through judicial sale or under a power-of-sale clause.
Real estate may also be used as security under a deed of trust, which permits a trustee to sell the land automatically on default, without recourse to a court of law.
Nonconsensual liens are security interests created by law. These include court-decreed liens, such as attachment liens and judgment liens. Other liens are mechanic’s liens (for labor, services, or materials furnished in connection with someone’s real property), possessory liens (for artisans working with someone else’s personal properly), and tax liens.
Exercises
1. Able bought a duplex from Carr, who had borrowed from First Bank for its purchase. Able took title subject to Carr’s mortgage. Able did not make mortgage payments to First Bank; the bank foreclosed and sold the property, leaving a deficiency. Which is correct?
1. Carr alone is liable for the deficiency.
2. Able alone is liable for the deficiency because he assumed the mortgage.
3. First Bank may pursue either Able or Carr.
4. Only if Carr fails to pay will Able be liable.
2. Harry borrowed \$175,000 from Judith, giving her a note for that amount and a mortgage on his condo. Judith did not record the mortgage. After Harry defaulted on his payments, Judith began foreclosure proceedings. Harry argued that the mortgage was invalid because Judith had failed to record it. Judith counterargues that because a mortgage is not an interest in real estate, recording is not necessary. Who is correct? Explain.
3. Assume in Exercise 2 that the documents did not contain an acceleration clause and that Harry missed three consecutive payments. Could Judith foreclose? Explain.
4. Rupert, an automobile mechanic, does carpentry work on weekends. He built a detached garage for Clyde for \$20,000. While he was constructing the garage, he agreed to tune up Clyde’s car for an additional \$200. When the work was completed, Clyde failed to pay him the \$20,200, and Rupert claimed a mechanic’s lien on the garage and car. What problems, if any, might Rupert encounter in enforcing his lien? Explain.
5. In Exercise 4, assume that Clyde had borrowed \$50,000 from First Bank and had given the bank a mortgage on the property two weeks after Rupert commenced work on the garage but several weeks before he filed the lien. Assuming that the bank immediately recorded its mortgage and that Rupert’s lien is valid, does the mortgage take priority over the lien? Why?
6. Defendant purchased a house from Seller and assumed the mortgage indebtedness to Plaintiff. All monthly payments were made on time until March 25, 1948, when no more were made. On October 8, 1948, Plaintiff sued to foreclose and accelerate the note. In February of 1948, Plaintiff asked to obtain a loan elsewhere and pay him off; he offered a discount if she would do so, three times, increasing the amount offered each time. Plaintiff understood that Defendant was getting a loan from the Federal Housing Administration (FHA), but she was confronted with a number of requirements, including significant property improvements, which—because they were neighbors—Plaintiff knew were ongoing. While the improvements were being made, in June or July, he said to her, “Just let the payments go and we’ll settle everything up at the same time,” meaning she need not make monthly payments until the FHA was consummated, and he’d be paid from the proceeds. But then “he changed his tune” and sought foreclosure. Should the court order it?
self-test questions
1. The person or institution holding a mortgage is called
1. the mortgagor
2. the mortgagee
3. the debtor
4. none of the above
2. Mortgages are regulated by
1. the Truth in Lending Act
2. the Equal Credit Opportunity Act
3. the Real Estate Settlement Procedures Act
4. all of the above
3. At the closing, a mortgagor signs
1. only a mortgage
2. only a note
3. either a note or the mortgage
4. both a note and the mortgage
4. Mortgages are terminated by
1. repayment
2. novation
3. foreclosure
4. any of the above
5. A lien ordered against a person’s property to prevent its disposal during a lawsuit is called
1. a judgment lien
2. an attachment lien
3. a possessory lien
4. none of the above
Answer
1. 2
2. 4
3. 4
4. 4
5. 2 | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/26%3A_Mortgages_and_Non-consensual_Liens/26.5%3A_Summary_and_Exercises.txt |
Learning Objectives
After reading this chapter, you should understand the following:
1. A short history of US bankruptcy law
2. An overview of key provisions of the 2005 bankruptcy act
3. The basic operation of Chapter 7 bankruptcy
4. The basic operation of Chapter 11 bankruptcy
5. The basic operation of Chapter 13 bankruptcy
6. What debtor’s relief is available outside of bankruptcy
27: Bankruptcy
Learning Objectives
1. Understand what law governs bankruptcy in the United States.
2. Know the key provisions of the law.
The Purpose of Bankruptcy Law
Bankruptcy law governs the rights of creditors and insolvent debtors who cannot pay their debts. In broadest terms, bankruptcy deals with the seizure of the debtor’s assets and their distribution to the debtor’s various creditors. The term derives from the Renaissance custom of Italian traders, who did their trading from benches in town marketplaces. Creditors literally “broke the bench” of a merchant who failed to pay his debts. The term banco rotta (broken bench) thus came to apply to business failures.
In the Victorian era, many people in both England and the United States viewed someone who became bankrupt as a wicked person. In part, this attitude was prompted by the law itself, which to a greater degree in England and to a lesser degree in the United States treated the insolvent debtor as a sort of felon. Until the second half of the nineteenth century, British insolvents could be imprisoned; jail for insolvent debtors was abolished earlier in the United States. And the entire administration of bankruptcy law favored the creditor, who could with a mere filing throw the financial affairs of the alleged insolvent into complete disarray.
Today a different attitude prevails. Bankruptcy is understood as an aspect of financing, a system that permits creditors to receive an equitable distribution of the bankrupt person’s assets and promises new hope to debtors facing impossible financial burdens. Without such a law, we may reasonably suppose that the level of economic activity would be far less than it is, for few would be willing to risk being personally burdened forever by crushing debt. Bankruptcy gives the honest debtor a fresh start and resolves disputes among creditors.
Constitutional Basis
The US Constitution prohibits the states from impairing the “obligation of a contract.” This means that no state can directly provide a means for discharging a debtor unless the debt has been entirely paid. But the Constitution in Article I, Section 8, does give the federal government such a power by providing that Congress may enact a uniform bankruptcy law.
Bankruptcy Statutes
Congress passed bankruptcy laws in 1800, 1841, and 1867. These lasted only a few years each. In 1898, Congress enacted the Bankruptcy Act, which together with the Chandler Act amendments in 1938, lasted until 1978. In 1978, Congress passed the Bankruptcy Reform Act, and in 2005, it adopted the current law, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This law is the subject of our chapter.
At the beginning of the twentieth century, bankruptcies averaged fewer than 20,000 per year. Even in 1935, at the height of the Great Depression, bankruptcy filings in federal court climbed only to 69,000. At the end of World War II, in 1945, they stood at 13,000. From 1950 on, the statistics show a steep increase. During the decade before the 1978 changes, bankruptcy filings in court averaged 181,000 a year—reaching a high of 254,000 in 1975. They soared to over 450,000 filings per year in the 1980s and mostly maintained that pace until just before the 2005 law took effect (see Figure 27.1 "US Bankruptcies, 1980–2009"). The 2005 act—preceded by “massive lobbying largely by banks and credit card companies” CCH Bankruptcy Reform Act Briefing, “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” April 2005, http://www.cch.com/bankruptcy/bankruptcy_04-21.pdf.—was intended by its promoters to restore personal responsibility and integrity in the bankruptcy system. The law’s critics said it was simply a way for the credit card industry to extract more money from consumers before their debts were wiped away.
Figure 27.1 US Bankruptcies, 1980–2009
Bankruptcy Action.com, http://www.bankruptcyaction.com/USbankstats.htm, statistics from Administrative Office of the Courts.
Bankruptcy Courts, Judges, and Costs
Each federal judicial district has a US Bankruptcy Court, whose judges are appointed by US Courts of Appeal. Unless both sides agree otherwise, bankruptcy judges are to hear only bankruptcy matters (called core proceedings). Bankruptcy trustees are government lawyers appointed by the US Attorney General. They have administrative responsibilities in overseeing the proceedings.
The filing fee for a bankruptcy is about \$200, depending upon the type of bankruptcy, and the typical lawyer’s fee for uncomplicated cases is about \$1,200–\$1,400.
Overview of Bankruptcy Provisions
The BAPCPA provides for six different kinds of bankruptcy proceedings. Each is covered by its own chapter in the act and is usually referred to by its chapter number (see Figure 27.2 "Bankruptcy Options").
Figure 27.2 Bankruptcy Options
The bankruptcy statute (as opposed to case law interpreting it) is usually referred to as the bankruptcy code. The types of bankruptcies are as follows:
• Chapter 7, Liquidation: applies to all debtors except railroads, insurance companies, most banks and credit unions, and homestead associations.11 United States Code, Section 109(b). A liquidation is a “straight” bankruptcy proceeding. It entails selling the debtor’s nonexempt assets for cash and distributing the cash to the creditors, thereby discharging the insolvent person or business from any further liability for the debt. About 70 percent of all bankruptcy filings are Chapter 7.
• Chapter 9, Adjustment of debts of a municipality: applies to municipalities that are insolvent and want to adjust their debts.11 United States Code, Section 109(c). (The law does not suppose that a town, city, or county will go out of existence in the wake of insolvency.)
• Chapter 11, Reorganization: applies to anybody who could file Chapter 7, plus railroads. It is the means by which a financially troubled company can continue to operate while its financial affairs are put on a sounder basis. A business might liquidate following reorganization but will probably take on new life after negotiations with creditors on how the old debt is to be paid off. A company may voluntarily decide to seek Chapter 11 protection in court, or it may be forced involuntarily into a Chapter 11 proceeding.
• Chapter 12, Adjustment of debts of a family farmer or fisherman with regular annual income.11 United States Code, Section 109(f). Many family farmers cannot qualify for reorganization under Chapter 13 because of the low debt ceiling, and under Chapter 11, the proceeding is often complicated and expensive. As a result, Congress created Chapter 12, which applies only to farmers whose total debts do not exceed \$1.5 million.
• Chapter 13, Adjustment of debts of an individual with regular income: applies only to individuals (no corporations or partnerships) with debt not exceeding about \$1.3 million.11 United States Code, Section 109(e). This chapter permits an individual with regular income to establish a repayment plan, usually either a composition (an agreement among creditors, discussed in Section 27.5 "Alternatives to Bankruptcy", “Alternatives to Bankruptcy”) or an extension (a stretch-out of the time for paying the entire debt).
• Chapter 15, Ancillary and other cross-border cases: incorporates the United Nations’ Model Law on Cross-Border Insolvency to promote cooperation among nations involved in cross-border cases and is intended to create legal certainty for trade and investment. “Ancillary” refers to the possibility that a US debtor might have assets or obligations in a foreign country; those non-US aspects of the case are “ancillary” to the US bankruptcy case.
The BAPCPA includes three chapters that set forth the procedures to be applied to the various proceedings. Chapter 1, “General Provisions,” establishes who is eligible for relief under the act. Chapter 3, “Case Administration,” spells out the powers of the various officials involved in the bankruptcy proceedings and establishes the methods for instituting bankruptcy cases. Chapter 5, “Creditors, the Debtor, and the Estate,” deals with the debtor’s “estate”—his or her assets. It lays down ground rules for determining which property is to be included in the estate, sets out the powers of the bankruptcy trustee to “avoid” (invalidate) transactions by which the debtor sought to remove property from the estate, orders the distribution of property to creditors, and sets forth the duties and benefits that accrue to the debtor under the act.
To illustrate how these procedural chapters (especially Chapter 3 and Chapter 5) apply, we focus on the most common proceeding: liquidation (Chapter 7). Most of the principles of bankruptcy law discussed in connection with liquidation apply to the other types of proceedings as well. However, some principles vary, and we conclude the chapter by noting special features of two other important proceedings—Chapter 13 and Chapter 11.
Key Takeaway
Bankruptcy law’s purpose is to give the honest debtor a fresh start and to resolve disputes among creditors. The most recent amendments to the law were effective in 2005. Bankruptcy law provides relief to six kinds of debtors: (1) Chapter 7, straight bankruptcy—liquidation—applies to most debtors (except banks and railroads); (2) Chapter 9 applies to municipalities; (3) Chapter 11 is business reorganization; (4) Chapter 12 applies to farmers; (5) Chapter 13 is for wage earners; and (6) Chapter 15 applies to cross-border bankruptcies. The bankruptcy statutes also have several chapters that cover procedures of bankruptcy proceedings.
Exercises
1. Why is bankruptcy law required in a modern capitalistic society?
2. Who does the bankruptcy trustee represent?
3. The three most commonly filed bankruptcies are Chapter 7, 11, and 13. Who gets relief under those chapters? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/27%3A_Bankruptcy/27.1%3A_Introduction_to_Bankruptcy_and_Overview_of_the_2005_Bankruptcy_Act.txt |
Learning Objectives
1. Understand the basic procedures involved in administering a bankruptcy case.
2. Recognize the basic elements of creditors’ rights under the bankruptcy code.
3. Understand the fundamentals of what property is included in the debtor’s estate.
4. Identify some of the debtor’s exemptions—what property can be kept by the debtor.
5. Know some of the debts that cannot be discharged in bankruptcy.
6. Know how an estate is liquidated under Chapter 7.
Case Administration (Chapter 3 of the Bankruptcy Code)
Recall that the purpose of liquidation is to convert the debtor’s assets—except those exempt under the law—into cash for distribution to the creditors and thereafter to discharge the debtor from further liability. With certain exceptions, any person may voluntarily file a petition to liquidate under Chapter 7. A “person” is defined as any individual, partnership, or corporation. The exceptions are railroads and insurance companies, banks, savings and loan associations, credit unions, and the like.
For a Chapter 7 liquidation proceeding, as for bankruptcy proceedings in general, the various aspects of case administration are covered by the bankruptcy code’s Chapter 3. These include the rules governing commencement of the proceedings, the effect of the petition in bankruptcy, the first meeting of the creditors, and the duties and powers of trustees.
Commencement
The bankruptcy begins with the filing of a petition in bankruptcy with the bankruptcy court.
Voluntary and Involuntary Petitions
The individual, partnership, or corporation may file a voluntary petition in bankruptcy; 99 percent of bankruptcies are voluntary petitions filed by the debtor. But involuntary bankruptcy is possible, too, under Chapter 7 or Chapter 11. To put anyone into bankruptcy involuntarily, the petitioning creditors must meet three conditions: (1) they must have claims for unsecured debt amounting to at least \$13,475; (2) three creditors must join in the petition whenever twelve or more creditors have claims against the particular debtor—otherwise, one creditor may file an involuntary petition, as long as his claim is for at least \$13,475; (3) there must be no bona fide dispute about the debt owing. If there is a dispute, the debtor can resist the involuntary filing, and if she wins the dispute, the creditors who pushed for the involuntary petition have to pay the associated costs. Persons owing less than \$13,475, farmers, and charitable organizations cannot be forced into bankruptcy.
The Automatic Stay
The petition—voluntary or otherwise—operates as a stay against suits or other actions against the debtor to recover claims, enforce judgments, or create liens (but not alimony collection). In other words, once the petition is filed, the debtor is freed from worry over other proceedings affecting her finances or property. No more debt collection calls! Anyone with a claim, secured or unsecured, must seek relief in the bankruptcy court. This provision in the act can have dramatic consequences. Beset by tens of thousands of products-liability suits for damages caused by asbestos, UNR Industries and Manville Corporation, the nation’s largest asbestos producers, filed (separate) voluntary bankruptcy petitions in 1982; those filings automatically stayed all pending lawsuits.
First Meeting of Creditors
Once a petition in bankruptcy is filed, the court issues an order of relief, which determines that the debtor’s property is subject to bankruptcy court control and creates the stay. The Chapter 7 case may be dismissed by the court if, after a notice and hearing, it finds that among other things (e.g., delay, nonpayment of required bankruptcy fees), the debts are primarily consumer debts and the debtor could pay them off—that’s the 2005 act’s famous “means test,” discussed in Section 27.3 "Chapter 7 Liquidation".
Assuming that the order of relief has been properly issued, the creditors must meet within a reasonable time. The debtor is obligated to appear at the meeting and submit to examination under oath. The judge does not preside and, indeed, is not even entitled to attend the meeting.
When the judge issues an order for relief, an interim trustee is appointed who is authorized initially to take control of the debtor’s assets. The trustee is required to collect the property, liquidate the debtor’s estate, and distribute the proceeds to the creditors. The trustee may sue and be sued in the name of the estate. Under every chapter except Chapter 7, the court has sole discretion to name the trustee. Under Chapter 7, the creditors may select their own trustee as long as they do it at the first meeting of creditors and follow the procedures laid down in the act.
Trustee’s Powers and Duties
The act empowers the trustee to use, sell, or lease the debtor’s property in the ordinary course of business or, after notice and a hearing, even if not in the ordinary course of business. In all cases, the trustee must protect any security interests in the property. As long as the court has authorized the debtor’s business to continue, the trustee may also obtain credit in the ordinary course of business. She may invest money in the estate to yield the maximum, but reasonably safe, return. Subject to the court’s approval, she may employ various professionals, such as attorneys, accountants, and appraisers, and may, with some exceptions, assume or reject executory contracts and unexpired leases that the debtor has made. The trustee also has the power to avoid many prebankruptcy transactions in order to recover property of the debtor to be included in the liquidation.
Creditors’ Claims, the Debtor, and the Estate (Chapter 5 of the Bankruptcy Code)
We now turn to the major matters covered in Chapter 5 of the bankruptcy act: creditors’ claims, debtors’ exemptions and discharge, and the property to be included in the estate. We begin with the rules governing proof of claims by creditors and the priority of their claims.
Claims and Creditors
A claim is defined as a right to payment, whether or not it is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. A creditor is defined as a person or entity with a claim that arose no later than when the court issues the order for relief. These are very broad definitions, intended to give the debtor the broadest possible relief when finally discharged.
Proof of Claims
Before the trustee can distribute proceeds of the estate, unsecured creditors must file a proof of claim, prima facie evidence that they are owed some amount of money. They must do so within six months after the first date set for the first meeting of creditors. A creditor’s claim is disallowed, even though it is valid, if it is not filed in a timely manner. A party in interest, such as the trustee or creditor, may object to a proof of claim, in which case the court must determine whether to allow it. In the absence of objection, the claim is “deemed allowed.” The court will not allow some claims. These include unenforceable claims, claims for unmatured interest, claims that may be offset by debts the creditor owes the debtor, and unreasonable charges by an insider or an attorney. If it’s a “no asset” bankruptcy—most are—creditors are in effect told by the court not to waste their time filing proof of claim.
Claims with Priority
The bankruptcy act sets out categories of claimants and establishes priorities among them. The law is complex because it sets up different orders of priorities.
First, secured creditors get their security interests before anyone else is satisfied, because the security interest is not part of the property that the trustee is entitled to bring into the estate. This is why being a secured creditor is important (as discussed in Chapter 25 "Secured Transactions and Suretyship" and Chapter 26 "Mortgages and Nonconsensual Liens"). To the extent that secured creditors have claims in excess of their collateral, they are considered unsecured or general creditors and are lumped in with general creditors of the appropriate class.
Second, of the six classes of claimants (see Figure 27.3 "Distribution of the Estate"), the first is known as that of “priority claims.” It is subdivided into ten categories ranked in order of priority. The highest-priority class within the general class of priority claims must be paid off in full before the next class can share in a distribution from the estate, and so on. Within each class, members will share pro rata if there are not enough assets to satisfy everyone fully. The priority classes, from highest to lowest, are set out in the bankruptcy code (11 USC Section 507) as follows:
(1) Domestic support obligations (“DSO”), which are claims for support due to the spouse, former spouse, child, or child’s representative, and at a lower priority within this class are any claims by a governmental unit that has rendered support assistance to the debtor’s family obligations.
(2) Administrative expenses that are required to administer the bankruptcy case itself. Under former law, administrative expenses had the highest priority, but Congress elevated domestic support obligations above administrative expenses with the passage of the BAPCPA. Actually, though, administrative expenses have a de facto priority over domestic support obligations, because such expenses are deducted before they are paid to DSO recipients. Since trustees are paid from the bankruptcy estate, the courts have allowed de facto top priority for administrative expenses because no trustee is going to administer a bankruptcy case for nothing (and no lawyer will work for long without getting paid, either).
(3) Gap creditors. Claims made by gap creditors in an involuntary bankruptcy petition under Chapter 7 or Chapter 11 are those that arise between the filing of an involuntary bankruptcy petition and the order for relief issued by the court. These claims are given priority because otherwise creditors would not deal with the debtor, usually a business, when the business has declared bankruptcy but no trustee has been appointed and no order of relief issued.
(4) Employee wages up to \$10,950 for each worker, for the 180 days previous to either the bankruptcy filing or when the business ceased operations, whichever is earlier (180-day period).
(5) Unpaid contributions to employee benefit plans during the 180-day period, but limited by what was already paid by the employer under subsection (4) above plus what was paid on behalf of the employees by the bankruptcy estate for any employment benefit plan.
(6) Any claims for grain from a grain producer or fish from a fisherman for up to \$5,400 each against a storage or processing facility.
(7) Consumer layaway deposits of up to \$2,425 each.
(8) Taxes owing to federal, state, and local governments for income, property, employment and excise taxes. Outside of bankruptcy, taxes usually have a higher priority than this, which is why many times creditors—not tax creditors—file an involuntary bankruptcy petition against the debtor so that they have a higher priority in bankruptcy than they would outside it.
(9) Allowed claims based on any commitment by the debtor to a federal depository institution to maintain the capital of an insured depository institution.
(10) Claims for death or personal injury from a motor vehicle or vessel that occurred while the debtor was legally intoxicated.
Third through sixth (after secured creditors and priority claimants), other claimants are attended to, but not immediately. The bankruptcy code (perhaps somewhat awkwardly) deals with who gets paid when in more than one place. Chapter 5 sets out priority claims as just noted; that order applies to all bankruptcies. Chapter 7, dealing with liquidation (as opposed to Chapter 11 and Chapter 13, wherein the debtor pays most of her debt), then lists the order of distribution. Section 726 of 11 United States Code provides: “Distribution of property of the estate. (1) First, in payment of claims of the kind specified in, and in the order specified in section 507…” (again, the priority of claims just set out). Following the order specified in the bankruptcy code, our discussion of the order of distribution is taken up in Section 27.3 "Chapter 7 Liquidation".
Debtor's Duties and Exemptions
The act imposes certain duties on the debtor, and it exempts some property that the trustee can accumulate and distribute from the estate.
Debtor’s Duties
The debtor, reasonably enough, is supposed to file a list of creditors, assets, liabilities, and current income, and a statement of financial affairs. The debtor must cooperate with the trustee and be an “honest debtor” in general; the failure to abide by these duties is grounds for a denial of discharge.
The individual debtor (not including partnerships or corporations) also must show evidence that he or she attended an approved nonprofit budget and counseling agency within 180 days before the filing. The counseling may be “an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outline[s] the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.”11 United States Code, Section 109(h). In Section 111, the 2005 act describes who can perform this counseling, and a host of regulations and enforcement mechanisms are instituted, generally applying to persons who provide goods or services related to bankruptcy work for consumer debtors whose nonexempt assets are less than \$150,000, in order to improve the professionalism of attorneys and others who work with debtors in, or contemplating, bankruptcy. A debtor who is incapacitated, disabled, or on active duty in a military zone doesn’t have to go through the counseling.
Debtor’s Exemptions
The bankruptcy act exempts certain property of the estate of an individual debtor so that he or she will not be impoverished upon discharge. Exactly what is exempt depends on state law.
Notwithstanding the Constitution’s mandate that Congress establish “uniform laws on the subject of bankruptcies,” bankruptcy law is in fact not uniform because the states persuaded Congress to allow nonuniform exemptions. The concept makes sense: what is necessary for a debtor in Maine to live a nonimpoverished postbankruptcy life might not be the same as what is necessary in southern California. The bankruptcy code describes how a person’s residence is determined for claiming state exemptions: basically, where the debtor lived for 730 days immediately before filing or where she lived for 180 days immediately preceding the 730-day period. For example, if the debtor resided in the same state, without interruption, in the two years leading up to the bankruptcy, he can use that state’s exemptions. If not, the location where he resided for a majority of the half-year preceding the initial two years will be used. The point here is to reduce “exemption shopping”—to reduce the incidences in which a person moves to a generous exemption state only to declare bankruptcy there.
Unless the state has opted out of the federal exemptions (a majority have), a debtor can choose which exemptions to claim. These are the states that allow residents to chose either federal or state exemptions (the other states mandate the use of state exemptions only): Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin. There are also some exemptions not included in the bankruptcy code: veteran’s, Social Security, unemployment, and disability benefits are outside the code, and alimony payments are also exempt under federal law. The federal exemptions can be doubled by a married couple filing together.
Here are the federal exemptions:11 United States Code, Section 522.
Homestead:
• Real property, including mobile homes and co-ops, or burial plots up to \$20,200. Unused portion of homestead, up to \$10,125, may be used for other property.
Personal Property:
• Motor vehicle up to \$3,225.
• Animals, crops, clothing, appliances and furnishings, books, household goods, and musical instruments up to \$525 per item, and up to \$10,775 total.
• Jewelry up to \$1,350.
• \$1,075 of any property, and unused portion of homestead up to \$10,125.
• Health aids.
• Wrongful death recovery for person you depended upon.
• Personal injury recovery up to \$20,200 except for pain and suffering or for pecuniary loss.
• Lost earnings payments.
Pensions:
• Tax exempt retirement accounts; IRAs and Roth IRAs up to \$1,095,000 per person.
Public Benefits:
• Public assistance, Social Security, Veteran’s benefits, Unemployment Compensation.
• Crime victim’s compensation.
Tools of Trade:
• Implements, books, and tools of trade, up to \$2,025.
Alimony and Child Support:
• Alimony and child support needed for support.
Insurance:
• Unmatured life insurance policy except credit insurance.
• Life insurance policy with loan value up to \$10,775.
• Disability, unemployment, or illness benefits.
• Life insurance payments for a person you depended on, which you need for support.
In the run-up to the 2005 changes in the bankruptcy law, there was concern that some states—especially Florida. The Florida homestead exemption is “[r]eal or personal property, including mobile or modular home and condominium, to unlimited value. Property cannot exceed: 1/2 acre in a municipality, or 160 acres elsewhere.” The 2005 act limits the state homestead exemptions, as noted.—had gone too far in giving debtors’ exemptions. The BAPCPA amended Section 522 to limit the amount of equity a debtor can exempt, even in a state with unlimited homestead exemptions, in certain circumstances. (Section 522(o) and (p) set out the law’s changes.)
Secured Property
As already noted, secured creditors generally have priority, even above the priority claims. That’s why banks and lending institutions almost always secure the debtor’s obligations. But despite the general rule, the debtor can avoid certain types of security interests. Liens that attach to assets that the debtor is entitled to claim as exempt can be avoided to the extent the lien impairs the value of the exemption in both Chapter 13 and Chapter 7. To be avoidable, the lien must be a judicial lien (like a judgment or a garnishment), or a nonpossessory, non-purchase-money security interest in household goods or tools of the trade.
Tax liens (which are statutory liens, not judicial liens) aren’t avoidable in Chapter 7 even if they impair exemptions; tax liens can be avoided in Chapter 13 to the extent the lien is greater than the asset’s value.
Dischargeable and Nondischargeable Debts
The whole point of bankruptcy, of course, is for debtors to get relief from the press of debt that they cannot reasonably pay.
Dischargeable Debts
Once discharged, the debtor is no longer legally liable to pay any remaining unpaid debts (except nondischargeable debts) that arose before the court issued the order of relief. The discharge operates to void any money judgments already rendered against the debtor and to bar the judgment creditor from seeking to recover the judgment.
Nondischargeable Debts
Some debts are not dischargeable in bankruptcy. A bankruptcy discharge varies, depending on the type of bankruptcy the debtor files (Chapter 7, 11, 12, or 13). The most common nondischargeable debts listed in Section 523 include the following:
• All debts not listed in the bankruptcy petition
• Student loans—unless it would be an undue hardship to repay them (see Section 27.6 "Cases", In re Zygarewicz)
• Taxes—federal, state, and municipal
• Fines for violating the law, including criminal fines and traffic tickets
• Alimony and child support, divorce, and other property settlements
• Debts for personal injury caused by driving, boating, or operating an aircraft while intoxicated
• Consumer debts owed to a single creditor and aggregating more than \$550 for luxury goods or services incurred within ninety days before the order of relief
• Cash advances aggregating more than \$825 obtained by an individual debtor within ninety days before the order for relief
• Debts incurred because of fraud or securities law violations
• Debts for willful injury to another’s person or his or her property
• Debts from embezzlement
This is not an exhaustive list, and as noted in Section 27.3 "Chapter 7 Liquidation", there are some circumstances in which it is not just certain debts that aren’t dischargeable: sometimes a discharge is denied entirely.
Reaffirmation
A debtor may reaffirm a debt that was discharged. Section 524 of the bankruptcy code provides important protection to the debtor intent on doing so. No reaffirmation is binding unless the reaffirmation was made prior to the granting of the discharge; the reaffirmation agreement must contain a clear and conspicuous statement that advises the debtor that the agreement is not required by bankruptcy or nonbankruptcy law and that the agreement may be rescinded by giving notice of rescission to the holder of such claim at any time prior to discharge or within sixty days after the agreement is filed with the court, whichever is later.
A written agreement to reaffirm a debt must be filed with the bankruptcy court. The attorney for the debtor must file an affidavit certifying that the agreement represents a fully informed and voluntary agreement, that the agreement does not impose an undue hardship on the debtor or a dependent of the debtor, and that the attorney has fully advised the debtor of the legal consequences of the agreement and of a default under the agreement. Where the debtor is an individual who was not represented by an attorney during the course of negotiating the agreement, the reaffirmation agreement must be approved by the court, after disclosures to the debtor, and after the court finds that it is in the best interest of the debtor and does not cause an undue hardship on the debtor or a dependent.
Property Included in the Estate
When a bankruptcy petition is filed, a debtor’s estate is created consisting of all the debtor’s then-existing property interests, whether legal or equitable. In addition, the estate includes any bequests, inheritances, and certain other distributions of property that the debtor receives within the next 180 days. It also includes property recovered by the trustee under certain powers granted by the law. What is not exempt property will be distributed to the creditors.
The bankruptcy code confers on the trustee certain powers to recover property for the estate that the debtor transferred before bankruptcy.
One such power (in Section 544) is to act as a hypothetical lien creditor. This power is best explained by an example. Suppose Dennis Debtor purchases equipment on credit from Acme Supply Company. Acme fails to perfect its security interest, and a few weeks later Debtor files a bankruptcy petition. By virtue of the section conferring on the trustee the status of a hypothetical lien creditor, the trustee can act as though she had a lien on the equipment, with priority over Acme’s unperfected security interest. Thus the trustee can avoid Acme’s security interest, with the result that Acme would be treated as an unsecured creditor.
Another power is to avoid transactions known as voidable preferences—transactions highly favorable to particular creditors.11 United States Code, Section 547. A transfer of property is voidable if it was made (1) to a creditor or for his benefit, (2) on account of a debt owed before the transfer was made, (3) while the debtor was insolvent, (4) on or within ninety days before the filing of the petition, and (5) to enable a creditor to receive more than he would have under Chapter 7. If the creditor was an “insider”—one who had a special relationship with the debtor, such as a relative or general partner of the debtor or a corporation that the debtor controls or serves in as director or officer—then the trustee may void the transaction if it was made within one year of the filing of the petition, assuming that the debtor was insolvent at the time the transaction was made.
Some prebankruptcy transfers that seem to fall within these provisions do not. The most important exceptions are (1) transfers made for new value (the debtor buys a refrigerator for cash one week before filing a petition; this is an exchange for new value and the trustee may not void it); (2) a transfer that creates a purchase-money security interest securing new value if the secured party perfects within ten days after the debtor receives the goods; (3) payment of a debt incurred in the ordinary course of business, on ordinary business terms; (4) transfers totaling less than \$600 by an individual whose debts are primarily consumer debts; (5) transfers totaling less than \$5,475 by a debtor whose debts are not primarily consumer debts; and (6) transfers to the extent the transfer was a bona fide domestic support obligation.
A third power of the trustee is to avoid fraudulent transfers made within two years before the date that the bankruptcy petition was filed.11 United States Code, Section 548. This provision contemplates various types of fraud. For example, while insolvent, the debtor might transfer property to a relative for less than it was worth, intending to recover it after discharge. This situation should be distinguished from the voidable preference just discussed, in which the debtor pays a favored creditor what he actually owes but in so doing cannot then pay other creditors.
Key Takeaway
A bankruptcy commences with the filing of a petition of bankruptcy. Creditors file proofs of claim and are entitled to certain priorities: domestic support obligations and the costs of administration are first. The debtor has an obligation to file full and truthful schedules and to attend a credit counseling session, if applicable. The debtor has a right to claim exemptions, federal or state, that leave her with assets sufficient to make a fresh start: some home equity, an automobile, and clothing and personal effects, among others. The honest debtor is discharged of many debts, but some are nondischargeable, among them taxes, debt from illegal behavior (embezzlement, drunk driving), fines, student loans, and certain consumer debt. A debtor may, after proper counseling, reaffirm debt, but only before filing. The bankruptcy trustee takes over the nonexempt property of the debtor; he may act as a hypothetical lien creditor (avoiding unperfected security interests) and avoid preferential and fraudulent transfers that unfairly diminish the property of the estate.
Exercises
1. What is the automatic stay, and when does it arise?
2. Why are the expenses of claimants administering the bankruptcy given top priority (notwithstanding the nominal top priority of domestic support obligations)?
3. Why are debtor’s exemptions not uniform? What sorts of things are exempt from being taken by the bankruptcy trustee, and why are such exemptions allowed?
4. Some debts are nondischargeable; give three examples. What is the rationale for disallowing some debts from discharge?
5. How does the law take care that the debtor is fully informed of the right not to reaffirm debts, and why is such care taken?
6. What is a hypothetical lien creditor? What is the difference between a preferential transfer and a fraudulent one? Why is it relevant to discuss these three things in the same paragraph? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/27%3A_Bankruptcy/27.2%3A_Case_Administration_Creditors_Claims_Debtors_Exemptions_and_Dischargeable_Debts_Debtors_Estate.txt |
Learning Objectives
1. Recognize the grounds for a Chapter 7 case to be dismissed.
2. Be familiar with the BAPCPA’s means-testing requirements before Chapter 7 discharge is granted.
3. Know under what circumstances a debtor will be denied discharge.
4. Understand the order of distribution of the debtor’s estate under Chapter 7.
Trustee’s Duties under Chapter 7; Grounds for Dismissal: The Means Test
Except as noted, the provisions discussed up until now apply to each type of bankruptcy proceeding. The following discussion is limited to certain provisions under Chapter 7.
Trustee’s Duties
In addition to the duties already noted, the trustee has other duties under Chapter 7. He must sell the property for money, close up the estate “as expeditiously as is compatible with the best interests of parties in interest,” investigate the debtor’s financial affairs, examine proofs of claims, reject improper ones, oppose the discharge of the debtor where doing so is advisable in the trustee’s opinion, furnish a creditor with information about the estate and his administration (unless the court orders otherwise), file tax reports if the business continues to be operated, and make a final report and file it with the court.
Conversion
Under Section 706 of the bankruptcy code, the debtor may convert a Chapter 7 case to Chapter 11, 12, or 13 at any time. The court may order a conversion to Chapter 11 at any time upon request of a party in interest and after notice and hearing. And, as discussed next, a case may be converted from Chapter 7 to Chapter 13 if the debtor agrees, or be dismissed if he does not, in those cases where the debtor makes too much money to be discharged without it being an “abuse” under the 2005 act.
Dismissal
The court may dismiss a case for three general reasons.
The first reason is “for cause,” after notice and a hearing for cause, including (1) unreasonable delay by the debtor that prejudices creditors, (2) nonpayment of any fees required, (3) failure to file required documents and schedules.
The second reason for dismissal (or, with the debtor’s permission, conversion to Chapter 11 or 13) applies to debtors whose debt is primarily consumer debt: the court may—after notice and a hearing—dismiss a case if granting relief would be “an abuse of the provisions” of the bankruptcy code.
The third reason for dismissal is really the crux of the 2005 law: under it, the court will find that granting relief under Chapter 7 to a debtor whose debt is primarily consumer debt is “an abuse” if the debtor makes too much money. The debtor must pass a means test: If he’s poor enough, he can go Chapter 7. If he is not poor enough (or if they are not, in case of a married couple), Chapter 13—making payments to creditors—is the way to go. Here is one practitioner’s explanation of the means test:
To apply the means test, the courts will look at the debtor’s average income for the 6 months prior to filing [not the debtor’s income at the time of filing, when—say—she just lost her job] and compare it to the median income for that state. For example, the median annual income for a single wage-earner in California is \$42,012. If the income is below the median, then Chapter 7 remains open as an option. If the income exceeds the median, the remaining parts of the means test will be applied.
The next step in the calculation takes monthly income less reasonable living expenses [“reasonable living expenses” are strictly calculated based on IRS standards; the figure excludes payments on the debts included in the bankruptcy], and multiplies that figure times 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations.
If the income available for debt repayment over that 5-year period is \$10,000 or more, then Chapter 13 will be required. In other words, anyone earning above the state median, and with at least \$166.67 per month (\$10,000 divided by 60) of available income, will automatically be denied Chapter 7. So for example, if the court determines that you have \$200 per month income above living expenses, \$200 times 60 is \$12,000. Since \$12,000 is above \$10,000, you’re stuck with Chapter 13.
What happens if you are above the median income but do NOT have at least \$166.67 per month to pay toward your debts? Then the final part of the means test is applied. If the available income is less than \$100 per month, then Chapter 7 again becomes an option. If the available income is between \$100 and \$166.66, then it is measured against the debt as a percentage, with 25% being the benchmark.
In other words, let’s say your income is above the median, your debt is \$50,000, and you only have \$125 of available monthly income. We take \$125 times 60 months (5 years), which equals \$7,500 total. Since \$7,500 is less than 25% of your \$50,000 debt, Chapter 7 is still a possible option for you. If your debt was only \$25,000, then your \$7,500 of available income would exceed 25% of your debt and you would be required to file under Chapter 13.
To sum up, first figure out whether you are above or below the median income for your state—median income figures are available at www.new-bankruptcy-law-info.com. Be sure to account for your spouse’s income if you are a two-income family. Next, deduct your average monthly living expenses from your monthly income and multiply by 60. If the result is above \$10,000, you’re stuck with Chapter 13. If the result is below \$6,000, you may still be able to file Chapter 7. If the result is between \$6,000 and \$10,000, compare it to 25% of your debt. Above 25%, you’re looking at Chapter 13 for sure.Charles Phelan, “The New Bankruptcy Means Test Explained in Plain English,” Buzzle.com, www.buzzle.com/editorials/1-10-2006-85999.asp.
The law also requires that attorneys sign the petition (as well as the debtor); the attorney’s signature certifies that the petition is well-grounded in fact and that the attorney has no knowledge after reasonable inquiry that the schedules and calculations are incorrect. Attorneys thus have an incentive to err in favor of filing Chapter 13 instead of Chapter 7 (perhaps that was part of Congress’s purpose in this section of the law).
If there’s been a dismissal, the debtor and creditors have the same rights and remedies as they had prior to the case being commenced—as if the case had never been filed (almost). The debtor can refile immediately, unless the court orders a 120-day penalty (for failure to appear). In most cases, a debtor can file instantly for a Chapter 13 following a Chapter 7 dismissal.
Distribution of the Estate
The estate includes all his or her assets or all their assets (in the case of a married couple) broadly defined. From the estate, the debtor removes property claimed exempt; the trustee may recapture some assets improperly removed from the estate (preferential and fraudulent transfers), and what’s left is the distributable estate. It is important to note that the vast majority of Chapter 7 bankruptcies are no-asset cases—90–95 percent of them, according to one longtime bankruptcy trustee.Eugene Crane, Hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Tenth Congress, Second Session, Statement to the House Judiciary Sub-Committee, September 16, 2008; judiciary.house.gov/hearings/printers/110th/44493.PDF. That means creditors get nothing. But in those cases where there are assets, the trustee must distribute the estate to the remaining classes of claimants in this order:
1. Secured creditors, paid on their security interests
2. Claims with priority
3. Unsecured creditors who filed their claims on time
4. Unsecured creditors who were tardy in filing, if they had no notice of the bankruptcy
5. Unsecured creditors who were tardy and had notice, real or constructive
6. Claims by creditors for fines, penalties, and exemplary or punitive damages
7. Interest for all creditors at the legal rate
8. The debtor
Figure 27.3 Distribution of the Estate
Discharge
Once the estate is distributed, the court will order the debtor discharged (except for nondischargeable debts) unless one of the following overall exceptions applies for denying discharge (i.e., relief from the debt). This list is not exhaustive:
1. The debtor is not an individual. In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge; instead, the entity is dissolved and its assets liquidated. The debts remain theoretically valid but uncollectible until the statute of limitations on them has run. Only an individual can receive a Chapter 7 discharge.11 United States Code, Section 727(a)(1).
2. The debtor has concealed or destroyed property with intent to defraud, hinder, or delay within twelve months preceding filing of the petition.
3. The debtor has concealed, destroyed, or falsified books and records
4. The debtor has lied under oath, knowingly given a false account, presented or used a false claim, given or received bribes, refused to obey court orders.
5. The debtor has failed to explain satisfactorily any loss of assets.
6. The debtor has declared Chapter 7 or Chapter 11 bankruptcy within eight years, or Chapter 13 within six years (with some exceptions).
7. The debtor failed to participate in “an instructional course concerning personal financial management” (unless that’s excused).
8. An individual debtor has “abused” the bankruptcy process. A preferential transfer is not an “abuse,” but it will be set aside. Making too much money to file Chapter 7 is “an abuse” that will deny discharge.
A discharge may be revoked if the debtor committed fraud during the bankruptcy proceedings, but the trustee or a creditor must apply for revocation within one year of the discharge.
Having the discharge denied does not affect the administration of the bankruptcy case. The trustee can (and will) continue to liquidate any nonexempt assets of the debtor and pay the creditors, but the debtor still has to pay the debts left over.
As to any consequence of discharge, bankruptcy law prohibits governmental units from discriminating against a person who has gone through bankruptcy. Debtors are also protected from discrimination by private employers; for example, a private employer may not fire a debtor because of the bankruptcy. Certainly, however, the debtor’s credit rating will be affected by the bankruptcy.
Key Takeaway
A Chapter 7 bankruptcy case may be dismissed for cause or because the debtor has abused the system. The debtor is automatically considered to have abused the system if he makes too much money. With the debtor’s permission, the Chapter 7 may be converted to Chapter 11, 12, or 13. The law requires that the debtor pass a means test to qualify for Chapter 7. Assuming the debtor does qualify for Chapter 7, her nonexempt assets (if there are any) are sold by the trustee and distributed to creditors according to a priority set out in the law. A discharge may be denied, in general because the debtor has behaved dishonestly or—again—has abused the system.
Exercises
1. What is the difference between denial of a discharge for cause and denial for abuse?
2. What is the difference between a dismissal and a denial of discharge?
3. Which creditors get satisfied first in a Chapter 7 bankruptcy? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/27%3A_Bankruptcy/27.3%3A_Chapter_7_Liquidation.txt |
Learning Objectives
1. Understand the basic concepts of Chapter 11 bankruptcies.
2. Understand the basic concepts of Chapter 13 bankruptcies.
Overview
Chapter 11 provides a means by which corporations, partnerships, and other businesses, including sole proprietorships, can rehabilitate themselves and continue to operate free from the burden of debts that they cannot pay.
It is simple enough to apply for the protection of the court in Chapter 11 proceeding, and for many years, large financially ailing companies have sought shelter in Chapter 11. Well-known examples include General Motors, Texaco, K-Mart, Delta Airlines, and Northwest Airlines. An increasing number of corporations have turned to Chapter 11 even though, by conventional terms, they were solvent. Doing so enables them to negotiate with creditors to reduce debt. It also may even permit courts to snuff out lawsuits that have not yet been filed. Chapters 3 and 5, discussed in Section 27.2 "Case Administration; Creditors’ Claims; Debtors’ Exemptions and Dischargeable Debts; Debtor’s Estate", apply to Chapter 11 proceedings also. Our discussion, therefore, is limited to special features of Chapter 11.
Eligibility
Any person eligible for discharge in Chapter 7 proceeding (plus railroads) is eligible for a Chapter 11 proceeding, except stockbrokers and commodity brokers. Individuals filing Chapter 11 must take credit counseling; businesses do not. A company may voluntarily enter Chapter 11 or may be put there involuntarily by creditors. Individuals can file Chapter 11 particularly if they have too much debt to qualify for Chapter 13 and make too much money to qualify for Chapter 7; under the 2005 act, individuals must commit future wages to creditors, just as in Chapter 13.11 United States Code, Sections 1115, 1123(a)(8), and 1129(a)(15).
Operation of Business
Unless a trustee is appointed, the debtor will retain possession of the business and may continue to operate with its own management. The court may appoint a trustee on request of any party in interest after notice and a hearing. The appointment may be made for cause—such as dishonesty, incompetence, or gross mismanagement—or if it is otherwise in the best interests of the creditors. Frequently, the same incompetent management that got the business into bankruptcy is left running it—that’s a criticism of Chapter 11.
Creditors’ Committee
The court must appoint a committee of unsecured creditors as soon as practicable after issuing the order for relief. The committee must consist of creditors willing to serve who have the seven largest claims, unless the court decides to continue a committee formed before the filing, if the committee was fairly chosen and adequately represents the various claims. The committee has several duties, including these: (1) to investigate the debtor’s financial affairs, (2) to determine whether to seek appointment of a trustee or to let the business continue to operate, and (3) to consult with the debtor or trustee throughout the case.
The Reorganization Plan
The debtor may always file its own plan, whether in a voluntary or involuntary case. If the court leaves the debtor in possession without appointing a trustee, the debtor has the exclusive right to file a reorganization plan during the first 120 days. If it does file, it will then have another 60 days to obtain the creditors’ acceptances. Although its exclusivity expires at the end of 180 days, the court may lengthen or shorten the period for good cause. At the end of the exclusive period, the creditors’ committee, a single creditor, or a holder of equity in the debtor’s property may file a plan. If the court does appoint a trustee, any party in interest may file a plan at any time.
The Bankruptcy Reform Act specifies certain features of the plan and permits others to be included. Among other things, the plan must (1) designate classes of claims and ownership interests; (2) specify which classes or interests are impaired—a claim or ownership interest is impaired if the creditor’s legal, equitable, contractual rights are altered under the plan; (3) specify the treatment of any class of claims or interests that is impaired under the plan; (4) provide the same treatment of each claim or interests of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment; and (5) provide adequate means for carrying out the plan. Basically, what the plan does is provide a process for rehabilitating the company’s faltering business by relieving it from repaying part of its debt and initiating reforms so that the company can try to get back on its feet.
Acceptance of the Plan
The act requires the plan to be accepted by certain proportions of each impaired class of claims and interests. A class of claims accepts the plan if creditors representing at least two-thirds of the dollar amount of claims and more than one-half the number of allowed claims vote in favor. A class of property interests accepts the plan if creditors representing two-thirds of the dollar amount of the allowed ownership interests vote in favor. Unimpaired classes of claims and interest are deemed to have accepted the plan; it is unnecessary to solicit their acceptance.
Confirmation of the Plan
The final act necessary under Chapter 11 is confirmation by the court. Once the court confirms the plan, the plan is binding on all creditors. The rules governing confirmation are complex, but in essence, they include the following requirements:
1. The plan must have been proposed in good faith. Companies must also make a good-faith attempt to negotiate modifications in their collective bargaining agreements (labor union contracts).
2. All provisions of the act must have been complied with.
3. The court must have determined that the reorganized business will be likely to succeed and be unlikely to require further financial reorganization in the foreseeable future.
4. Impaired classes of claims and interests must have accepted the plan, unless the plan treats them in a “fair and equitable” manner, in which case consent is not required. This is sometimes referred to as the cram-down provision.
5. All members of every class must have received no less value than they would have in Chapter 7 liquidation.
Discharge, Conversion
The debtor gets discharged when all payments under the plan are completed. A Chapter 11 bankruptcy may be converted to Chapter 7, with some restrictions, if it turns out the debtor cannot make the plan work.
In General
Anyone with a steady income who is having difficulty paying off accumulated debts may seek the protection of a bankruptcy court in Chapter 13 proceeding (often called the wage earner’s plan). Under this chapter, the individual debtor presents a payment plan to creditors, and the court appoints a trustee. If the creditors wind up with more under the plan presented than they would receive in Chapter 7 proceeding, then the court is likely to approve it. In general, a Chapter 13 repayment plan extends the time to pay the debt and may reduce it so that the debtor need not pay it all. Typically, the debtor will pay a fixed sum monthly to the trustee, who will distribute it to the creditors. The previously discussed provisions of Chapters 3 and 5 apply also to this chapter; therefore, the discussion that follows focuses on some unique features of Chapter 13.
People seek Chapter 13 discharges instead of Chapter 7 for various reasons: they make too much money to pass the Chapter 7 means test; they are behind on their mortgage or car payments and want to make them up over time and reinstate the original agreement; they have debts that can’t be discharged in Chapter 7; they have nonexempt property they want to keep; they have codebtors on a personal debt who would be liable if the debtor went Chapter 7; they have a real desire to pay their debts but cannot do so without getting the creditors to give them some breathing room. Chapter 7 cases may always be converted to Chapter 13.
Eligibility
Chapter 13 is voluntary only. Anyone—sole proprietorships included—who has a regular income, unsecured debts of less than \$336,000, and secured debts of less than \$1,010,650 is eligible to seek its protection. The debts must be unpaid and owing at the time the debtor applies for relief. If the person has more debt than that, she will have to file Chapter 11. The debtor must attend a credit-counseling class, as in Chapter 7.
The Plan
Plans are typically extensions or compositions—that is, they extend the time to pay what is owing, or they are agreements among creditors each to accept something less than the full amount owed (so that all get something). Under Chapter 13, the stretch-out period is three to five three years. The plan must provide for payments of all future income or a sufficient portion of it to the trustee. Priority creditors are entitled to be paid in full, although they may be paid later than required under the original indebtedness. As long as the plan is being carried out, the debtor may enjoin any creditors from suing to collect the original debt.
Confirmation
Under Section 1325 of the bankruptcy code, the court must approve the plan if it meets certain requirements. These include (1) distribution of property to unsecured creditors whose claims are allowed in an amount no less than that which they would have received had the estate been liquidated under Chapter 7; (2) acceptance by secured creditors, with some exceptions, such as when the debtor surrenders the secured property to the creditor; and (3) proposal of the plan “in good faith.” If the trustee or an unsecured creditor objects to confirmation, the plan must meet additional tests. For example, a plan will be approved if all of the debtor’s disposable income (as defined in Section 1325) over the commitment period (three to five years) will be used to make payments under the plan.
Discharge
Once a debtor has made all payments called for in the plan, the court will discharge him from all remaining debts except certain long-term debts and obligations to pay alimony, maintenance, and support. Under former law, Chapter 13 was so broad that it permitted the court to discharge the debtor from many debts considered nondischargeable under Chapter 7, but 1994 amendments and the 2005 act made Chapter 13 less expansive. Debts dischargeable in Chapter 13, but not in Chapter 7, include debts for willful and malicious injury to property, debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. (See Section 27.6 "Cases", In re Ryan, for a discussion of what debts are dischargeable under Chapter 13 as compared with Chapter 7.)
Although a Chapter 13 debtor generally receives a discharge only after completing all payments required by the court-approved (i.e., “confirmed”) repayment plan, there are some limited circumstances under which the debtor may request the court to grant a “hardship discharge” even though the debtor has failed to complete plan payments. Such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor’s control. A Chapter 13 discharge stays on the credit record for up to ten years.
A discharge may be denied if the debtor previously went through a bankruptcy too soon before filing Chapter 13, failed to act in good faith, or—with some exceptions—failed to complete a personal financial management course.
Key Takeaway
Chapter 11—frequently referred to as “corporate reorganization”—is most often used by businesses whose value as a going concern is greater than it would be if liquidated, but, with some exceptions, anyone eligible to file Chapter 7 can file Chapter 11. The business owners, or in some cases the trustee or creditors, develop a plan to pay the firm’s debts over a three- to five-year period; the plan must be approved by creditors and the court. Chapter 13—frequently called the wage-earner’s plan—is a similar mechanism by which a person can discharge some debt and have longer to pay debts off than originally scheduled. Under Chapter 13, people can get certain relief from creditors that they cannot get in Chapter 7.
Exercises
1. David Debtor is a freelance artist with significant debt that he feels a moral obligation to pay. Why is Chapter 11 his best choice of bankruptcy chapters to file under?
2. What is the practical difference between debts arising from property settlements in divorce or separation proceedings—which can be discharged under Chapter 13—and debts owing for alimony (maintenance) and child support—which cannot be discharged under Chapter 13?
3. Why would a person want to go through the long grind of Chapter 13 instead of just declaring straight bankruptcy (Chapter 7) and being done with it? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/27%3A_Bankruptcy/27.4%3A_Chapter_11_and_Chapter_13_Bankruptcies.txt |
Learning Objectives
1. Understand that there are nonbankruptcy alternatives for debtors who cannot pay their bills in a timely way: assignment for benefit of creditors, compositions, and receiverships.
2. Recognize the reasons why these alternatives might not work.
Alternatives to Bankruptcy: Overview
Bankruptcy is a necessary thing in a capitalist economic system. As already noted, without it, few people would be willing to take business risks, and the economy would necessarily operate at a lower level (something some people might not think so bad overall). But bankruptcy, however “enlightened” society may have become about it since Victorian days, still carries a stigma. Bankruptcy filings are public information; the lists of people and businesses who declare bankruptcy are regularly published in monthly business journals. Bankruptcy is expensive, too, and both debtors and creditors become enmeshed in significantly complex federal law. For these reasons, among others, both parties frequently determine it is in their best interest to find an alternative to bankruptcy. Here we take up briefly three common alternatives.
In other parts of this book, other nonbankruptcy creditors’ rights are discussed: under the Uniform Commercial Code (UCC), creditors have rights to reclaim goods sold and delivered but not paid for; under the UCC, too, creditors have a right to repossess personal property that has been put up as collateral for the debtor’s loan or extension of credit; and mortgagees have the right to repossess real estate without judicial assistance in many circumstances. These nonbankruptcy remedies are governed mostly by state law.
The nonbankruptcy alternatives discussed here are governed by state law also.
Assignment for Benefit of Creditors
Under a common-law assignment for the benefit of creditors, the debtor transfers some or all of his assets to a trustee—usually someone appointed by the adjustment bureau of a local credit managers’ association—who sells the assets and apportions the proceeds in some agreed manner, usually pro rata, to the creditors. Of course, not every creditor need agree with such a distribution. Strictly speaking, the common-law assignment does not discharge the balance of the debt. Many state statutes attempt to address this problem either by prohibiting creditors who accept a partial payment of debt under an assignment from claiming the balance or by permitting debtors to demand a release from creditors who accept partial payment.
Composition
A composition is simply an agreement by creditors to accept less than the full amount of the debt and to discharge the debtor from further liability. As a contract, composition requires consideration; the mutual agreement among creditors to accept a pro rata share of the proceeds is held to be sufficient consideration to support the discharge. The essential difference between assignment and composition lies in the creditors’ agreement: an assignment implies no agreement among the creditors, whereas a composition does. Not all creditors of the particular debtor need agree to the composition for it to be valid. A creditor who does not agree to the composition remains free to attempt to collect the full sum owed; in particular, a creditor not inclined to compose the debt could attach the debtor’s assets while other creditors are bargaining over the details of the composition agreement.
One advantage of the assignment over the composition is that in the former the debtor’s assets—having been assigned—are protected from attachment by hungry creditors. Also, the assignment does not require creditors’ consent. However, an advantage to the debtor of the assignment (compared with the composition) is that in the composition creditors cannot go after the debtor for any deficiency (because they agreed not to).
Receivership
A creditor may petition the court to appoint a receiver; receivership is a long-established procedure in equity whereby the receiver takes over the debtor’s property under instructions from the court. The receiver may liquidate the property, continue to operate the business, or preserve the assets without operating the business until the court finally determines how to dispose of the debtor’s property.
The difficulty with most of the alternatives to bankruptcy lies in their voluntary character: a creditor who refuses to go along with an agreement to discharge the debtor can usually manage to thwart the debtor and her fellow creditors because, at the end of the day, the US Constitution forbids the states from impairing private citizens’ contractual obligations. The only final protection, therefore, is to be found in the federal bankruptcy law.
Key Takeaway
Bankruptcy is expensive and frequently convoluted. Nonbankruptcy alternatives include assignment for the benefit of creditors (the debtor’s assets are assigned to a trustee who manages or disposes of them for creditors), compositions (agreements by creditors to accept less than they are owed and to discharge the debtor from further liability), and receivership (a type of court-supervised assignment).
Exercises
1. What is an assignment for benefit of creditors?
2. What is a composition?
3. What is a receivership?
4. Why are these alternatives to bankruptcy often unsatisfactory? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/27%3A_Bankruptcy/27.5%3A_Alternatives_to_Bankruptcy.txt |
Dischargeability of Student Loans under Chapter 7
In re Zygarewicz
423 B.R. 909 (Bkrtcy.E.D.Cal. 2010)
MCMANUS, BANKRUPTCY JUDGE.
Angela Zygarewicz, a chapter 7 debtor and the plaintiff in this adversary proceeding, borrowed 16 government-guaranteed student [sic] loans totaling \$81,429. The loans have been assigned to Educational Credit Management Corporation (“ECMC”). By September 2009, the accrual of interest on these student loans had caused the debt to balloon to more than \$146,000. The debtor asks the court to declare that these student loans were discharged in bankruptcy.
The Bankruptcy Code provides financially distressed debtors with a fresh start by discharging most of their pre-petition debts.…However, under 11 U.S.C. § 523(a)(8), there is a presumption that educational loans extended by or with the aid of a governmental unit or nonprofit institution are nondischargeable unless the debtor can demonstrate that their repayment would be an undue hardship. See [Citation]. This exception to a bankruptcy discharge ensures that student loans, which are typically extended solely on the basis of the student’s future earnings potential, cannot be discharged by recent graduates who then pocket all of the future benefits derived from their education. See [Citation].
The debtor bears the burden of proving by a preponderance of the evidence that she is entitled to a discharge of the student loan. See [Citation]. That is, the debtor must prove that repayment of student loans will cause an undue hardship.
The Bankruptcy Code does not define “the undue hardship.” Courts interpreting section 523(a)(8), however, have concluded that undue hardship [and] is something more than “garden-variety hardship.” [Citation.] Only cases involving “real and substantial” hardship merit discharges. See [Citation.]
The Ninth Circuit has adopted a three-part test to guide courts in their attempts to determine whether a debtor will suffer an undue hardship is required to repay a student loan:
• First, the debtor must establish “that she cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans.”…
• Second, the debtor must show “that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.”…
• The third prong requires “that the debtor has made good faith efforts to repay the loans.…”
(Pena, citing Brunner v. N.Y. State Higher Educ. Servs. Corp., [Citation]).
Debtor must satisfy all three parts of the Brunner test before her student loans can be discharged. Failure to prove any of the three prongs will defeat a debtor’s case.
When this bankruptcy case was filed in September 2005, the debtor was a single woman and had no dependents. She is 39 years old.
Schedule I reported that the debtor was unemployed. The debtor’s responses to the Statement of Financial Affairs revealed that she had received \$5,500 in income during 2005 prior to the filing of the petition. Evidence at trial indicated that after the petition was filed, the debtor found work and earned a total of \$9,424 in 2005. In 2004 and 2003, she earned \$13,994 and \$17,339, respectively.
Despite this modest income, the debtor did not immediately file an adversary proceeding to determine the dischargeability of her student loans. It was almost three years after the entry of her chapter 7 discharge ‘on January 3, 2006 that the debtor reopened her chapter 7 case in order to pursue this adversary proceeding.’
In her complaint, the debtor admits that after she received a discharge, she found part-time work with a church and later took a full-time job as a speech therapist. During 2006, the debtor earned \$20,009 and in 2007 she earned \$37,314. Hence, while it is clear the debtor’s income was very modest in the time period immediately prior to her bankruptcy petition, her financial situation improved during her bankruptcy case.
The court cannot conclude based on the evidence of the debtor’s financial circumstances up to the date of the discharge, that she was unable to maintain a minimal standard of living if she was required to repay her students [sic] loans.
However, in January 2007, the debtor was injured in an automobile accident. Her injuries eventually halted the financial progress she had been making and eventually prevented her from working. She now subsists on social security disability payments.
The circumstance creating the debtor’s hardship, the automobile accident, occurred after her chapter 7 petition was filed, indeed, approximately one year after her discharge was entered. The debtor is maintaining that this post-petition, post-discharge circumstance warrants a declaration that her student loans were discharged effective from the petition date.
When must the circumstances creating a debtor’s hardship arise: before the bankruptcy case is filed; after the case if filed but prior to the entry of a discharge; or at anytime, including after the entry of a discharge?
The court concludes that the circumstances causing a chapter 7 debtor’s financial hardship must arise prior to the entry of the discharge. If the circumstances causing a debtor’s hardship arise after the entry of a discharge, those circumstances cannot form the basis of a determination that repayment of a student loan will be an undue hardship.…
[T]here is nothing in the Bankruptcy Code requiring that a complaint under section 523(a)(8) [to discharge student loans] be filed at any particular point in a bankruptcy case, whether it is filed under chapter 7 or 13. [Relevant Federal Rules of Bankruptcy Procedure] permits such dischargeability complaints to be brought at any time, including after the entry of a discharge and the closing of the bankruptcy case.…
While a debtor’s decision to file an action to determine the dischargeability of a student loan is not temporally constrained, this does not mean that a debtor’s financial hardship may arise after a discharge has been entered.
[The] Coleman [case, cited by debtor] deals with the ripeness of a dispute concerning the dischargeability of a student loan. [The Ninth Circuit held that it] is ripe for adjudication at any point during the case. The Ninth Circuit did not conclude, however, that a debtor could rely upon post-discharge circumstances to establish undue hardship. In fact, the court in Coleman made clear that the debtor could take a snapshot of the hardship warranting a discharge of a student loan any time prior to discharge. [Coleman was a Chapter 13 case.]
Here, the debtor was injured in an automobile accident on January 17, 2007, almost exactly one year after her January 3, 2006 chapter 7 discharge. Because the accident had no causal link to the misfortune prompting the debtor to seek bankruptcy relief in the first instance, the accident cannot be relied on to justify the discharge of the student loans because repayment would be an undue hardship.
To hold otherwise would mean that a bankruptcy discharge is a perpetual license to discharge student loans based on events that occur years after the bankruptcy discharge is granted. If a discharged debtor suffers later financial misfortune, that debtor must consider seeking another discharge subject to the limitations imposed by [the sections of the code stipulating how often a person can petition for bankruptcy]. In the context of a second case, the debtor could then ask that the student loan be declared dischargeable under section 523(a)(8).
In this instance, the debtor is now eligible for a discharge in a chapter 13 case. Her chapter 7 petition was filed on September 19, 2005. Section 1328(f)(1) bars a chapter 13 discharge when the debtor has received a chapter 7 discharge in a case commenced in the prior four years. She would not be eligible for a chapter 7 discharge until September 19, 2013.
This is not to say that post-discharge events are irrelevant. The second and third prongs of the Pena test require the court to consider whether the circumstances preventing a debtor from repaying a student loan are likely to persist, and whether the debtor has made good faith efforts to repay the student loan. Post-discharge events are relevant to these determinations because they require the court to look into the debtor’s financial future.
Unfortunately for the debtor, it is unnecessary to consider the second and third prongs because she cannot satisfy the first prong.
case questions
1. What is the rationale for making the bankruptcy discharge of student loans very difficult?
2. Petitioner argued that she should be able to use a postdischarge event (the auto accident) as a basis for establishing that she could not maintain a “minimal” standard of living, and thus she should get a retroactive discharge of her student loans. What benefit is there to her if she could successfully make the argument, given that she could—as the court noted—file for Chapter 13?
3. The court cites the Coleman case. That was a Chapter 13 proceeding. Here were the facts: Debtor had not yet completed her payments under her five-year repayment plan, and no discharge order had yet been entered; one year into the plan, she was laid off work. She had been trying to repay her student loans for several years, and she claimed she would suffer hardship in committing to the five-year repayment plan without any guarantee that her student loan obligations would be discharged, since she was required to commit all of her disposable income to payments under the plan and would likely be forced to pursue undue hardship issue pro se upon completion of the plan.” In Coleman, the court held that Debtor could, postfiling but predischarge—one year into the five-year plan—bring up the hardship issue.
Now, in the case here, after the auto accident, the petitioner “subsists” on Social Security disability payments, and she has almost \$150,000 in debt, yet the court prohibited her from claiming a hardship discharge of student loans. Does this result really make sense? Is the court’s concern that allowing this postdischarge relief would mean “that a bankruptcy discharge is a perpetual license to discharge student loans based on events that occur years after the bankruptcy discharge is granted” well founded? Suppose it is scheduled to take thirty years to pay off student loans; in year 4, the student-borrower, now Debtor, declares Chapter 7 bankruptcy, student loans not being discharged; in year 6, the person is rendered disabled. What public policy is offended if the person is allowed to “reopen” the bankruptcy and use the postbankruptcy event as a basis for claiming a hardship discharge of student loans?
4. The court suggests she file for Chapter 13. What if—because of timing—the petitioner was not eligible for Chapter 13? What would happen then?
Chapter 11 Bankruptcy
In re Johns-Manville Corp.
36 B.R. 727 (Bkrtcy. N.Y. 1984)
Lifland, Bankruptcy Judge.
Whether an industrial enterprise in the United States is highly successful is often gauged by its “membership” in what has come to be known as the “Fortune 500”. Having attained this measure of financial achievement, Johns-Manville Corp. and its affiliated companies (collectively referred to as “Manville”) were deemed a paradigm of success in corporate America by the financial community. Thus, Manville’s filing for protection under Chapter 11 of Title 11 of the United States Code (“the Code or the Bankruptcy Code”) on August 26, 1982 (“the filing date”) was greeted with great surprise and consternation on the part of some of its creditors and other corporations that were being sued along with Manville for injuries caused by asbestos exposure. As discussed at length herein, Manville submits that the sole factor necessitating its filing is the mammoth problem of uncontrolled proliferation of asbestos health suits brought against it because of its substantial use for many years of products containing asbestos which injured those who came into contact with the dust of this lethal substance. According to Manville, this current problem of approximately 16,000 lawsuits pending as of the filing date is compounded by the crushing economic burden to be suffered by Manville over the next 20–30 years by the filing of an even more staggering number of suits by those who had been exposed but who will not manifest the asbestos-related diseases until some time during this future period (“the future asbestos claimants”). Indeed, approximately 6,000 asbestos health claims are estimated to have arisen in only the first 16 months since the filing date. This burden is further compounded by the insurance industry’s general disavowal of liability to Manville on policies written for this very purpose.
It is the propriety of the filing by Manville which is the subject of the instant decision. Four separate motions to dismiss the petition pursuant to Section 1112(b) of the Code have been lodged before this Court.…
Preliminarily, it must be stated that there is no question that Manville is eligible to be a debtor under the Code’s statutory requirements. Moreover, it should also be noted that neither Section 109 nor any other provision relating to voluntary petitions by companies contains any insolvency requirement.…Accordingly, it is abundantly clear that Manville has met all of the threshold eligibility requirements for filing a voluntary petition under the Code.…
A “principal goal” of the Bankruptcy Code is to provide “open access” to the “bankruptcy process.” [Citation.] The rationale behind this “open access” policy is to provide access to bankruptcy relief which is as “open” as “access to the credit economy.” Thus, Congress intended that “there should be no legal barrier to voluntary petitions.” Another major goal of the Code, that of “rehabilitation of debtors,” requires that relief for debtors must be “timely.” Congress declared that it is essential to both the “open access” and “rehabilitation” goals that
[i]nitiating relief should not be a death knell. The process should encourage resort to it, by debtors and creditors, that cuts short the dissipation of assets and the accumulation of debts. Belated commencement of a case may kill an opportunity for reorganization or arrangement.
Accordingly, the drafters of the Code envisioned that a financially beleaguered debtor with real debt and real creditors should not be required to wait until the economic situation is beyond repair in order to file a reorganization petition. The “Congressional purpose” in enacting the Code was to encourage resort to the bankruptcy process. This philosophy not only comports with the elimination of an insolvency requirement, but also is a corollary of the key aim of Chapter 11 of the Code, that of avoidance of liquidation. The drafters of the Code announced this goal, declaring that reorganization is more efficient than liquidation because “assets that are used for production in the industry for which they were designed are more valuable than those same assets sold for scrap.” [Citation.] Moreover, reorganization also fosters the goals of preservation of jobs in the threatened entity. [Citation.]
In the instant case, not only would liquidation be wasteful and inefficient in destroying the utility of valuable assets of the companies as well as jobs, but, more importantly, liquidation would preclude just compensation of some present asbestos victims and all future asbestos claimants. This unassailable reality represents all the more reason for this Court to adhere to this basic potential liquidation avoidance aim of Chapter 11 and deny the motions to dismiss. Manville must not be required to wait until its economic picture has deteriorated beyond salvation to file for reorganization.
Clearly, none of the justifications for declaring an abuse of the jurisdiction of the bankruptcy court announced by these courts [in various cases cited] are present in the Manville case. In Manville, it is undeniable that there has been no sham or hoax perpetrated on the Court in that Manville is a real business with real creditors in pressing need of economic reorganization. Indeed, the Asbestos Committee has belied its own contention that Manville has no debt and no real creditors by quantifying a benchmark settlement demand approaching one billion dollars for compensation of approximately 15,500 pre-petition asbestos claimants, during the course of negotiations pitched toward achieving a consensual plan. This huge asserted liability does not even take into account the estimated 6,000 new asbestos health claims which have arisen in only the first 16 months since the filing date. The number of post-filing claims increases each day as “future claims back into the present.” …
In short, Manville’s filing did not in the appropriate sense abuse the jurisdiction of this Court and it is indeed, like the debtor in [Citation], a “once viable business supporting employees and unsecured creditors [that] has more recently been burdened with judgments [and suits] that threaten to put it out of existence.” Thus, its petition must be sustained.…
In sum, Manville is a financially besieged enterprise in desperate need of reorganization of its crushing real debt, both present and future. The reorganization provisions of the Code were drafted with the aim of liquidation avoidance by great access to Chapter 11. Accordingly, Manville’s filing does not abuse the jurisdictional integrity of this Court, but rather presents the same kinds of reasons that were present in [Citation], for awaiting the determination of Manville’s good faith until it is considered…as a prerequisite to confirmation or as a part of the cadre of motions before me which are scheduled to be heard subsequently.
[A]ll four of the motions to dismiss the Manville petition are denied in their entirety.
case questions
1. What did Manville want to do here, and why?
2. How does this case demonstrate the fundamental purpose of Chapter 11 as opposed to Chapter 7 filings?
3. The historical background here is that Manville knew from at least 1930 that asbestos—used in many industrial applications—was a deadly carcinogen, and it worked diligently for decades to conceal and obfuscate the fact. What “good faith” argument was raised by the movants in this case?
Chapter 13: What Debts Are Dischargeable?
In re Ryan
389 B.R. 710 9th Cir. BAP, (Idaho, 2008)
On July 13, 1995, Ryan was convicted of possession of an unregistered firearm under 26 U.S.C. § 5861(d) in the United States District Court for the District of Alaska. Ryan was sentenced to fifty-seven months in prison followed by three years of supervised release. In addition, Ryan was ordered to pay a fine of \$7,500…, costs of prosecution in the amount of \$83,420, and a special assessment of \$50.00. Ryan served his sentence. He also paid the \$7,500 fine. The district court, following an appellate mandate, ultimately eliminated the restitution obligation.
On April 25, 2003, Ryan filed a petition for bankruptcy relief under chapter 7 in the District of Idaho. He received his chapter 7 discharge on August 11, 2003. Shortly thereafter, Ryan filed a case under chapter 13, listing as his only obligation the amount of unpaid costs of prosecution owed to the United States (“Government”).…
Ryan completed payments under the plan, and an “Order of Discharge” was entered on October 5, 2006. The chapter 13 trustee’s final report reflected that the Government received \$2,774.89 from payments made by Ryan under his plan, but a balance of \$77,088.34 on the Government’s costs of prosecution claim remained unpaid. Ryan then renewed his request for determination of dischargeability. The bankruptcy court held that the unpaid portion of the Government’s claim for costs of prosecution was excepted from discharge by § 1328(a)(3). Ryan appealed.
Section 1328(a)(3) provides an exception to discharge in chapter 13 for “restitution, or a criminal fine.” It states, in pertinent part:
[A]s soon as practicable after the completion by the debtor of all payments under the plan, the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title except any debt…
(3) for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime [.] [emphasis added].
The essential question, then, is whether these costs of prosecution constitute a “criminal fine.”
Statutory interpretation begins with a review of the particular language used by Congress in the relevant version of the law. [Citation.]
The term “criminal fine” is not defined in [Chapter 13] or anywhere else in the Bankruptcy Code. However, its use in § 1328(a)(3) implicates two important policies embedded in the Bankruptcy Code. First, in light of the objective to provide a fresh start for debtors overburdened by debts that they cannot pay, exceptions to discharge are interpreted strictly against objecting creditors and in favor of debtors. See, e.g. [Citations]. In chapter 13, this principle is particularly important because Congress adopted the liberal “superdischarge” provisions of § 1328 as an incentive to debtors to commit to a plan to pay their creditors all of their disposable income over a period of years rather than simply discharging their debts in a chapter 7 liquidation.
“[T]he dischargeability of debts in chapter 13 that are not dischargeable in chapter 7 represents a policy judgment that [it] is preferable for debtors to attempt to pay such debts to the best of their abilities over three years rather than for those debtors to have those debts hanging over their heads indefinitely, perhaps for the rest of their lives.” [Citations.]
A second, countervailing policy consideration is a historic deference, both in the Bankruptcy Code and in the administration of prior bankruptcy law, to excepting criminal sanctions from discharge in bankruptcy. Application of this policy is consistent with a general recognition that, “[t]he principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’” [Citation] (emphasis added [in original]).
The legislative history is clear that [in its 1994 amendments to the bankruptcy law] Congress intended to overrule the result in [of a 1990 Supreme Court case so that]:…“[N]o debtor with criminal restitution obligations will be able to discharge them through any bankruptcy proceeding.”…
The imposition on a defendant of the costs of a special prosecutor is different from ordering a defendant to pay criminal fines. Costs are paid to the entity incurring the costs; criminal fines are generally paid to a special fund for victims’ compensation and assistance in the U.S. Treasury.…
To honor the principle that exceptions to discharge are to be construed narrowly in favor of debtors, particularly in chapter 13, where a broad discharge was provided by Congress as an incentive for debtors to opt for relief under that chapter rather than under chapter 7, it is not appropriate to expand the scope of the [Chapter 13] exception beyond the terms of the statute. Congress could have adopted an exception to discharge in chapter 13 that mirrored [the one in Chapter 7]. It did not do so. In contrast, under [the 2005] BAPCPA, when Congress wanted to limit the chapter 13 “superdischarge,” it incorporated exceptions to discharge from [Chapter 7] wholesale.…
As a bottom line matter, Ryan served his time and paid in full the criminal fine that was imposed as part of his sentence for conviction of possession of an unregistered firearm. The restitution obligation that was included as part of his sentence was voided. Ryan paid the Government a total of \$6,331.66 to be applied to the costs of prosecution awarded as part of his criminal judgment, including \$2,774.89 paid under his chapter 13 plan, leaving a balance of \$77,088.34. We determine that the unpaid balance of the costs of prosecution award was covered by Ryan’s chapter 13 discharge.
Based on the foregoing analysis, we conclude that the exception to discharge included in [Chapter 13] for “restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime” does not cover costs of prosecution included in such a sentence, and we REVERSE.
case questions
1. What is the rationale for making some things dischargeable under Chapter 13 that are not dischargeable under Chapter 7?
2. What is the difference between “criminal restitution” (which in 1994 Congress said could not get discharged at all) and “the costs of prosecution”?
3. Why did the court decide that Ryan’s obligation to pay “costs of prosecution” was not precluded by the limits on Chapter 13 bankruptcies imposed by Congress? | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/27%3A_Bankruptcy/27.6%3A_Cases.txt |
summary
The Constitution gives Congress the power to legislate on bankruptcy. The current law is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which provides for six types of proceedings: (1) liquidation, Chapter 7; (2) adjustment of debts of a municipality, Chapter 9; (3) reorganization, Chapter 11; (4) family farmers with regular income, Chapter 12; (5) individuals with regular income, Chapter 13; and (6) cross-border bankruptcies, Chapter 15.
With some exceptions, any individual, partnership, or corporation seeking liquidation may file a voluntary petition in bankruptcy. An involuntary petition is also possible; creditors petitioning for that must meet certain criteria.
A petition operates as a stay against the debtor for lawsuits to recover claims or enforce judgments or liens. A judge will issue an order of relief and appoint a trustee, who takes over the debtor’s property and preserves security interests. To recover monies owed, creditors must file proof of claims. The trustee has certain powers to recover property for the estate that the debtor transferred before bankruptcy. These include the power to act as a hypothetical lien creditor, to avoid fraudulent transfers and voidable preferences.
The bankruptcy act sets out categories of claimants and establishes priority among them. After secured parties take their security, the priorities are (1) domestic support obligations, (2) administrative expenses, (3) gap creditor claims, (4) employees’ wages, salaries, commissions, (5) contributions to employee benefit plans, (6) grain or fish producers’ claims against a storage facility, (7) consumer deposits, (8) taxes owed to governments, (9) allowed claims for personal injury or death resulting from debtor’s driving or operating a vessel while intoxicated. After these priority claims are paid, the trustee must distribute the estate in this order: (a) unsecured creditors who filed timely, (b) unsecured creditors who filed late, (c) persons claiming fines and the like, (d) all other creditors, (e) the debtor. Most bankruptcies are no-asset, so creditors get nothing.
Under Chapter 7’s 2005 amendments, debtors must pass a means test to be eligible for relief; if they make too much money, they must file Chapter 13.
Certain property is exempt from the estate of an individual debtor. States may opt out of the federal list of exemptions and substitute their own; most have.
Once discharged, the debtor is no longer legally liable for most debts. However, some debts are not dischargeable, and bad faith by the debtor may preclude discharge. Under some circumstances, a debtor may reaffirm a discharged debt. A Chapter 7 case may be converted to Chapter 11 or 13 voluntarily, or to Chapter 11 involuntarily.
Chapter 11 provides for reorganization. Any person eligible for discharge in Chapter 7 is eligible for Chapter 11, except stockbrokers and commodity brokers; those who have too much debt to file Chapter 13 and surpass the means test for Chapter 7 file Chapter 11. Under Chapter 11, the debtor retains possession of the business and may continue to operate it with its own management unless the court appoints a trustee. The court may do so either for cause or if it is in the best interests of the creditors. The court must appoint a committee of unsecured creditors, who remain active throughout the proceeding. The debtor may file its own reorganization plan and has the exclusive right to do so within 120 days if it remains in possession. The plan must be accepted by certain proportions of each impaired class of claims and interests. It is binding on all creditors, and the debtor is discharged from all debts once the court confirms the plan.
Chapter 13 is for any individual with regular income who has difficulty paying debts; it is voluntary only; the debtor must get credit counseling. The debtor presents a payment plan to creditors, and the court appoints a trustee. The plan extends the time to pay and may reduce the size of the debt. If the creditors wind up with more in this proceeding than they would have in Chapter 7, the court is likely to approve the plan. The court may approve a stretch-out of five years. Some debts not dischargeable under Chapter 7 may be under Chapter 13.
Alternatives to bankruptcy are (1) composition (agreement by creditors to accept less than the face amount of the debt), (2) assignment for benefit of creditors (transfer of debtor’s property to a trustee, who uses it to pay debts), and (3) receivership (a disinterested person is appointed by the court to preserve assets and distribute them at the court’s direction). Because these are voluntary procedures, they are ineffective if all parties do not agree to them.
Exercises
1. David has debts of \$18,000 and few assets. Because his debts are less than \$25,000, he decides to file for bankruptcy using the state court system rather than the federal system. Briefly describe the procedure he should follow to file for bankruptcy at the state level.
2. Assume that David in Exercise 1 is irregularly employed and has developed a plan for paying off his creditors. What type of bankruptcy should he use, Chapter 7, 11, or 13? Why?
3. Assume that David owns the following unsecured property: a \$3,000 oboe, a \$1,000 piano, a \$2,000 car, and a life insurance policy with a cash surrender value of \$8,000. How much of this property is available for distribution to his creditors in a bankruptcy? Explain.
4. If David owes his ex-wife alimony (maintenance) payments and is obligated to pay \$12,000 for an educational loan, what effect will his discharge have on these obligations?
5. Assume that David owns a corporation that he wants to liquidate under Chapter 7. After the corporate assets are distributed to creditors, there is still money owing to many of them. What obstacle does David face in obtaining a discharge for the corporation?
6. The famous retired professional football player—with a pension from the NFL—Orenthal James “O.J.” Simpson was convicted of wrongful death in a celebrated Santa Monica, California, trial in 1997 and ordered to pay \$33.5 million in damages to the families of the deceased. Mr. Simpson sold his California house, moved to Florida, and, from occasional appearances in the press, seemed to be living a high-style life with a big house, nice cars, and sharp clothing. He has never declared bankruptcy. Why hasn’t he been forced into an involuntary Chapter 7 bankruptcy by his creditors?
1. A debtor has an automobile worth \$5,000. The federal exemption applicable to her is \$3,225. The trustee sells the car and gives the debtor the amount of the exemption. The debtor, exhausted by the bankruptcy proceedings, takes the \$3,225 and spends it on a six-week vacation in Baja California. Is this an “abuse” of the bankruptcy system?
2. A debtor has \$500 in cash beyond what is exempt in bankruptcy. She takes the cash and buys new tires for her car, which is worth about \$2,000. Is this an “abuse” of the bankruptcy system?
self-test questions
1. Alternatives to bankruptcy include
1. an assignment
2. a composition
3. receivership
4. all of the above
2. A composition is
1. a procedure where a receiver takes over the debtor’s property
2. an agreement by creditors to take less than the face value of their debt
3. basically the same as an assignment
4. none of these
3. The highest-priority class set out by the 2005 act is for
1. employees’ wages
2. administrative expenses
3. property settlements arising from divorce
4. domestic support obligations
4. Darlene Debtor did the following within ninety days of filing for bankruptcy. Which could be set aside as a preferential payment?
1. paid water and electricity bills
2. made a gift to the Humane Society
3. prepaid an installment loan on inventory
4. borrowed money from a bank secured by a mortgage on business property
5. Donald Debtor sold his 1957 Chevrolet to his brother for one-fifth its value sixty days before filing for bankruptcy. The trustee wishes to avoid the transaction on the basis that it was
1. a hypothetical lien
2. a lease disguised as a sale
3. a preferential payment
4. a voidable preference
6. Acme Co. filed for bankruptcy with the following debts; which is their correct priority from highest to lowest?
i. wages of \$15,000 owed to employees
ii. unpaid federal taxes
iii. balance owed to a creditor who claimed its security with a \$5,000 deficiency owing
1. i, ii, iii
2. ii, iii, i
3. iii, ii, i
4. i, iii, ii
Answer
1. 4
2. 2
3. 4
4. 3
5. 4
6. 1 | textbooks/biz/Civil_Law/Legal_Aspects_of_Commercial_Transactions/27%3A_Bankruptcy/27.7%3A_Summary_and_Exercises.txt |
Learning Objectives
Tinker v. Des Moines School Dist.
393 U.S. 503 (1969)
United States Supreme Court, Docket No. 21
Argued: November 12, 1968 Decided: February 24, 1969
Petitioners, three public school pupils in Des Moines, Iowa, were suspended from school for wearing black armbands to protest the Government’s policy in Vietnam. They sought nominal damages and an injunction against a regulation that the respondents had promulgated banning the wearing of armbands. The District Court dismissed the complaint on the ground that the regulation was within the Board’s power, despite the absence of any finding of substantial interference with the conduct of school activities. The Court of Appeals, sitting en banc, affirmed by an equally divided court.
Held:
1. In wearing armbands, the petitioners were quiet and passive. They were not disruptive and did not impinge upon the rights of others. In these circumstances, their conduct was within the protection of the Free Speech Clause of the First Amendment and the Due Process Clause of the Fourteenth. Pp. 505-506. 2. First Amendment rights are available to teachers and students, subject to application in light of the special characteristics of the school environment. Pp. 506-507. 3. A prohibition against expression of opinion, without any evidence that the rule is necessary to avoid substantial interference with school discipline or the rights of others, is not permissible under the First and Fourteenth Amendments. Pp. 507-514.
383 F.2d 988, reversed and remanded.
Dan L. Johnston argued the cause for petitioners. With him on the brief were Melvin L. Wulf and David N. Ellenhorn.
Allan A. Herrick argued the cause for respondents. With him on the brief were Herschel G. Langdon and David W. Belin.
Charles Morgan, Jr., filed a brief for the United States National Student Association, as amicus curiae, urging reversal. [393 U.S. 503, 504]
MR. JUSTICE FORTAS delivered the opinion of the Court. Petitioner John F. Tinker, 15 years old, and petitioner Christopher Eckhardt, 16 years old, attended high schools in Des Moines, Iowa. Petitioner Mary Beth Tinker, John’s sister, was a 13-year-old student in junior high school. In December 1965, a group of adults and students in Des Moines held a meeting at the Eckhardt home. The group determined to publicize their objections to the hostilities in Vietnam and their support for a truce by wearing black armbands during the holiday season and by fasting on December 16 and New Year’s Eve. Petitioners and their parents had previously engaged in similar activities, and they decided to participate in the program.
The principals of the Des Moines schools became aware of the plan to wear armbands. On December 14, 1965, they met and adopted a policy that any student wearing an armband to school would be asked to remove it, and if he refused he would be suspended until he returned without the armband. Petitioners were aware of the regulation that the school authorities adopted.
On December 16, Mary Beth and Christopher wore black armbands to their schools. John Tinker wore his armband the next day. They were all sent home and suspended from school until they would come back without their armbands. They did not return to school until after the planned period for wearing armbands had expired—that is, until after New Year’s Day.
This complaint was filed in the United States District Court by petitioners, through their fathers, under § 1983 of Title 42 of the United States Code. It prayed for an injunction restraining the respondent school officials and the respondent members of the board of directors of the school district from disciplining the petitioners, and it sought nominal damages. After an evidentiary hearing the District Court dismissed the complaint. It upheld [393 U.S. 503, 505] the constitutionality of the school authorities’ action on the ground that it was reasonable in order to prevent disturbance of school discipline. 258 F. Supp. 971 (1966). The court referred to but expressly declined to follow the Fifth Circuit’s holding in a similar case that the wearing of symbols like the armbands cannot be prohibited unless it “materially and substantially interfere[s] with the requirements of appropriate discipline in the operation of the school.” Burnside v. Byars, 363 F.2d 744, 749 (1966). 1.1
On appeal, the Court of Appeals for the Eighth Circuit considered the case en banc. The court was equally divided, and the District Court’s decision was accordingly affirmed, without opinion. 383 F.2d 988 (1967). We granted certiorari. 390 U.S. 942 (1968).
I
The District Court recognized that the wearing of an armband for the purpose of expressing certain views is the type of symbolic act that is within the Free Speech Clause of the First Amendment. See West Virginia v. Barnette, 319 U.S. 624 (1943); Stromberg v. California, 283 U.S. 359 (1931). Cf. Thornhill v. Alabama, 310 U.S. 88 (1940); Edwards v. South Carolina, 372 U.S. 229 (1963); Brown v. Louisiana, 383 U.S. 131 (1966). As we shall discuss, the wearing of armbands in the circumstances of this case was entirely divorced from actually or potentially disruptive conduct by those participating in it. It was closely akin to “pure speech” [393 U.S. 503, 506] which, we have repeatedly held, is entitled to comprehensive protection under the First Amendment. Cf. Cox v. Louisiana, 379 U.S. 536, 555 (1965); Adderley v. Florida, 385 U.S. 39 (1966).
First Amendment rights, applied in light of the special characteristics of the school environment, are available to teachers and students. It can hardly be argued that either students or teachers shed their constitutional rights to freedom of speech or expression at the schoolhouse gate. This has been the unmistakable holding of this Court for almost 50 years. In Meyer v. Nebraska, 262 U.S. 390 (1923), and Bartels v. Iowa, 262 U.S. 404 (1923), this Court, in opinions by Mr. Justice McReynolds, held that the Due Process Clause of the Fourteenth Amendment prevents States from forbidding the teaching of a foreign language to young students. Statutes to this effect, the Court held, unconstitutionally interfere with the liberty of teacher, student, and parent. 1.2 See also Pierce v. Society of Sisters, [393 U.S. 503, 507] 268 U.S. 510 (1925); West Virginia v. Barnette, 319 U.S. 624 (1943); McCollum v. Board of Education, 333 U.S. 203 (1948); Wieman v. Updegraff, 344 U.S. 183, 195 (1952) (concurring opinion); Sweezy v. New Hampshire, 354 U.S. 234 (1957); Shelton v. Tucker, 364 U.S. 479, 487 (1960); Engel v. Vitale, 370 U.S. 421 (1962); Keyishian v. Board of Regents, 385 U.S. 589, 603 (1967); Epperson v. Arkansas, ante, p. 97 (1968).
In West Virginia v. Barnette, supra, this Court held that under the First Amendment, the student in public school may not be compelled to salute the flag. Speaking through Mr. Justice Jackson, the Court said:
“The Fourteenth Amendment, as now applied to the States, protects the citizen against the State itself and all of its creatures—Boards of Education not excepted. These have, of course, important, delicate, and highly discretionary functions, but none that they may not perform within the limits of the Bill of Rights. That they are educating the young for citizenship is reason for scrupulous protection of Constitutional freedoms of the individual, if we are not to strangle the free mind at its source and teach youth to discount important principles of our government as mere platitudes.” 319 U.S., at 637.
On the other hand, the Court has repeatedly emphasized the need for affirming the comprehensive authority of the States and of school officials, consistent with fundamental constitutional safeguards, to prescribe and control conduct in the schools. See Epperson v. Arkansas, supra, at 104; Meyer v. Nebraska, supra, at 402. Our problem lies in the area where students in the exercise of First Amendment rights collide with the rules of the school authorities.
II
The problem posed by the present case does not relate to regulation of the length of skirts or the type of clothing, [393 U.S. 503, 508] to hair style, or deportment. Cf. Ferrell v. Dallas Independent School District, 392 F.2d 697 (1968); Pugsley v. Sellmeyer, 158 Ark. 247, 250 S. W. 538 (1923). It does not concern aggressive, disruptive action or even group demonstrations. Our problem involves direct, primary First Amendment rights akin to “pure speech.”
The school officials banned and sought to punish petitioners for a silent, passive expression of opinion, unaccompanied by any disorder or disturbance on the part of petitioners. There is here no evidence whatever of petitioners’ interference, actual or nascent, with the schools’ work or of collision with the rights of other students to be secure and to be let alone. Accordingly, this case does not concern speech or action that intrudes upon the work of the schools or the rights of other students.
Only a few of the 18,000 students in the school system wore the black armbands. Only five students were suspended for wearing them. There is no indication that the work of the schools or any class was disrupted. Outside the classrooms, a few students made hostile remarks to the children wearing armbands, but there were no threats or acts of violence on school premises.
The District Court concluded that the action of the school authorities was reasonable because it was based upon their fear of a disturbance from the wearing of the armbands. But, in our system, undifferentiated fear or apprehension of disturbance is not enough to overcome the right to freedom of expression. Any departure from absolute regimentation may cause trouble. Any variation from the majority’s opinion may inspire fear. Any word spoken, in class, in the lunchroom, or on the campus, that deviates from the views of another person may start an argument or cause a disturbance. But our Constitution says we must take this risk, Terminiello v. Chicago, 337 U.S. 1 (1949); and our history says that it is this sort of hazardous freedom—this kind of openness—that is [393 U.S. 503, 509] the basis of our national strength and of the independence and vigor of Americans who grow up and live in this relatively permissive, often disputatious, society.
In order for the State in the person of school officials to justify prohibition of a particular expression of opinion, it must be able to show that its action was caused by something more than a mere desire to avoid the discomfort and unpleasantness that always accompany an unpopular viewpoint. Certainly where there is no finding and no showing that engaging in the forbidden conduct would “materially and substantially interfere with the requirements of appropriate discipline in the operation of the school,” the prohibition cannot be sustained. Burnside v. Byars, supra, at 749.
In the present case, the District Court made no such finding, and our independent examination of the record fails to yield evidence that the school authorities had reason to anticipate that the wearing of the armbands would substantially interfere with the work of the school or impinge upon the rights of other students. Even an official memorandum prepared after the suspension that listed the reasons for the ban on wearing the armbands made no reference to the anticipation of such disruption. 1.3 [393 U.S. 503, 510]
On the contrary, the action of the school authorities appears to have been based upon an urgent wish to avoid the controversy which might result from the expression, even by the silent symbol of armbands, of opposition to this Nation’s part in the conflagration in Vietnam. 1.4 It is revealing, in this respect, that the meeting at which the school principals decided to issue the contested regulation was called in response to a student’s statement to the journalism teacher in one of the schools that he wanted to write an article on Vietnam and have it published in the school paper. (The student was dissuaded. 1.5)
It is also relevant that the school authorities did not purport to prohibit the wearing of all symbols of political or controversial significance. The record shows that students in some of the schools wore buttons relating to national political campaigns, and some even wore the Iron Cross, traditionally a symbol of Nazism. The order prohibiting the wearing of armbands did not extend to these. Instead, a particular symbol—black armbands worn to exhibit opposition to this Nation’s involvement [393 U.S. 503, 511] in Vietnam—was singled out for prohibition. Clearly, the prohibition of expression of one particular opinion, at least without evidence that it is necessary to avoid material and substantial interference with schoolwork or discipline, is not constitutionally permissible.
In our system, state-operated schools may not be enclaves of totalitarianism. School officials do not possess absolute authority over their students. Students in school as well as out of school are “persons” under our Constitution. They are possessed of fundamental rights which the State must respect, just as they themselves must respect their obligations to the State. In our system, students may not be regarded as closed-circuit recipients of only that which the State chooses to communicate. They may not be confined to the expression of those sentiments that are officially approved. In the absence of a specific showing of constitutionally valid reasons to regulate their speech, students are entitled to freedom of expression of their views. As Judge Gewin, speaking for the Fifth Circuit, said, school officials cannot suppress “expressions of feelings with which they do not wish to contend.” Burnside v. Byars, supra, at 749.
In Meyer v. Nebraska, supra, at 402, Mr. Justice McReynolds expressed this Nation’s repudiation of the principle that a State might so conduct its schools as to “foster a homogeneous people.” He said:
“In order to submerge the individual and develop ideal citizens, Sparta assembled the males at seven into barracks and intrusted their subsequent education and training to official guardians. Although such measures have been deliberately approved by men of great genius, their ideas touching the relation between individual and State were wholly different from those upon which our institutions rest; and it hardly will be affirmed that any legislature could impose such restrictions upon the people of a [393 U.S. 503, 512] State without doing violence to both letter and spirit of the Constitution.”
This principle has been repeated by this Court on numerous occasions during the intervening years. In Keyishian v. Board of Regents, 385 U.S. 589, 603, MR. JUSTICE BRENNAN, speaking for the Court, said:
“‘The vigilant protection of constitutional freedoms is nowhere more vital than in the community of American schools.’ Shelton v. Tucker, [364 U.S. 479] at 487. The classroom is peculiarly the ‘marketplace of ideas.’ The Nation’s future depends upon leaders trained through wide exposure to that robust exchange of ideas which discovers truth ‘out of a multitude of tongues, [rather] than through any kind of authoritative selection.’”
The principle of these cases is not confined to the supervised and ordained discussion which takes place in the classroom. The principal use to which the schools are dedicated is to accommodate students during prescribed hours for the purpose of certain types of activities. Among those activities is personal intercommunication among the students. 1.6 This is not only an inevitable part of the process of attending school; it is also an important part of the educational process. A student’s rights, therefore, do not embrace merely the classroom hours. When he is in the cafeteria, or on the playing field, or on [393 U.S. 503, 513] the campus during the authorized hours, he may express his opinions, even on controversial subjects like the conflict in Vietnam, if he does so without “materially and substantially interfer[ing] with the requirements of appropriate discipline in the operation of the school” and without colliding with the rights of others. Burnside v. Byars, supra, at 749. But conduct by the student, in class or out of it, which for any reason—whether it stems from time, place, or type of behavior—materially disrupts classwork or involves substantial disorder or invasion of the rights of others is, of course, not immunized by the constitutional guarantee of freedom of speech. Cf. Blackwell v. Issaquena County Board of Education, 363 F.2d 749 (C. A. 5th Cir. 1966).
Under our Constitution, free speech is not a right that is given only to be so circumscribed that it exists in principle but not in fact. Freedom of expression would not truly exist if the right could be exercised only in an area that a benevolent government has provided as a safe haven for crackpots. The Constitution says that Congress (and the States) may not abridge the right to free speech. This provision means what it says. We properly read it to permit reasonable regulation of speechconnected activities in carefully restricted circumstances. But we do not confine the permissible exercise of First Amendment rights to a telephone booth or the four corners of a pamphlet, or to supervised and ordained discussion in a school classroom.
If a regulation were adopted by school officials forbidding discussion of the Vietnam conflict, or the expression by any student of opposition to it anywhere on school property except as part of a prescribed classroom exercise, it would be obvious that the regulation would violate the constitutional rights of students, at least if it could not be justified by a showing that the students’ activities would materially and substantially disrupt the work and discipline of the school. Cf. Hammond [393 U.S. 503, 514] v. South Carolina State College, 272 F. Supp. 947 (D.C. S. C. 1967) (orderly protest meeting on state college campus); Dickey v. Alabama State Board of Education, 273 F. Supp. 613 (D.C. M. D. Ala. 1967) (expulsion of student editor of college newspaper). In the circumstances of the present case, the prohibition of the silent, passive “witness of the armbands,” as one of the children called it, is no less offensive to the Constitution’s guarantees.
As we have discussed, the record does not demonstrate any facts which might reasonably have led school authorities to forecast substantial disruption of or material interference with school activities, and no disturbances or disorders on the school premises in fact occurred. These petitioners merely went about their ordained rounds in school. Their deviation consisted only in wearing on their sleeve a band of black cloth, not more than two inches wide. They wore it to exhibit their disapproval of the Vietnam hostilities and their advocacy of a truce, to make their views known, and, by their example, to influence others to adopt them. They neither interrupted school activities nor sought to intrude in the school affairs or the lives of others. They caused discussion outside of the classrooms, but no interference with work and no disorder. In the circumstances, our Constitution does not permit officials of the State to deny their form of expression.
We express no opinion as to the form of relief which should be granted, this being a matter for the lower courts to determine. We reverse and remand for further proceedings consistent with this opinion.
Reversed and remanded.
Footnotes
[ 1.3 ] The only suggestions of fear of disorder in the report are these:
“A former student of one of our high schools was killed in Viet Nam. Some of his friends are still in school and it was felt that if any kind of a demonstration existed, it might evolve into something which would be difficult to control.”
“Students at one of the high schools were heard to say they would wear arm bands of other colors if the black bands prevailed.”
Moreover, the testimony of school authorities at trial indicates that it was not fear of disruption that motivated the regulation prohibiting the armbands; the regulation was directed against “the principle of the demonstration” itself. School authorities simply felt that “the schools are no place for demonstrations,” and if the students “didn’t like the way our elected officials were handling things, it should be handled with the ballot box and not in the halls of our public schools.”
[ 1.4 ] The District Court found that the school authorities, in prohibiting black armbands, were influenced by the fact that “[t]he Viet Nam war and the involvement of the United States therein has been the subject of a major controversy for some time. When the arm band regulation involved herein was promulgated, debate over the Viet Nam war had become vehement in many localities. A protest march against the war had been recently held in Washington, D.C. A wave of draft card burning incidents protesting the war had swept the country. At that time two highly publicized draft card burning cases were pending in this Court. Both individuals supporting the war and those opposing it were quite vocal in expressing their views.” 258 F. Supp., at 972-973.
[ 1.5 ] After the principals’ meeting, the director of secondary education and the principal of the high school informed the student that the principals were opposed to publication of his article. They reported that “we felt that it was a very friendly conversation, although we did not feel that we had convinced the student that our decision was a just one.”
[ 1.6 ] In Hammond v. South Carolina State College, 272 F. Supp. 947 (D.C. S. C. 1967), District Judge Hemphill had before him a case involving a meeting on campus of 300 students to express their views on school practices. He pointed out that a school is not like a hospital or a jail enclosure. Cf. Cox v. Louisiana, 379 U.S. 536 (1965); Adderley v. Florida, 385 U.S. 39 (1966). It is a public place, and its dedication to specific uses does not imply that the constitutional rights of persons entitled to be there are to be gauged as if the premises were purely private property. Cf. Edwards v. South Carolina, 372 U.S. 229 (1963); Brown v. Louisiana, 383 U.S. 131 (1966).
MR. JUSTICE STEWART, concurring.
Although I agree with much of what is said in the Court’s opinion, and with its judgment in this case, I [393 U.S. 503, 515] cannot share the Court’s uncritical assumption that, school discipline aside, the First Amendment rights of children are co-extensive with those of adults. Indeed, I had thought the Court decided otherwise just last Term in Ginsberg v. New York, 390 U.S. 629. I continue to hold the view I expressed in that case: “[A] State may permissibly determine that, at least in some precisely delineated areas, a child—like someone in a captive audience—is not possessed of that full capacity for individual choice which is the presupposition of First Amendment guarantees.” Id., at 649-650 (concurring in result). Cf. Prince v. Massachusetts, 321 U.S. 158.
MR. JUSTICE WHITE, concurring.
While I join the Court’s opinion, I deem it appropriate to note, first, that the Court continues to recognize a distinction between communicating by words and communicating by acts or conduct which sufficiently impinges on some valid state interest; and, second, that I do not subscribe to everything the Court of Appeals said about free speech in its opinion in Burnside v. Byars, 363 F.2d 744, 748 (C. A. 5th Cir. 1966), a case relied upon by the Court in the matter now before us.
MR. JUSTICE BLACK, dissenting.
The Court’s holding in this case ushers in what I deem to be an entirely new era in which the power to control pupils by the elected “officials of state supported public schools . . .” in the United States is in ultimate effect transferred to the Supreme Court. 2.1 The Court brought [393 U.S. 503, 516] this particular case here on a petition for certiorari urging that the First and Fourteenth Amendments protect the right of school pupils to express their political views all the way “from kindergarten through high school.” Here the constitutional right to “political expression” asserted was a right to wear black armbands during school hours and at classes in order to demonstrate to the other students that the petitioners were mourning because of the death of United States soldiers in Vietnam and to protest that war which they were against. Ordered to refrain from wearing the armbands in school by the elected school officials and the teachers vested with state authority to do so, apparently only seven out of the school system’s 18,000 pupils deliberately refused to obey the order. One defying pupil was Paul Tinker, 8 years old, who was in the second grade; another, Hope Tinker, was 11 years old and in the fifth grade; a third member of the Tinker family was 13, in the eighth grade; and a fourth member of the same family was John Tinker, 15 years old, an 11th grade high school pupil. Their father, a Methodist minister without a church, is paid a salary by the American Friends Service Committee. Another student who defied the school order and insisted on wearing an armband in school was Christopher Eckhardt, an 11th grade pupil and a petitioner in this case. His mother is an official in the Women’s International League for Peace and Freedom.
As I read the Court’s opinion it relies upon the following grounds for holding unconstitutional the judgment of the Des Moines school officials and the two courts below. First, the Court concludes that the wearing of armbands is “symbolic speech” which is “akin to ‘pure speech’“ and therefore protected by the First and Fourteenth Amendments. Secondly, the Court decides that the public schools are an appropriate place to exercise “symbolic speech” as long as normal school functions [393 U.S. 503, 517] are not “unreasonably” disrupted. Finally, the Court arrogates to itself, rather than to the State’s elected officials charged with running the schools, the decision as to which school disciplinary regulations are “reasonable.”
Assuming that the Court is correct in holding that the conduct of wearing armbands for the purpose of conveying political ideas is protected by the First Amendment, cf., e.g., Giboney v. Empire Storage & Ice Co., 336 U.S. 490 (1949), the crucial remaining questions are whether students and teachers may use the schools at their whim as a platform for the exercise of free speech—“symbolic” or “pure”—and whether the courts will allocate to themselves the function of deciding how the pupils’ school day will be spent. While I have always believed that under the First and Fourteenth Amendments neither the State nor the Federal Government has any authority to regulate or censor the content of speech, I have never believed that any person has a right to give speeches or engage in demonstrations where he pleases and when he pleases. This Court has already rejected such a notion. In Cox v. Louisiana, 379 U.S. 536, 554 (1965), for example, the Court clearly stated that the rights of free speech and assembly “do not mean that everyone with opinions or beliefs to express may address a group at any public place and at any time.”
While the record does not show that any of these armband students shouted, used profane language, or were violent in any manner, detailed testimony by some of them shows their armbands caused comments, warnings by other students, the poking of fun at them, and a warning by an older football player that other, nonprotesting students had better let them alone. There is also evidence that a teacher of mathematics had his lesson period practically “wrecked” chiefly by disputes with Mary Beth Tinker, who wore her armband for her “demonstration.” [393 U.S. 503, 518] Even a casual reading of the record shows that this armband did divert students’ minds from their regular lessons, and that talk, comments, etc., made John Tinker “self-conscious” in attending school with his armband. While the absence of obscene remarks or boisterous and loud disorder perhaps justifies the Court’s statement that the few armband students did not actually “disrupt” the classwork, I think the record overwhelmingly shows that the armbands did exactly what the elected school officials and principals foresaw they would, that is, took the students’ minds off their classwork and diverted them to thoughts about the highly emotional subject of the Vietnam war. And I repeat that if the time has come when pupils of state-supported schools, kindergartens, grammar schools, or high schools, can defy and flout orders of school officials to keep their minds on their own schoolwork, it is the beginning of a new revolutionary era of permissiveness in this country fostered by the judiciary. The next logical step, it appears to me, would be to hold unconstitutional laws that bar pupils under 21 or 18 from voting, or from being elected members of the boards of education. 2.2
The United States District Court refused to hold that the state school order violated the First and Fourteenth Amendments. 258 F. Supp. 971. Holding that the protest was akin to speech, which is protected by the First [393 U.S. 503, 519] and Fourteenth Amendments, that court held that the school order was “reasonable” and hence constitutional. There was at one time a line of cases holding “reasonableness” as the court saw it to be the test of a “due process” violation. Two cases upon which the Court today heavily relies for striking down this school order used this test of reasonableness, Meyer v. Nebraska, 262 U.S. 390 (1923), and Bartels v. Iowa, 262 U.S. 404 (1923). The opinions in both cases were written by Mr. Justice McReynolds; Mr. Justice Holmes, who opposed this reasonableness test, dissented from the holdings as did Mr. Justice Sutherland. This constitutional test of reasonableness prevailed in this Court for a season. It was this test that brought on President Franklin Roosevelt’s well-known Court fight. His proposed legislation did not pass, but the fight left the “reasonableness” constitutional test dead on the battlefield, so much so that this Court in Ferguson v. Skrupa, 372 U.S. 726, 729, 730, after a thorough review of the old cases, was able to conclude in 1963:
“There was a time when the Due Process Clause was used by this Court to strike down laws which were thought unreasonable, that is, unwise or incompatible with some particular economic or social philosophy.
. . . . .
“The doctrine that prevailed in Lochner, Coppage, Adkins, Burns, and like cases—that due process authorizes courts to hold laws unconstitutional when they believe the legislature has acted unwisely—has long since been discarded.”
The Ferguson case totally repudiated the old reasonableness-due process test, the doctrine that judges have the power to hold laws unconstitutional upon the belief of judges that they “shock the conscience” or that they are [393 U.S. 503, 520] “unreasonable,” “arbitrary,” “irrational,” “contrary to fundamental ‘decency,’” or some other such flexible term without precise boundaries. I have many times expressed my opposition to that concept on the ground that it gives judges power to strike down any law they do not like. If the majority of the Court today, by agreeing to the opinion of my Brother FORTAS, is resurrecting that old reasonableness-due process test, I think the constitutional change should be plainly, unequivocally, and forthrightly stated for the benefit of the bench and bar. It will be a sad day for the country, I believe, when the present-day Court returns to the McReynolds due process concept. Other cases cited by the Court do not, as implied, follow the McReynolds reasonableness doctrine. West Virginia v. Barnette, 319 U.S. 624, clearly rejecting the “reasonableness” test, held that the Fourteenth Amendment made the First applicable to the States, and that the two forbade a State to compel little schoolchildren to salute the United States flag when they had religious scruples against doing so. 2.3 Neither Thornhill v. Alabama, 310 U.S. 88; Stromberg v. California, 283 U.S. 359; Edwards [393 U.S. 503, 521] v. South Carolina, 372 U.S. 229; nor Brown v. Louisiana, 383 U.S. 131, related to schoolchildren at all, and none of these cases embraced Mr. Justice McReynolds’ reasonableness test; and Thornhill, Edwards, and Brown relied on the vagueness of state statutes under scrutiny to hold them unconstitutional. Cox v. Louisiana, 379 U.S. 536, 555, and Adderley v. Florida, 385 U.S. 39, cited by the Court as a “compare,” indicating, I suppose, that these two cases are no longer the law, were not rested to the slightest extent on the Meyer and Bartels “reasonablenessdue process-McReynolds” constitutional test.
I deny, therefore, that it has been the “unmistakable holding of this Court for almost 50 years” that “students” and “teachers” take with them into the “schoolhouse gate” constitutional rights to “freedom of speech or expression.” Even Meyer did not hold that. It makes no reference to “symbolic speech” at all; what it did was to strike down as “unreasonable” and therefore unconstitutional a Nebraska law barring the teaching of the German language before the children reached the eighth grade. One can well agree with Mr. Justice Holmes and Mr. Justice Sutherland, as I do, that such a law was no more unreasonable than it would be to bar the teaching of Latin and Greek to pupils who have not reached the eighth grade. In fact, I think the majority’s reason for invalidating the Nebraska law was that it did not like it or in legal jargon that it “shocked the Court’s conscience,” “offended its sense of justice,” or was “contrary to fundamental concepts of the English-speaking world,” as the Court has sometimes said. See, e.g., Rochin v. California, 342 U.S. 165, and Irvine v. California, 347 U.S. 128. The truth is that a teacher of kindergarten, grammar school, or high school pupils no more carries into a school with him a complete right to freedom of speech and expression than an antiCatholic or anti-Semite carries with him a complete freedom of [393 U.S. 503, 522] speech and religion into a Catholic church or Jewish synagogue. Nor does a person carry with him into the United States Senate or House, or into the Supreme Court, or any other court, a complete constitutional right to go into those places contrary to their rules and speak his mind on any subject he pleases. It is a myth to say that any person has a constitutional right to say what he pleases, where he pleases, and when he pleases. Our Court has decided precisely the opposite. See, e.g., Cox v. Louisiana, 379 U.S. 536, 555; Adderley v. Florida, 385 U.S. 39.
In my view, teachers in state-controlled public schools are hired to teach there. Although Mr. Justice McReynolds may have intimated to the contrary in Meyer v. Nebraska, supra, certainly a teacher is not paid to go into school and teach subjects the State does not hire him to teach as a part of its selected curriculum. Nor are public school students sent to the schools at public expense to broadcast political or any other views to educate and inform the public. The original idea of schools, which I do not believe is yet abandoned as worthless or out of date, was that children had not yet reached the point of experience and wisdom which enabled them to teach all of their elders. It may be that the Nation has outworn the old-fashioned slogan that “children are to be seen not heard,” but one may, I hope, be permitted to harbor the thought that taxpayers send children to school on the premise that at their age they need to learn, not teach.
The true principles on this whole subject were in my judgment spoken by Mr. Justice McKenna for the Court in Waugh v. Mississippi University in 237 U.S. 589, 596-597. The State had there passed a law barring students from peaceably assembling in Greek letter fraternities and providing that students who joined them could be expelled from school. This law would appear on the surface to run afoul of the First Amendment’s [393 U.S. 503, 523] freedom of assembly clause. The law was attacked as violative of due process and of the privileges and immunities clause and as a deprivation of property and of liberty, under the Fourteenth Amendment. It was argued that the fraternity made its members more moral, taught discipline, and inspired its members to study harder and to obey better the rules of discipline and order. This Court rejected all the “fervid” pleas of the fraternities’ advocates and decided unanimously against these Fourteenth Amendment arguments. The Court in its next to the last paragraph made this statement which has complete relevance for us today:
“It is said that the fraternity to which complainant belongs is a moral and of itself a disciplinary force. This need not be denied. But whether such membership makes against discipline was for the State of Mississippi to determine. It is to be remembered that the University was established by the State and is under the control of the State, and the enactment of the statute may have been induced by the opinion that membership in the prohibited societies divided the attention of the students and distracted from that singleness of purpose which the State desired to exist in its public educational institutions. It is not for us to entertain conjectures in opposition to the views of the State and annul its regulations upon disputable considerations of their wisdom or necessity.” (Emphasis supplied.)
It was on the foregoing argument that this Court sustained the power of Mississippi to curtail the First Amendment’s right of peaceable assembly. And the same reasons are equally applicable to curtailing in the States’ public schools the right to complete freedom of expression. Iowa’s public schools, like Mississippi’s university, are operated to give students an opportunity to learn, not to talk politics by actual speech, or by “symbolic” [393 U.S. 503, 524] speech. And, as I have pointed out before, the record amply shows that public protest in the school classes against the Vietnam war “distracted from that singleness of purpose which the State [here Iowa] desired to exist in its public educational institutions.” Here the Court should accord Iowa educational institutions the same right to determine for themselves to what extent free expression should be allowed in its schools as it accorded Mississippi with reference to freedom of assembly. But even if the record were silent as to protests against the Vietnam war distracting students from their assigned class work, members of this Court, like all other citizens, know, without being told, that the disputes over the wisdom of the Vietnam war have disrupted and divided this country as few other issues ever have. Of course students, like other people, cannot concentrate on lesser issues when black armbands are being ostentatiously displayed in their presence to call attention to the wounded and dead of the war, some of the wounded and the dead being their friends and neighbors. It was, of course, to distract the attention of other students that some students insisted up to the very point of their own suspension from school that they were determined to sit in school with their symbolic armbands.
Change has been said to be truly the law of life but sometimes the old and the tried and true are worth holding. The schools of this Nation have undoubtedly contributed to giving us tranquility and to making us a more law-abiding people. Uncontrolled and uncontrollable liberty is an enemy to domestic peace. We cannot close our eyes to the fact that some of the country’s greatest problems are crimes committed by the youth, too many of school age. School discipline, like parental discipline, is an integral and important part of training our children to be good citizens—to be better citizens. Here a very small number of students have crisply and summarily [393 U.S. 503, 525] refused to obey a school order designed to give pupils who want to learn the opportunity to do so. One does not need to be a prophet or the son of a prophet to know that after the Court’s holding today some students in Iowa schools and indeed in all schools will be ready, able, and willing to defy their teachers on practically all orders. This is the more unfortunate for the schools since groups of students all over the land are already running loose, conducting break-ins, sit-ins, lie-ins, and smash-ins. Many of these student groups, as is all too familiar to all who read the newspapers and watch the television news programs, have already engaged in rioting, property seizures, and destruction. They have picketed schools to force students not to cross their picket lines and have too often violently attacked earnest but frightened students who wanted an education that the pickets did not want them to get. Students engaged in such activities are apparently confident that they know far more about how to operate public school systems than do their parents, teachers, and elected school officials. It is no answer to say that the particular students here have not yet reached such high points in their demands to attend classes in order to exercise their political pressures. Turned loose with lawsuits for damages and injunctions against their teachers as they are here, it is nothing but wishful thinking to imagine that young, immature students will not soon believe it is their right to control the schools rather than the right of the States that collect the taxes to hire the teachers for the benefit of the pupils. This case, therefore, wholly without constitutional reasons in my judgment, subjects all the public schools in the country to the whims and caprices of their loudest-mouthed, but maybe not their brightest, students. I, for one, am not fully persuaded that school pupils are wise enough, even with this Court’s expert help from Washington, to run the 23,390 public school [393 U.S. 503, 526] systems 2.4 in our 50 States. I wish, therefore, wholly to disclaim any purpose on my part to hold that the Federal Constitution compels the teachers, parents, and elected school officials to surrender control of the American public school system to public school students. I dissent.
Footnotes
[ 2.1 ] The petition for certiorari here presented this single question:
“Whether the First and Fourteenth Amendments permit officials of state supported public schools to prohibit students from wearing symbols of political views within school premises where the symbols are not disruptive of school discipline or decorum.”
[ 2.2 ] The following Associated Press article appeared in the Washington Evening Star, January 11, 1969, p. A-2, col. 1:
“BELLINGHAM, Mass. (AP)—Todd R. Hennessy, 16, has filed nominating papers to run for town park commissioner in the March election.
“ ‘I can see nothing illegal in the youth’s seeking the elective office,’ said Lee Ambler, the town counsel. ‘But I can’t overlook the possibility that if he is elected any legal contract entered into by the park commissioner would be void because he is a juvenile.’
“Todd is a junior in Mount St. Charles Academy, where he has a top scholastic record.”
[ 2.3 ] In Cantwell v. Connecticut, 310 U.S. 296, 303-304 (1940), this Court said:
“The First Amendment declares that Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof. The Fourteenth Amendment has rendered the legislatures of the states as incompetent as Congress to enact such laws. The constitutional inhibition of legislation on the subject of religion has a double aspect. On the one hand, it forestalls compulsion by law of the acceptance of any creed or the practice of any form of worship. Freedom of conscience and freedom to adhere to such religious organization or form of worship as the individual may choose cannot be restricted by law. On the other hand, it safeguards the free exercise of the chosen form of religion. Thus the Amendment embraces two concepts,—freedom to believe and freedom to act. The first is absolute but, in the nature of things, the second cannot be. Conduct remains subject to regulation for the protection of society.”
[ 2.4 ] Statistical Abstract of the United States (1968), Table No. 578, p. 406.
MR. JUSTICE HARLAN, dissenting.
I certainly agree that state public school authorities in the discharge of their responsibilities are not wholly exempt from the requirements of the Fourteenth Amendment respecting the freedoms of expression and association. At the same time I am reluctant to believe that there is any disagreement between the majority and myself on the proposition that school officials should be accorded the widest authority in maintaining discipline and good order in their institutions. To translate that proposition into a workable constitutional rule, I would, in cases like this, cast upon those complaining the burden of showing that a particular school measure was motivated by other than legitimate school concerns—for example, a desire to prohibit the expression of an unpopular point of view, while permitting expression of the dominant opinion.
Finding nothing in this record which impugns the good faith of respondents in promulgating the armband regulation, I would affirm the judgment below. [393 U.S. 503, 527] | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/01%3A_The_First_Amendment/1.01%3A_New_Page.txt |
Learning Objectives
Hazelwood School District v. Kuhlmeier
484 U.S. 260 (1988) United States Supreme Court, Docket No. 86-836
Argued: October 13, 1987 Decided: January 13, 1988
Respondents, former high school students who were staff members of the school’s newspaper, filed suit in Federal District Court against petitioners, the school district and school officials, alleging that respondents’ First Amendment rights were violated by the deletion from a certain issue of the paper of two pages that included an article describing school students’ experiences with pregnancy and another article discussing the impact of divorce on students at the school. The newspaper was written and edited by a journalism class, as part of the school’s curriculum. Pursuant to the school’s practice, the teacher in charge of the paper submitted page proofs to the school’s principal, who objected to the pregnancy story because the pregnant students, although not named, might be identified from the text, and because he believed that the article’s references to sexual activity and birth control were inappropriate for some of the younger students. The principal objected to the divorce article because the page proofs he was furnished identified by name (deleted by the teacher from the final version) a student who complained of her father’s conduct, and the principal believed that the student’s parents should have been given an opportunity to respond to the remarks or to consent to their publication. Believing that there was no time to make necessary changes in the articles if the paper was to be issued before the end of the school year, the principal directed that the pages on which they appeared be withheld from publication even though other, unobjectionable articles were included on such pages. The District Court held that no First Amendment violation had occurred. The Court of Appeals reversed.
Held:
Respondents’ First Amendment rights were not violated. Pp. 266-276
(a) First Amendment rights of students in the public schools are not automatically coextensive with the rights of adults in other settings, and must be applied in light of the special characteristics of the school environment. A school need not tolerate student speech that is inconsistent with its basic educational mission, even though the government could not censor similar speech outside the school. Pp. 266-267.
(b) The school newspaper here cannot be characterized as a forum for public expression. School facilities may be deemed to be public forums [484 U.S. 260, 261] only if school authorities have by policy or by practice opened the facilities for indiscriminate use by the general public, or by some segment of the public, such as student organizations. If the facilities have instead been reserved for other intended purposes, communicative or otherwise, then no public forum has been created, and school officials may impose reasonable restrictions on the speech of students, teachers, and other members of the school community. The school officials in this case did not deviate from their policy that the newspaper’s production was to be part of the educational curriculum and a regular classroom activity under the journalism teacher’s control as to almost every aspect of publication. The officials did not evince any intent to open the paper’s pages to indiscriminate use by its student reporters and editors, or by the student body generally. Accordingly, school officials were entitled to regulate the paper’s contents in any reasonable manner. Pp. 267-270.
(c) The standard for determining when a school may punish student expression that happens to occur on school premises is not the standard for determining when a school may refuse to lend its name and resources to the dissemination of student expression. Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503, distinguished. Educators do not offend the First Amendment by exercising editorial control over the style and content of student speech in school-sponsored expressive activities so long as their actions are reasonably related to legitimate pedagogical concerns. Pp. 270-273.
(d) The school principal acted reasonably in this case in requiring the deletion of the pregnancy article, the divorce article, and the other articles that were to appear on the same pages of the newspaper. Pp. 274-276.
795 F.2d 1368, reversed.
WHITE, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and STEVENS, O’CONNOR, and SCALIA, JJ., joined. BRENNAN, J., filed a dissenting opinion, in which MARSHALL and BLACKMUN, JJ., joined, post, p. 277.
Robert P. Baine, Jr., argued the cause for petitioners. With him on the briefs were John Gianoulakis and Robert T. Haar.
Leslie D. Edwards argued the cause and filed a brief for respondents. *
[ * ] Ronald A. Zumbrun and Anthony T. Caso filed a brief for the Pacific Legal Foundation as amicus curiae urging reversal.
Briefs of amici curiae urging affirmance were filed for the American Civil Liberties Union et al. by Janet L. Benshoof, John A. Powell, Steven [484 U.S. 260, 261] R. Shapiro, and Frank Susman; for the American Society of Newspaper Editors et al. by Richard M. Schmidt, Jr.; for People for the American Way by Marvin E. Frankel; for the NOW Legal Defense and Education Fund et al. by Martha L. Minow, Sarah E. Burns, and Marsha Levick; for the Planned Parenthood Federation of America, Inc., et al. by Eve W. Paul; and for the Student Press Law Center et al. by J. Marc Abrams.
Briefs of amici curiae were filed for the National School Boards Association et al. by Gwendolyn H. Gregory, August W. Steinhilber, Thomas A. Shannon, and Ivan B. Gluckman; and for the School Board of Dade County, Florida, by Frank A. Howard, Jr., and Johnny Brown. [484 U.S. 260, 262]
JUSTICE WHITE delivered the opinion of the Court.
This case concerns the extent to which educators may exercise editorial control over the contents of a high school newspaper produced as part of the school’s journalism curriculum.
I
Petitioners are the Hazelwood School District in St. Louis County, Missouri; various school officials; Robert Eugene Reynolds, the principal of Hazelwood East High School; and Howard Emerson, a teacher in the school district. Respondents are three former Hazelwood East students who were staff members of Spectrum, the school newspaper. They contend that school officials violated their First Amendment rights by deleting two pages of articles from the May 13, 1983, issue of Spectrum.
Spectrum was written and edited by the Journalism II class at Hazelwood East. The newspaper was published every three weeks or so during the 1982-1983 school year. More than 4,500 copies of the newspaper were distributed during that year to students, school personnel, and members of the community.
The Board of Education allocated funds from its annual budget for the printing of Spectrum. These funds were supplemented by proceeds from sales of the newspaper. The printing expenses during the 1982-1983 school year totaled \$4,668.50; revenue from sales was \$1,166.84. The other costs associated with the newspaper—such as supplies, textbooks, [484 U.S. 260, 263] and a portion of the journalism teacher’s salary—were borne entirely by the Board.
The Journalism II course was taught by Robert Stergos for most of the 1982-1983 academic year. Stergos left Hazelwood East to take a job in private industry on April 29, 1983, when the May 13 edition of Spectrum was nearing completion, and petitioner Emerson took his place as newspaper adviser for the remaining weeks of the term.
The practice at Hazelwood East during the spring 1983 semester was for the journalism teacher to submit page proofs of each Spectrum issue to Principal Reynolds for his review prior to publication. On May 10, Emerson delivered the proofs of the May 13 edition to Reynolds, who objected to two of the articles scheduled to appear in that edition. One of the stories described three Hazelwood East students’ experiences with pregnancy; the other discussed the impact of divorce on students at the school.
Reynolds was concerned that, although the pregnancy story used false names “to keep the identity of these girls a secret,” the pregnant students still might be identifiable from the text. He also believed that the article’s references to sexual activity and birth control were inappropriate for some of the younger students at the school. In addition, Reynolds was concerned that a student identified by name in the divorce story had complained that her father “wasn’t spending enough time with my mom, my sister and I” prior to the divorce, “was always out of town on business or out late playing cards with the guys,” and “always argued about everything” with her mother. App. to Pet. for Cert. 38. Reynolds believed that the student’s parents should have been given an opportunity to respond to these remarks or to consent to their publication. He was unaware that Emerson had deleted the student’s name from the final version of the article.
Reynolds believed that there was no time to make the necessary changes in the stories before the scheduled press run [484 U.S. 260, 264] and that the newspaper would not appear before the end of the school year if printing were delayed to any significant extent. He concluded that his only options under the circumstances were to publish a four-page newspaper instead of the planned six-page newspaper, eliminating the two pages on which the offending stories appeared, or to publish no newspaper at all. Accordingly, he directed Emerson to withhold from publication the two pages containing the stories on pregnancy and divorce. 1.1 He informed his superiors of the decision, and they concurred.
Respondents subsequently commenced this action in the United States District Court for the Eastern District of Missouri seeking a declaration that their First Amendment rights had been violated, injunctive relief, and monetary damages. After a bench trial, the District Court denied an injunction, holding that no First Amendment violation had occurred. 607 F. Supp. 1450 (1985).
The District Court concluded that school officials may impose restraints on students’ speech in activities that are “‘an integral part of the school’s educational function’”—including the publication of a school-sponsored newspaper by a journalism class—so long as their decision has “‘a substantial and reasonable basis.’” Id., at 1466 (quoting Frasca v. Andrews, 463 F. Supp. 1043, 1052 (EDNY 1979)). The court found that Principal Reynolds’ concern that the pregnant student’s anonymity would be lost and their privacy invaded was “legitimate and reasonable,” given “the small number of pregnant students at Hazelwood East and several identifying characteristics that were disclosed in the article.” 607 F. Supp., at 1466. The court held that Reynolds’ action was also justified “to avoid the impression that [the school] endorses [484 U.S. 260, 265] the sexual norms of the subjects” and to shield younger students from exposure to unsuitable material. Ibid. The deletion of the article on divorce was seen by the court as a reasonable response to the invasion of privacy concerns raised by the named student’s remarks. Because the article did not indicate that the student’s parents had been offered an opportunity to respond to her allegations, said the court, there was cause for “serious doubt that the article complied with the rules of fairness which are standard in the field of journalism and which were covered in the textbook used in the Journalism II class.” Id., at 1467. Furthermore, the court concluded that Reynolds was justified in deleting two full pages of the newspaper, instead of deleting only the pregnancy and divorce stories or requiring that those stories be modified to address his concerns, based on his “reasonable belief that he had to make an immediate decision and that there was no time to make modifications to the articles in question.” Id., at 1466. The Court of Appeals for the Eighth Circuit reversed. 795 F.2d 1368 (1986). The court held at the outset that Spectrum was not only “a part of the school adopted curriculum,” id., at 1373, but also a public forum, because the newspaper was “intended to be and operated as a conduit for student viewpoint.” Id., at 1372. The court then concluded that Spectrum’s status as a public forum precluded school officials from censoring its contents except when “‘necessary to avoid material and substantial interference with school work or discipline . . . or the rights of others.’” Id., at 1374 (quoting Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503, 511 (1969)).
The Court of Appeals found “no evidence in the record that the principal could have reasonably forecast that the censored articles or any materials in the censored articles would have materially disrupted classwork or given rise to substantial disorder in the school.” 795 F.2d, at 1375. School officials were entitled to censor the articles on the ground that [484 U.S. 260, 266] they invaded the rights of others, according to the court, only if publication of the articles could have resulted in tort liability to the school. The court concluded that no tort action for libel or invasion of privacy could have been maintained against the school by the subjects of the two articles or by their families. Accordingly, the court held that school officials had violated respondents’ First Amendment rights by deleting the two pages of the newspaper.
We granted certiorari, 479 U.S. 1053 (1987), and we now reverse.
II
Students in the public schools do not “shed their constitutional rights to freedom of speech or expression at the schoolhouse gate.” Tinker, supra, at 506. They cannot be punished merely for expressing their personal views on the school premises—whether “in the cafeteria, or on the playing field, or on the campus during the authorized hours,” 393 U.S., at 512-513—unless school authorities have reason to believe that such expression will “substantially interfere with the work of the school or impinge upon the rights of other students.” Id., at 509.
We have nonetheless recognized that the First Amendment rights of students in the public schools “are not automatically coextensive with the rights of adults in other settings,” Bethel School District No. 403 v. Fraser, 478 U.S. 675, 682 (1986), and must be “applied in light of the special characteristics of the school environment.” Tinker, supra, at 506; cf. New Jersey v. T. L. O., 469 U.S. 325, 341-343 (1985). A school need not tolerate student speech that is inconsistent with its “basic educational mission,” Fraser, supra, at 685, even though the government could not censor similar speech outside the school. Accordingly, we held in Fraser that a student could be disciplined for having delivered a speech that was “sexually explicit” but not legally obscene at an official school assembly, because the school was entitled to “disassociate itself ” from the speech in a manner [484 U.S. 260, 267] that would demonstrate to others that such vulgarity is “wholly inconsistent with the ‘fundamental values’ of public school education.” 478 U.S., at 685-686. We thus recognized that “[t]he determination of what manner of speech in the classroom or in school assembly is inappropriate properly rests with the school board,” id., at 683, rather than with the federal courts. It is in this context that respondents’ First Amendment claims must be considered.
A
We deal first with the question whether Spectrum may appropriately be characterized as a forum for public expression. The public schools do not possess all of the attributes of streets, parks, and other traditional public forums that “time out of mind, have been used for purposes of assembly, communicating thoughts between citizens, and discussing public questions.” Hague v. CIO, 307 U.S. 496, 515 (1939). Cf. Widmar v. Vincent, 454 U.S. 263, 267-268, n. 5 (1981). Hence, school facilities may be deemed to be public forums only if school authorities have “by policy or by practice” opened those facilities “for indiscriminate use by the general public,” Perry Education Assn. v. Perry Local Educators’ Assn., 460 U.S. 37, 47 (1983), or by some segment of the public, such as student organizations. Id., at 46, n. 7 (citing Widmar v. Vincent). If the facilities have instead been reserved for other intended purposes, “communicative or otherwise,” then no public forum has been created, and school officials may impose reasonable restrictions on the speech of students, teachers, and other members of the school community. 460 U.S., at 46, n. 7. “The government does not create a public forum by inaction or by permitting limited discourse, but only by intentionally opening a nontraditional forum for public discourse.” Cornelius v. NAACP Legal Defense & Educational Fund, Inc., 473 U.S. 788, 802 (1985). [484 U.S. 260, 268]
The policy of school officials toward Spectrum was reflected in Hazelwood School Board Policy 348.51 and the Hazelwood East Curriculum Guide. Board Policy 348.51 provided that “[s]chool sponsored publications are developed within the adopted curriculum and its educational implications in regular classroom activities.” App. 22. The Hazelwood East Curriculum Guide described the Journalism II course as a “laboratory situation in which the students publish the school newspaper applying skills they have learned in Journalism I.” Id., at 11. The lessons that were to be learned from the Journalism II course, according to the Curriculum Guide, included development of journalistic skills under deadline pressure, “the legal, moral, and ethical restrictions imposed upon journalists within the school community,” and “responsibility and acceptance of criticism for articles of opinion.” Ibid. Journalism II was taught by a faculty member during regular class hours. Students received grades and academic credit for their performance in the course.
School officials did not deviate in practice from their policy that production of Spectrum was to be part of the educational curriculum and a “regular classroom activit[y].” The District Court found that Robert Stergos, the journalism teacher during most of the 1982-1983 school year, “both had the authority to exercise and in fact exercised a great deal of control over Spectrum.” 607 F. Supp., at 1453. For example, Stergos selected the editors of the newspaper, scheduled publication dates, decided the number of pages for each issue, assigned story ideas to class members, advised students on the development of their stories, reviewed the use of quotations, edited stories, selected and edited the letters to the editor, and dealt with the printing company. Many of these decisions were made without consultation with the Journalism II students. The District Court thus found it “clear that Mr. Stergos was the final authority with respect to almost every aspect of the production and publication of Spectrum, including its content.” Ibid. Moreover, after [484 U.S. 260, 269] each Spectrum issue had been finally approved by Stergos or his successor, the issue still had to be reviewed by Principal Reynolds prior to publication. Respondents’ assertion that they had believed that they could publish “practically anything” in Spectrum was therefore dismissed by the District Court as simply “not credible.” Id., at 1456. These factual findings are amply supported by the record, and were not rejected as clearly erroneous by the Court of Appeals.
The evidence relied upon by the Court of Appeals in finding Spectrum to be a public forum, see 795 F.2d, at 1372-1373, is equivocal at best. For example, Board Policy 348.51, which stated in part that “[s]chool sponsored student publications will not restrict free expression or diverse viewpoints within the rules of responsible journalism,” also stated that such publications were “developed within the adopted curriculum and its educational implications.” App. 22. One might reasonably infer from the full text of Policy 348.51 that school officials retained ultimate control over what constituted “responsible journalism” in a school-sponsored newspaper. Although the Statement of Policy published in the September 14, 1982, issue of Spectrum declared that “Spectrum, as a student-press publication, accepts all rights implied by the First Amendment,” this statement, understood in the context of the paper’s role in the school’s curriculum, suggests at most that the administration will not interfere with the students’ exercise of those First Amendment rights that attend the publication of a school-sponsored newspaper. It does not reflect an intent to expand those rights by converting a curricular newspaper into a public forum. 1.2 Finally, [484 U.S. 260, 270] that students were permitted to exercise some authority over the contents of Spectrum was fully consistent with the Curriculum Guide objective of teaching the Journalism II students “leadership responsibilities as issue and page editors.” App. 11. A decision to teach leadership skills in the context of a classroom activity hardly implies a decision to relinquish school control over that activity. In sum, the evidence relied upon by the Court of Appeals fails to demonstrate the “clear intent to create a public forum,” Cornelius, 473 U.S., at 802, that existed in cases in which we found public forums to have been created. See id., at 802-803 (citing Widmar v. Vincent, 454 U.S., at 267; Madison School District v. Wisconsin Employment Relations Comm’n, 429 U.S. 167, 174, n. 6 (1976); Southeastern Promotions, Ltd. v. Conrad, 420 U.S. 546, 555 (1975)). School officials did not evince either “by policy or by practice,” Perry Education Assn., 460 U.S., at 47, any intent to open the pages of Spectrum to “indiscriminate use,” ibid., by its student reporters and editors, or by the student body generally. Instead, they “reserve[d] the forum for its intended purpos[e],” id., at 46, as a supervised learning experience for journalism students. Accordingly, school officials were entitled to regulate the contents of Spectrum in any reasonable manner. Ibid. It is this standard, rather than our decision in Tinker, that governs this case.
B
The question whether the First Amendment requires a school to tolerate particular student speech—the question that we addressed in Tinker—is different from the question whether the First Amendment requires a school affirmatively [484 U.S. 260, 271] to promote particular student speech. The former question addresses educators’ ability to silence a student’s personal expression that happens to occur on the school premises. The latter question concerns educators’ authority over school-sponsored publications, theatrical productions, and other expressive activities that students, parents, and members of the public might reasonably perceive to bear the imprimatur of the school. These activities may fairly be characterized as part of the school curriculum, whether or not they occur in a traditional classroom setting, so long as they are supervised by faculty members and designed to impart particular knowledge or skills to student participants and audiences. 1.3
Educators are entitled to exercise greater control over this second form of student expression to assure that participants learn whatever lessons the activity is designed to teach, that readers or listeners are not exposed to material that may be inappropriate for their level of maturity, and that the views of the individual speaker are not erroneously attributed to the school. Hence, a school may in its capacity as publisher of a school newspaper or producer of a school play “disassociate itself,” Fraser, 478 U.S., at 685, not only from speech that would “substantially interfere with [its] work . . . or impinge upon the rights of other students,” Tinker, 393 U.S., at 509, but also from speech that is, for example, ungrammatical, poorly written, inadequately researched, biased or prejudiced, vulgar or profane, or unsuitable for immature audiences. 1.4 A school must be able to set high standards for [484 U.S. 260, 272] the student speech that is disseminated under its auspices—standards that may be higher than those demanded by some newspaper publishers or theatrical producers in the “real” world—and may refuse to disseminate student speech that does not meet those standards. In addition, a school must be able to take into account the emotional maturity of the intended audience in determining whether to disseminate student speech on potentially sensitive topics, which might range from the existence of Santa Claus in an elementary school setting to the particulars of teenage sexual activity in a high school setting. A school must also retain the authority to refuse to sponsor student speech that might reasonably be perceived to advocate drug or alcohol use, irresponsible sex, or conduct otherwise inconsistent with “the shared values of a civilized social order,” Fraser, supra, at 683, or to associate the school with any position other than neutrality on matters of political controversy. Otherwise, the schools would be unduly constrained from fulfilling their role as “a principal instrument in awakening the child to cultural values, in preparing him for later professional training, and in helping him to adjust normally to his environment.” Brown v. Board of Education, 347 U.S. 483, 493 (1954).
Accordingly, we conclude that the standard articulated in Tinker for determining when a school may punish student expression need not also be the standard for determining when a school may refuse to lend its name and resources to the dissemination [484 U.S. 260, 273] of student expression. 1.5 Instead, we hold that educators do not offend the First Amendment by exercising editorial control over the style and content of student speech in school-sponsored expressive activities so long as their actions are reasonably related to legitimate pedagogical concerns. 1.6
This standard is consistent with our oft-expressed view that the education of the Nation’s youth is primarily the responsibility of parents, teachers, and state and local school officials, and not of federal judges. See, e.g., Board of Education of Hendrick Hudson Central School Dist. v. Rowley, 458 U.S. 176, 208 (1982); Wood v. Strickland, 420 U.S. 308, 326 (1975); Epperson v. Arkansas, 393 U.S. 97, 104 (1968). It is only when the decision to censor a school-sponsored publication, theatrical production, or other vehicle of student expression has no valid educational purpose that the First Amendment is so “directly and sharply implicate[d],” ibid., as to require judicial intervention to protect students’ constitutional rights. 1.7 [484 U.S. 260, 274]
III
We also conclude that Principal Reynolds acted reasonably in requiring the deletion from the May 13 issue of Spectrum of the pregnancy article, the divorce article, and the remaining articles that were to appear on the same pages of the newspaper.
The initial paragraph of the pregnancy article declared that “[a]ll names have been changed to keep the identity of these girls a secret.” The principal concluded that the students’ anonymity was not adequately protected, however, given the other identifying information in the article and the small number of pregnant students at the school. Indeed, a teacher at the school credibly testified that she could positively identify at least one of the girls and possibly all three. It is likely that many students at Hazelwood East would have been at least as successful in identifying the girls. Reynolds therefore could reasonably have feared that the article violated whatever pledge of anonymity had been given to the pregnant students. In addition, he could reasonably have been concerned that the article was not sufficiently sensitive to the privacy interests of the students’ boyfriends and parents, who were discussed in the article but who were given no opportunity to consent to its publication or to offer a response. The article did not contain graphic accounts of sexual activity. The girls did comment in the article, however, concerning their sexual histories and their use or nonuse of birth control. It was not unreasonable for the principal to have concluded that such frank talk was inappropriate in a schoolsponsored publication distributed to 14-year-old freshmen [484 U.S. 260, 275] and presumably taken home to be read by students’ even younger brothers and sisters.
The student who was quoted by name in the version of the divorce article seen by Principal Reynolds made comments sharply critical of her father. The principal could reasonably have concluded that an individual publicly identified as an inattentive parent—indeed, as one who chose “playing cards with the guys” over home and family—was entitled to an opportunity to defend himself as a matter of journalistic fairness. These concerns were shared by both of Spectrum’s faculty advisers for the 1982- 1983 school year, who testified that they would not have allowed the article to be printed without deletion of the student’s name. 1.8
Principal Reynolds testified credibly at trial that, at the time that he reviewed the proofs of the May 13 issue during an extended telephone conversation with Emerson, he believed that there was no time to make any changes in the articles, and that the newspaper had to be printed immediately or not at all. It is true that Reynolds did not verify whether the necessary modifications could still have been made in the articles, and that Emerson did not volunteer the information that printing could be delayed until the changes were made. We nonetheless agree with the District Court that the decision to excise the two pages containing the problematic articles was reasonable given the particular circumstances of this case. These circumstances included the very recent [484 U.S. 260, 276] replacement of Stergos by Emerson, who may not have been entirely familiar with Spectrum editorial and production procedures, and the pressure felt by Reynolds to make an immediate decision so that students would not be deprived of the newspaper altogether.
In sum, we cannot reject as unreasonable Principal Reynolds’ conclusion that neither the pregnancy article nor the divorce article was suitable for publication in Spectrum. Reynolds could reasonably have concluded that the students who had written and edited these articles had not sufficiently mastered those portions of the Journalism II curriculum that pertained to the treatment of controversial issues and personal attacks, the need to protect the privacy of individuals whose most intimate concerns are to be revealed in the newspaper, and “the legal, moral, and ethical restrictions imposed upon journalists within [a] school community” that includes adolescent subjects and readers. Finally, we conclude that the principal’s decision to delete two pages of Spectrum, rather than to delete only the offending articles or to require that they be modified, was reasonable under the circumstances as he understood them. Accordingly, no violation of First Amendment rights occurred. 1.9
The judgment of the Court of Appeals for the Eighth Circuit is therefore Reversed.
Footnotes
[ 1.1 ] The two pages deleted from the newspaper also contained articles on teenage marriage, runaways, and juvenile delinquents, as well as a general article on teenage pregnancy. Reynolds testified that he had no objection to these articles and that they were deleted only because they appeared on the same pages as the two objectionable articles.
[ 1.2 ] The Statement also cited Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503 (1969), for the proposition that “[o]nly speech that ‘materially and substantially interferes with the requirements of appropriate discipline’ can be found unacceptable and therefore be prohibited.” App. 26. This portion of the Statement does not, of course, even accurately reflect our holding in Tinker. Furthermore, the Statement nowhere expressly extended the Tinker standard to the news and feature articles contained in a school-sponsored newspaper. The dissent [484 U.S. 260, 270] apparently finds as a fact that the Statement was published annually in Spectrum; however, the District Court was unable to conclude that the Statement appeared on more than one occasion. In any event, even if the Statement says what the dissent believes that it says, the evidence that school officials never intended to designate Spectrum as a public forum remains overwhelming.
[ 1.3 ] The distinction that we draw between speech that is sponsored by the school and speech that is not is fully consistent with Papish v. University of Missouri Board of Curators, 410 U.S. 667 (1973) (per curiam), which involved an off-campus “underground” newspaper that school officials merely had allowed to be sold on a state university campus.
[ 1.4 ] The dissent perceives no difference between the First Amendment analysis applied in Tinker and that applied in Fraser. We disagree. The decision in Fraser rested on the “vulgar,” “lewd,” and “plainly offensive” character of a speech delivered at an official school assembly rather than on [484 U.S. 260, 272] any propensity of the speech to “materially disrup[t] classwork or involv[e] substantial disorder or invasion of the rights of others.” 393 U.S., at 513. Indeed, the Fraser Court cited as “especially relevant” a portion of Justice Black’s dissenting opinion in Tinker “ ‘disclaim[ing] any purpose . . . to hold that the Federal Constitution compels the teachers, parents, and elected school officials to surrender control of the American public school system to public school students.’ ” 478 U.S., at 686 (quoting 393 U.S., at 526). Of course, Justice Black’s observations are equally relevant to the instant case.
[ 1.5 ] We therefore need not decide whether the Court of Appeals correctly construed Tinker as precluding school officials from censoring student speech to avoid “invasion of the rights of others,” 393 U.S., at 513, except where that speech could result in tort liability to the school.
[ 1.6 ] We reject respondents’ suggestion that school officials be permitted to exercise prepublication control over school-sponsored publications only pursuant to specific written regulations. To require such regulations in the context of a curricular activity could unduly constrain the ability of educators to educate. We need not now decide whether such regulations are required before school officials may censor publications not sponsored by the school that students seek to distribute on school grounds. See Baughman v. Freienmuth, 478 F.2d 1345 (CA4 1973); Shanley v. Northeast Independent School Dist., Bexar Cty., Tex., 462 F.2d 960 (CA5 1972); Eisner v. Stamford Board of Education, 440 F.2d 803 (CA2 1971).
[ 1.7 ] A number of lower federal courts have similarly recognized that educators’ decisions with regard to the content of school-sponsored newspapers, dramatic productions, and other expressive activities are entitled to substantial deference. See, e.g., Nicholson v. Board of Education, Torrance Unified School Dist., 682 F.2d 858 (CA9 1982); Seyfried v. [484 U.S. 260, 274] Walton, 668 F.2d 214 (CA3 1981); Trachtman v. Anker, 563 F.2d 512 (CA2 1977), cert. denied, 435 U.S. 925 (1978); Frasca v. Andrews, 463 F. Supp. 1043 (EDNY 1979). We need not now decide whether the same degree of deference is appropriate with respect to school-sponsored expressive activities at the college and university level.
[ 1.8 ] The reasonableness of Principal Reynolds’ concerns about the two articles was further substantiated by the trial testimony of Martin Duggan, a former editorial page editor of the St. Louis Globe Democrat and a former college journalism instructor and newspaper adviser. Duggan testified that the divorce story did not meet journalistic standards of fairness and balance because the father was not given an opportunity to respond, and that the pregnancy story was not appropriate for publication in a high school newspaper because it was unduly intrusive into the privacy of the girls, their parents, and their boyfriends. The District Court found Duggan to be “an objective and independent witness” whose testimony was entitled to significant weight. 607 F. Supp. 1450, 1461 (ED Mo. 1985).
[ 1.9 ] It is likely that the approach urged by the dissent would as a practical matter have far more deleterious consequences for the student press than does the approach that we adopt today. The dissent correctly acknowledges “[t]he State’s prerogative to dissolve the student newspaper entirely.” Post, at 287. It is likely that many public schools would do just that rather than open their newspapers to all student expression that does not threaten “materia[l] disrup[tion of] classwork” or violation of “rights that are protected by law,” post, at 289, regardless of how sexually explicit, racially intemperate, or personally insulting that expression otherwise might be. [484 U.S. 260, 277]
JUSTICE BRENNAN, with whom JUSTICE MARSHALL and JUSTICE BLACKMUN join, dissenting
When the young men and women of Hazelwood East High School registered for Journalism II, they expected a civics lesson. Spectrum, the newspaper they were to publish, “was not just a class exercise in which students learned to prepare papers and hone writing skills, it was a . . . forum established to give students an opportunity to express their views while gaining an appreciation of their rights and responsibilities under the First Amendment to the United States Constitution. . . .” 795 F.2d 1368, 1373 (CA8 1986). “[A]t the beginning of each school year,” id., at 1372, the student journalists published a Statement of Policy—tacitly approved each year by school authorities—announcing their expectation that “Spectrum, as a student-press publication, accepts all rights implied by the First Amendment. . . . Only speech that ‘materially and substantially interferes with the requirements of appropriate discipline’ can be found unacceptable and therefore prohibited.” App. 26 (quoting Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503, 513 (1969)). 2.1 The school board itself affirmatively guaranteed the students of Journalism II an atmosphere conducive to fostering such an appreciation and exercising the full panoply of rights associated with a free student press. “School sponsored student publications,” it vowed, “will not restrict free expression or diverse viewpoints within the rules of responsible journalism.” App. 22 (Board Policy 348.51). [484 U.S. 260, 278]
This case arose when the Hazelwood East administration breached its own promise, dashing its students’ expectations. The school principal, without prior consultation or explanation, excised six articles—comprising two full pages—of the May 13, 1983, issue of Spectrum. He did so not because any of the articles would “materially and substantially interfere with the requirements of appropriate discipline,” but simply because he considered two of the six “inappropriate, personal, sensitive, and unsuitable” for student consumption. 795 F.2d, at 1371.
In my view the principal broke more than just a promise. He violated the First Amendment’s prohibitions against censorship of any student expression that neither disrupts classwork nor invades the rights of others, and against any censorship that is not narrowly tailored to serve its purpose.
I
Public education serves vital national interests in preparing the Nation’s youth for life in our increasingly complex society and for the duties of citizenship in our democratic Republic. See Brown v. Board of Education, 347 U.S. 483, 493 (1954). The public school conveys to our young the information and tools required not merely to survive in, but to contribute to, civilized society. It also inculcates in tomorrow’s leaders the “fundamental values necessary to the maintenance of a democratic political system. . . .” Ambach v. Norwick, 441 U.S. 68, 77 (1979). All the while, the public educator nurtures students’ social and moral development by transmitting to them an official dogma of “‘community values.’” Board of Education v. Pico, 457 U.S. 853, 864 (1982) (plurality opinion) (citation omitted).
The public educator’s task is weighty and delicate indeed. It demands particularized and supremely subjective choices among diverse curricula, moral values, and political stances to teach or inculcate in students, and among various methodologies for doing so. Accordingly, we have traditionally reserved [484 U.S. 260, 279] the “daily operation of school systems” to the States and their local school boards. Epperson v. Arkansas, 393 U.S. 97, 104 (1968); see Board of Education v. Pico, supra, at 863- 864. We have not, however, hesitated to intervene where their decisions run afoul of the Constitution. See e.g., Edwards v. Aguillard, 482 U.S. 578 (1987) (striking state statute that forbade teaching of evolution in public school unless accompanied by instruction on theory of “creation science”); Board of Education v. Pico, supra (school board may not remove books from library shelves merely because it disapproves of ideas they express); Epperson v. Arkansas, supra (striking state-law prohibition against teaching Darwinian theory of evolution in public school); West Virginia Board of Education v. Barnette, 319 U.S. 624 (1943) (public school may not compel student to salute flag); Meyer v. Nebraska, 262 U.S. 390 (1923) (state law prohibiting the teaching of foreign languages in public or private schools is unconstitutional).
Free student expression undoubtedly sometimes interferes with the effectiveness of the school’s pedagogical functions. Some brands of student expression do so by directly preventing the school from pursuing its pedagogical mission: The young polemic who stands on a soapbox during calculus class to deliver an eloquent political diatribe interferes with the legitimate teaching of calculus. And the student who delivers a lewd endorsement of a student-government candidate might so extremely distract an impressionable high school audience as to interfere with the orderly operation of the school. See Bethel School Dist. No. 403 v. Fraser, 478 U.S. 675 (1986). Other student speech, however, frustrates the school’s legitimate pedagogical purposes merely by expressing a message that conflicts with the school’s, without directly interfering with the school’s expression of its message: A student who responds to a political science teacher’s question with the retort, “socialism is good,” subverts the school’s inculcation of the message that capitalism is better. [484 U.S. 260, 280] Even the maverick who sits in class passively sporting a symbol of protest against a government policy, cf. Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503 (1969), or the gossip who sits in the student commons swapping stories of sexual escapade could readily muddle a clear official message condoning the government policy or condemning teenage sex. Likewise, the student newspaper that, like Spectrum, conveys a moral position at odds with the school’s official stance might subvert the administration’s legitimate inculcation of its own perception of community values.
If mere incompatibility with the school’s pedagogical message were a constitutionally sufficient justification for the suppression of student speech, school officials could censor each of the students or student organizations in the foregoing hypotheticals, converting our public schools into “enclaves of totalitarianism,” id., at 511, that “strangle the free mind at its source,” West Virginia Board of Education v. Barnette, supra, at 637. The First Amendment permits no such blanket censorship authority. While the “constitutional rights of students in public school are not automatically coextensive with the rights of adults in other settings,” Fraser, supra, at 682, students in the public schools do not “shed their constitutional rights to freedom of speech or expression at the schoolhouse gate,” Tinker, supra, at 506. Just as the public on the street corner must, in the interest of fostering “enlightened opinion,” Cantwell v. Connecticut, 310 U.S. 296, 310 (1940), tolerate speech that “tempt[s] [the listener] to throw [the speaker] off the street,” id., at 309, public educators must accommodate some student expression even if it offends them or offers views or values that contradict those the school wishes to inculcate.
In Tinker, this Court struck the balance. We held that official censorship of student expression— there the suspension of several students until they removed their armbands protesting the Vietnam war—is unconstitutional unless the [484 U.S. 260, 281] speech “materially disrupts classwork or involves substantial disorder or invasion of the rights of others. . . .” 393 U.S., at 513. School officials may not suppress “silent, passive expression of opinion, unaccompanied by any disorder or disturbance on the part of ” the speaker. Id., at 508. The “mere desire to avoid the discomfort and unpleasantness that always accompany an unpopular viewpoint,” id., at 509, or an unsavory subject, Fraser, supra, at 688- 689 (BRENNAN, J., concurring in judgment), does not justify official suppression of student speech in the high school.
This Court applied the Tinker test just a Term ago in Fraser, supra, upholding an official decision to discipline a student for delivering a lewd speech in support of a student-government candidate. The Court today casts no doubt on Tinker’s vitality. Instead it erects a taxonomy of school censorship, concluding that Tinker applies to one category and not another. On the one hand is censorship “to silence a student’s personal expression that happens to occur on the school premises.” Ante, at 271. On the other hand is censorship of expression that arises in the context of “school-sponsored . . . expressive activities that students, parents, and members of the public might reasonably perceive to bear the imprimatur of the school.” Ibid.
The Court does not, for it cannot, purport to discern from our precedents the distinction it creates. One could, I suppose, readily characterize the students’ symbolic speech in Tinker as “personal expression that happens to [have] occur[red] on school premises,” although Tinker did not even hint that the personal nature of the speech was of any (much less dispositive) relevance. But that same description could not by any stretch of the imagination fit Fraser’s speech. He did not just “happen” to deliver his lewd speech to an ad hoc gathering on the playground. As the second paragraph of Fraser evinces, if ever a forum for student expression was “school-sponsored,” Fraser’s was: [484 U.S. 260, 282]
“Fraser . . . delivered a speech nominating a fellow student for student elective office. Approximately 600 high school students . . . attended the assembly. Students were required to attend the assembly or to report to the study hall. The assembly was part of a school-sponsored educational program in self-government.” Fraser, 478 U.S., at 677 (emphasis added).
Yet, from the first sentence of its analysis, see id., at 680, Fraser faithfully applied Tinker.
Nor has this Court ever intimated a distinction between personal and school-sponsored speech in any other context. Particularly telling is this Court’s heavy reliance on Tinker in two cases of First Amendment infringement on state college campuses. See Papish v. University of Missouri Board of Curators, 410 U.S. 667, 671, n. 6 (1973) (per curiam); Healy v. James, 408 U.S. 169, 180, 189, and n. 18, 191 (1972). One involved the expulsion of a student for lewd expression in a newspaper that she sold on campus pursuant to university authorization, see Papish, supra, at 667-668, and the other involved the denial of university recognition and concomitant benefits to a political student organization, see Healy, supra, at 174, 176, 181-182. Tracking Tinker’s analysis, the Court found each act of suppression unconstitutional. In neither case did this Court suggest the distinction, which the Court today finds dispositive, between school-sponsored and incidental student expression.
II
Even if we were writing on a clean slate, I would reject the Court’s rationale for abandoning Tinker in this case. The Court offers no more than an obscure tangle of three excuses to afford educators “greater control” over school-sponsored speech than the Tinker test would permit: the public educator’s prerogative to control curriculum; the pedagogical interest in shielding the high school audience from objectionable viewpoints and sensitive topics; and the school’s need [484 U.S. 260, 283] to dissociate itself from student expression. Ante, at 271. None of the excuses, once disentangled, supports the distinction that the Court draws. Tinker fully addresses the first concern; the second is illegitimate; and the third is readily achievable through less oppressive means.
A
The Court is certainly correct that the First Amendment permits educators “to assure that participants learn whatever lessons the activity is designed to teach. . . .” Ante, at 271. That is, however, the essence of the Tinker test, not an excuse to abandon it. Under Tinker, school officials may censor only such student speech as would “materially disrup[t]” a legitimate curricular function. Manifestly, student speech is more likely to disrupt a curricular function when it arises in the context of a curricular activity—one that “is designed to teach” something—than when it arises in the context of a noncurricular activity. Thus, under Tinker, the school may constitutionally punish the budding political orator if he disrupts calculus class but not if he holds his tongue for the cafeteria. See Consolidated Edison Co. v. Public Service Comm’n of New York, 447 U.S. 530, 544-545 (1980) (STEVENS, J., concurring in judgment). That is not because some more stringent standard applies in the curricular context. (After all, this Court applied the same standard whether the students in Tinker wore their armbands to the “classroom” or the “cafeteria.” 393 U.S., at 512.) It is because student speech in the noncurricular context is less likely to disrupt materially any legitimate pedagogical purpose.
I fully agree with the Court that the First Amendment should afford an educator the prerogative not to sponsor the publication of a newspaper article that is “ungrammatical, poorly written, inadequately researched, biased or prejudiced,” or that falls short of the “high standards for . . . student speech that is disseminated under [the school’s] auspices. . . .” Ante, at 271-272. But we need not abandon Tinker [484 U.S. 260, 284] to reach that conclusion; we need only apply it. The enumerated criteria reflect the skills that the curricular newspaper “is designed to teach.” The educator may, under Tinker, constitutionally “censor” poor grammar, writing, or research because to reward such expression would “materially disrup[t]” the newspaper’s curricular purpose.
The same cannot be said of official censorship designed to shield the audience or dissociate the sponsor from the expression. Censorship so motivated might well serve (although, as I demonstrate infra, at 285-289, cannot legitimately serve) some other school purpose. But it in no way furthers the curricular purposes of a student newspaper, unless one believes that the purpose of the school newspaper is to teach students that the press ought never report bad news, express unpopular views, or print a thought that might upset its sponsors. Unsurprisingly, Hazelwood East claims no such pedagogical purpose.
The Court relies on bits of testimony to portray the principal’s conduct as a pedagogical lesson to Journalism II students who “had not sufficiently mastered those portions of the . . . curriculum that pertained to the treatment of controversial issues and personal attacks, the need to protect the privacy of individuals . . ., and ‘the legal, moral, and ethical restrictions imposed upon journalists. . . .’” Ante, at 276. In that regard, the Court attempts to justify censorship of the article on teenage pregnancy on the basis of the principal’s judgment that (1) “the [pregnant] students’ anonymity was not adequately protected,” despite the article’s use of aliases; and (2) the judgment that “the article was not sufficiently sensitive to the privacy interests of the students’ boyfriends and parents. . . .” Ante, at 274. Similarly, the Court finds in the principal’s decision to censor the divorce article a journalistic lesson that the author should have given the father of one student an “opportunity to defend himself ” against her charge that (in the Court’s words) he “chose [484 U.S. 260, 285] ‘playing cards with the guys’ over home and family. . . .” Ante, at 275.
But the principal never consulted the students before censoring their work. “[T]hey learned of the deletions when the paper was released. . . .” 795 F.2d, at 1371. Further, he explained the deletions only in the broadest of generalities. In one meeting called at the behest of seven protesting Spectrum staff members (presumably a fraction of the full class), he characterized the articles as “‘too sensitive’ for ‘our immature audience of readers,’” 607 F. Supp. 1450, 1459 (ED Mo. 1985), and in a later meeting he deemed them simply “inappropriate, personal, sensitive and unsuitable for the newspaper,” ibid. The Court’s supposition that the principal intended (or the protesters understood) those generalities as a lesson on the nuances of journalistic responsibility is utterly incredible. If he did, a fact that neither the District Court nor the Court of Appeals found, the lesson was lost on all but the psychic Spectrum staffer.
B
The Court’s second excuse for deviating from precedent is the school’s interest in shielding an impressionable high school audience from material whose substance is “unsuitable for immature audiences.” Ante, at 271 (footnote omitted). Specifically, the majority decrees that we must afford educators authority to shield high school students from exposure to “potentially sensitive topics” (like “the particulars of teenage sexual activity”) or unacceptable social viewpoints (like the advocacy of “irresponsible se[x] or conduct otherwise inconsistent with ‘the shared values of a civilized social order’”) through school-sponsored student activities. Ante, at 272 (citation omitted).
Tinker teaches us that the state educator’s undeniable, and undeniably vital, mandate to inculcate moral and political values is not a general warrant to act as “thought police” stifling discussion of all but state-approved topics and advocacy of all [484 U.S. 260, 286] but the official position. See also Epperson v. Arkansas, 393 U.S. 97 (1968); Meyer v. Nebraska, 262 U.S. 390 (1923). Otherwise educators could transform students into “closed-circuit recipients of only that which the State chooses to communicate,” Tinker, 393 U.S., at 511, and cast a perverse and impermissible “pall of orthodoxy over the classroom,” Keyishian v. Board of Regents, 385 U.S. 589, 603 (1967). Thus, the State cannot constitutionally prohibit its high school students from recounting in the locker room “the particulars of [their] teen-age sexual activity,” nor even from advocating “irresponsible se[x]” or other presumed abominations of “the shared values of a civilized social order.” Even in its capacity as educator the State may not assume an Orwellian “guardianship of the public mind,” Thomas v. Collins, 323 U.S. 516, 545 (1945) (Jackson, J., concurring).
The mere fact of school sponsorship does not, as the Court suggests, license such thought control in the high school, whether through school suppression of disfavored viewpoints or through official assessment of topic sensitivity. 2.2 The former would constitute unabashed and unconstitutional viewpoint [484 U.S. 260, 287] discrimination, see Board of Education v. Pico, 457 U.S., at 878-879 (BLACKMUN, J., concurring in part and concurring in judgment), as well as an impermissible infringement of the students’ “‘right to receive information and ideas,’” id., at 867 (plurality opinion) (citations omitted); see First National Bank v. Bellotti, 435 U.S. 765, 783 (1978). 2.3 Just as a school board may not purge its state-funded library of all books that “‘offen[d] [its] social, political and moral tastes,’” 457 U.S., at 858-859 (plurality opinion) (citation omitted), school officials may not, out of like motivation, discriminatorily excise objectionable ideas from a student publication. The State’s prerogative to dissolve the student newspaper entirely (or to limit its subject matter) no more entitles it to dictate which viewpoints students may express on its pages, than the State’s prerogative to close down the schoolhouse entitles it to prohibit the nondisruptive expression of antiwar sentiment within its gates.
Official censorship of student speech on the ground that it addresses “potentially sensitive topics” is, for related reasons, equally impermissible. I would not begrudge an educator the authority to limit the substantive scope of a school-sponsored publication to a certain, objectively definable topic, such as literary criticism, school sports, or an overview of the school year. Unlike those determinate limitations, “potential topic sensitivity” is a vaporous nonstandard—like “‘public welfare, peace, safety, health, decency, good order, morals or convenience,’” Shuttlesworth v. Birmingham, 394 U.S. 147, 150 (1969), or “‘general welfare of citizens,’” Staub v. Baxley, 355 U.S. 313, 322 (1958)—that invites manipulation to achieve ends that cannot permissibly be achieved through blatant viewpoint discrimination and chills student speech to which school officials might not [484 U.S. 260, 288] object. In part because of those dangers, this Court has consistently condemned any scheme allowing a state official boundless discretion in licensing speech from a particular forum. See, e.g., Shuttlesworth v. Birmingham, supra, at 150-151, and n. 2; Cox v. Louisiana, 379 U.S. 536, 557-558 (1965); Staub v. Baxley, supra, at 322-324.
The case before us aptly illustrates how readily school officials (and courts) can camouflage viewpoint discrimination as the “mere” protection of students from sensitive topics. Among the grounds that the Court advances to uphold the principal’s censorship of one of the articles was the potential sensitivity of “teenage sexual activity.” Ante, at 272. Yet the District Court specifically found that the principal “did not, as a matter of principle, oppose discussion of said topi[c] in Spectrum.” 607 F. Supp., at 1467. That much is also clear from the same principal’s approval of the “squeal law” article on the same page, dealing forthrightly with “teenage sexuality,” “the use of contraceptives by teenagers,” and “teenage pregnancy,” App. 4-5. If topic sensitivity were the true basis of the principal’s decision, the two articles should have been equally objectionable. It is much more likely that the objectionable article was objectionable because of the viewpoint it expressed: It might have been read (as the majority apparently does) to advocate “irresponsible sex.” See ante, at 272.
C
The sole concomitant of school sponsorship that might conceivably justify the distinction that the Court draws between sponsored and nonsponsored student expression is the risk “that the views of the individual speaker [might be] erroneously attributed to the school.” Ante, at 271. Of course, the risk of erroneous attribution inheres in any student expression, including “personal expression” that, like the armbands in Tinker, “happens to occur on the school premises,” ante, at 271. Nevertheless, the majority is certainly correct that indicia of school sponsorship increase the likelihood [484 U.S. 260, 289] of such attribution, and that state educators may therefore have a legitimate interest in dissociating themselves from student speech.
But “‘[e]ven though the governmental purpose be legitimate and substantial, that purpose cannot be pursued by means that broadly stifle fundamental personal liberties when the end can be more narrowly achieved.’” Keyishian v. Board of Regents, 385 U.S., at 602 (quoting Shelton v. Tucker, 364 U.S. 479, 488 (1960)). Dissociative means short of censorship are available to the school. It could, for example, require the student activity to publish a disclaimer, such as the “Statement of Policy” that Spectrum published each school year announcing that “[a]ll . . . editorials appearing in this newspaper reflect the opinions of the Spectrum staff, which are not necessarily shared by the administrators or faculty of Hazelwood East,” App. 26; or it could simply issue its own response clarifying the official position on the matter and explaining why the student position is wrong. Yet, without so much as acknowledging the less oppressive alternatives, the Court approves of brutal censorship.
III
Since the censorship served no legitimate pedagogical purpose, it cannot by any stretch of the imagination have been designed to prevent “materia[l] disrup[tion of] classwork,” Tinker, 393 U.S., at 513. Nor did the censorship fall within the category that Tinker described as necessary to prevent student expression from “inva[ding] the rights of others,” ibid. If that term is to have any content, it must be limited to rights that are protected by law. “Any yardstick less exacting than [that] could result in school officials curtailing speech at the slightest fear of disturbance,” 795 F.2d, at 1376, a prospect that would be completely at odds with this Court’s pronouncement that the “undifferentiated fear or apprehension of disturbance is not enough [even in the public school context] to overcome the right to freedom of expression.” [484 U.S. 260, 290] Tinker, supra, at 508. And, as the Court of Appeals correctly reasoned, whatever journalistic impropriety these articles may have contained, they could not conceivably be tortious, much less criminal. See 795 F.2d, at 1375-1376.
Finally, even if the majority were correct that the principal could constitutionally have censored the objectionable material, I would emphatically object to the brutal manner in which he did so. Where “[t]he separation of legitimate from illegitimate speech calls for more sensitive tools” Speiser v. Randall, 357 U.S. 513, 525 (1958); see Keyishian v. Board of Regents, supra, at 602, the principal used a paper shredder. He objected to some material in two articles, but excised six entire articles. He did not so much as inquire into obvious alternatives, such as precise deletions or additions (one of which had already been made), rearranging the layout, or delaying publication. Such unthinking contempt for individual rights is intolerable from any state official. It is particularly insidious from one to whom the public entrusts the task of inculcating in its youth an appreciation for the cherished democratic liberties that our Constitution guarantees.
IV
The Court opens its analysis in this case by purporting to reaffirm Tinker’s time-tested proposition that public school students “do not ‘shed their constitutional rights to freedom of speech or expression at the schoolhouse gate.’” Ante, at 266 (quoting Tinker, supra, at 506). That is an ironic introduction to an opinion that denudes high school students of much of the First Amendment protection that Tinker itself prescribed. Instead of “teach[ing] children to respect the diversity of ideas that is fundamental to the American system,” Board of Education v. Pico, 457 U.S., at 880 (BLACKMUN, J., concurring in part and concurring in judgment), and “that our Constitution is a living reality, not parchment preserved under glass,” Shanley v. Northeast Independent School Dist., Bexar Cty., Tex., 462 F.2d 960, 972 (CA5 [484 U.S. 260, 291] 1972), the Court today “teach[es] youth to discount important principles of our government as mere platitudes.” West Virginia Board of Education v. Barnette, 319 U.S., at 637. The young men and women of Hazelwood East expected a civics lesson, but not the one the Court teaches them today.
I dissent.
Footnotes
[ 2.1 ] The Court suggests that the passage quoted in the text did not “exten[d] the Tinker standard to the news and feature articles contained in a school-sponsored newspaper” because the passage did not expressly mention them. Ante, at 269, n. 2. It is hard to imagine why the Court (or anyone else) might expect a passage that applies categorically to “a student-press publication,” composed almost exclusively of “news and feature articles,” to mention those categories expressly. Understandably, neither court below so limited the passage.
[ 2.2 ] The Court quotes language in Bethel School Dist. No. 403 v. Fraser, 478 U.S. 675 (1986), for the proposition that “[t]he determination of what manner of speech in the classroom or in school assembly is inappropriate properly rests with the school board.’ ” Ante, at 267 (quoting 478 U.S., at 683). As the discussion immediately preceding that quotation makes clear, however, the Court was referring only to the appropriateness of the manner in which the message is conveyed, not of the message’s content. See, e.g., Fraser, 478 U.S., at 683 (“[T]he ‘fundamental values necessary to the maintenance of a democratic political system’ disfavor the use of terms of debate highly offensive or highly threatening to others”). In fact, the Fraser Court coupled its first mention of “society’s . . . interest in teaching students the boundaries of socially appropriate behavior,” with an acknowledgment of “[t]he undoubted freedom to advocate unpopular and controversial views in schools and classrooms,” id., at 681 (emphasis added). See also id., at 689 (BRENNAN, J., concurring in judgment) (“Nor does this case involve an attempt by school officials to ban written materials they consider ‘inappropriate’ for high school students” (citation omitted)).
[ 2.3 ] Petitioners themselves concede that “ ‘[c]ontrol over access’ ” to Spectrum is permissible only if “ ‘the distinctions drawn . . . are viewpoint neutral.’ ” Brief for Petitioners 32 (quoting Cornelius v. NAACP Legal Defense & Educational Fund, Inc., 473 U.S. 788, 806 (1985)). [484 U.S. 260, 292] | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/01%3A_The_First_Amendment/1.02%3A_New_Page.txt |
Learning Objectives
Bethel School Dist. No. 403 v. Fraser
478 U.S. 675 (1986)
United States Supreme Court, Docket No. 84-1667
Argued: March 3, 1986 Decided: July 7, 1986
Respondent public high school student (hereafter respondent) delivered a speech nominating a fellow student for a student elective office at a voluntary assembly that was held during school hours as part of a school-sponsored educational program in self-government, and that was attended by approximately 600 students, many of whom were 14-year-olds. During the entire speech, respondent referred to his candidate in terms of an elaborate, graphic, and explicit sexual metaphor. Some of the students at the assembly hooted and yelled during the speech, some mimicked the sexual activities alluded to in the speech, and others appeared to be bewildered and embarrassed. Prior to delivering the speech, respondent discussed it with several teachers, two of whom advised him that it was inappropriate and should not be given. The morning after the assembly, the Assistant Principal called respondent into her office and notified him that the school considered his speech to have been a violation of the school’s “disruptive-conduct rule,” which prohibited conduct that substantially interfered with the educational process, including the use of obscene, profane language or gestures. Respondent was given copies of teacher reports of his conduct, and was given a chance to explain his conduct. After he admitted that he deliberately used sexual innuendo in the speech, he was informed that he would be suspended for three days, and that his name would be removed from the list of candidates for graduation speaker at the school’s commencement exercises. Review of the disciplinary action through petitioner School District’s grievance procedures resulted in affirmance of the discipline, but respondent was allowed to return to school after serving only two days of his suspension. Respondent, by his father (also a respondent) as guardian ad litem, then filed suit in Federal District Court, alleging a violation of his First Amendment right to freedom of speech and seeking injunctive relief and damages under 42 U.S.C. § 1983. The court held that the school’s sanctions violated the First Amendment, that the school’s disruptive-conduct rule was unconstitutionally vague and overbroad, and that the removal of respondent’s name from the graduation speaker’s list violated the Due Process Clause of the Fourteenth Amendment. The court awarded respondent monetary relief and enjoined [478 U.S. 675, 676] the School District from preventing him from speaking at the commencement ceremonies. The Court of Appeals affirmed.
Held:
1. The First Amendment did not prevent the School District from disciplining respondent for giving the offensively lewd and indecent speech at the assembly. Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503, distinguished. Under the First Amendment, the use of an offensive form of expression may not be prohibited to adults making what the speaker considers a political point, but it does not follow that the same latitude must be permitted to children in a public school. It is a highly appropriate function of public school education to prohibit the use of vulgar and offensive terms in public discourse. Nothing in the Constitution prohibits the states from insisting that certain modes of expression are inappropriate and subject to sanctions. The inculcation of these values is truly the work of the school, and the determination of what manner of speech is inappropriate properly rests with the school board. First Amendment jurisprudence recognizes an interest in protecting minors from exposure to vulgar and offensive spoken language, FCC v. Pacifica Foundation, 438 U.S. 726, as well as limitations on the otherwise absolute interest of the speaker in reaching an unlimited audience where the speech is sexually explicit and the audience may include children, Ginsberg v. New York, 390 U.S. 629. Petitioner School District acted entirely within its permissible authority in imposing sanctions upon respondent in response to his offensively lewd and indecent speech, which had no claim to First Amendment protection. Pp. 680-686.
2. There is no merit to respondent’s contention that the circumstances of his suspension violated due process because he had no way of knowing that the delivery of the speech would subject him to disciplinary sanctions. Given the school’s need to be able to impose disciplinary sanctions for a wide range of unanticipated conduct disruptive of the educational process, the school disciplinary rules need not be as detailed as a criminal code which imposes criminal sanctions. The school disciplinary rule proscribing “obscene” language and the prespeech admonitions of teachers gave adequate warning to respondent that his lewd speech could subject him to sanctions. P. 686.
755 F.2d 1356, reversed.
BURGER, C. J., delivered the opinion of the Court, in which WHITE, POWELL, REHNQUIST, and O’CONNOR, JJ., joined. BRENNAN, J., filed an opinion concurring in the judgment, post, p. 687. BLACKMUN, J., concurred in the result. MARSHALL, J., post, p. 690, and STEVENS, J., post, p. 691, filed dissenting opinions. [478 U.S. 675, 677]
William A. Coats argued the cause for petitioners. With him on the briefs was Clifford D. Foster, Jr.
Jeffrey T. Haley argued the cause for respondents. With him on the brief was Charles S. Sims. *
[ * ] Briefs of amici curiae urging reversal were filed for the United States by Solicitor General Fried, Assistant Attorney General Willard, Deputy Solicitor General Kuhl, Anthony J. Steinmeyer, and Robert V Zener; for the Pacific Legal Foundation et al. by Ronald A. Zumbrun, John H Findley, and George Nicholson; and for the Texas Council of School Attorneys by Jean F. Powers and David Crump. Briefs of amici curiae urging affirmance were filed for the American Booksellers Association et al. by Ronald Coles; for the Freedom to Read Foundation by James A. Klenk; for the National Education Association by Michael D. Simpson; and for the Student Press Law Center by J. Marc Abrams. Gwendolyn H. Gregory, August W. Steinhilber, and Thomas A. Shannon filed a brief for the National School Boards Association as amicus curiae.
CHIEF JUSTICE BURGER delivered the opinion of the Court.
We granted certiorari to decide whether the First Amendment prevents a school district from disciplining a high school student for giving a lewd speech at a school assembly.
I
A
On April 26, 1983, respondent Matthew N. Fraser, a student at Bethel High School in Pierce County, Washington, delivered a speech nominating a fellow student for student elective office. Approximately 600 high school students, many of whom were 14-year-olds, attended the assembly. Students were required to attend the assembly or to report to the study hall. The assembly was part of a school-sponsored educational program in self-government. Students who elected not to attend the assembly were required to report to study hall. During the entire speech, Fraser referred [478 U.S. 675, 678] to his candidate in terms of an elaborate, graphic, and explicit sexual metaphor.
Two of Fraser’s teachers, with whom he discussed the contents of his speech in advance, informed him that the speech was “inappropriate and that he probably should not deliver it,” App. 30, and that his delivery of the speech might have “severe consequences.” Id., at 61.
During Fraser’s delivery of the speech, a school counselor observed the reaction of students to the speech. Some students hooted and yelled; some by gestures graphically simulated the sexual activities pointedly alluded to in respondent’s speech. Other students appeared to be bewildered and embarrassed by the speech. One teacher reported that on the day following the speech, she found it necessary to forgo a portion of the scheduled class lesson in order to discuss the speech with the class. Id., at 41-44.
A Bethel High School disciplinary rule prohibiting the use of obscene language in the school provides:
“Conduct which materially and substantially interferes with the educational process is prohibited, including the use of obscene, profane language or gestures.”
The morning after the assembly, the Assistant Principal called Fraser into her office and notified him that the school considered his speech to have been a violation of this rule. Fraser was presented with copies of five letters submitted by teachers, describing his conduct at the assembly; he was given a chance to explain his conduct, and he admitted to having given the speech described and that he deliberately used sexual innuendo in the speech. Fraser was then informed that he would be suspended for three days, and that his name would be removed from the list of candidates for graduation speaker at the school’s commencement exercises.
Fraser sought review of this disciplinary action through the School District’s grievance procedures. The hearing officer determined that the speech given by respondent was “indecent, lewd, and offensive to the modesty and decency of [478 U.S. 675, 679] many of the students and faculty in attendance at the assembly.” The examiner determined that the speech fell within the ordinary meaning of “obscene,” as used in the disruptive-conduct rule, and affirmed the discipline in its entirety. Fraser served two days of his suspension, and was allowed to return to school on the third day.
B
Respondent, by his father as guardian ad litem, then brought this action in the United States District Court for the Western District of Washington. Respondent alleged a violation of his First Amendment right to freedom of speech and sought both injunctive relief and monetary damages under 42 U.S.C. § 1983. The District Court held that the school’s sanctions violated respondent’s right to freedom of speech under the First Amendment to the United States Constitution, that the school’s disruptive-conduct rule is unconstitutionally vague and overbroad, and that the removal of respondent’s name from the graduation speaker’s list violated the Due Process Clause of the Fourteenth Amendment because the disciplinary rule makes no mention of such removal as a possible sanction. The District Court awarded respondent \$278 in damages, \$12,750 in litigation costs and attorney’s fees, and enjoined the School District from preventing respondent from speaking at the commencement ceremonies. Respondent, who had been elected graduation speaker by a write in vote of his classmates, delivered a speech at the commencement ceremonies on June 8, 1983.
The Court of Appeals for the Ninth Circuit affirmed the judgment of the District Court, 755 F.2d 1356 (1985), holding that respondent’s speech was indistinguishable from the protest armband in Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503 (1969). The court explicitly rejected the School District’s argument that the speech, unlike the passive conduct of wearing a black armband, had a disruptive effect on the educational process. The Court of [478 U.S. 675, 680] Appeals also rejected the School District’s argument that it had an interest in protecting an essentially captive audience of minors from lewd and indecent language in a setting sponsored by the school, reasoning that the School District’s “unbridled discretion” to determine what discourse is “decent” would “increase the risk of cementing white, middle-class standards for determining what is acceptable and proper speech and behavior in our public schools.” 755 F.2d, at 1363. Finally, the Court of Appeals rejected the School District’s argument that, incident to its responsibility for the school curriculum, it had the power to control the language used to express ideas during a school-sponsored activity.
We granted certiorari, 474 U.S. 814 (1985). We reverse.
II
This Court acknowledged in Tinker v. Des Moines Independent Community School Dist., supra, that students do not “shed their constitutional rights to freedom of speech or expression at the schoolhouse gate.” Id., at 506. The Court of Appeals read that case as precluding any discipline of Fraser for indecent speech and lewd conduct in the school assembly. That court appears to have proceeded on the theory that the use of lewd and obscene speech in order to make what the speaker considered to be a point in a nominating speech for a fellow student was essentially the same as the wearing of an armband in Tinker as a form of protest or the expression of a political position.
The marked distinction between the political “message” of the armbands in Tinker and the sexual content of respondent’s speech in this case seems to have been given little weight by the Court of Appeals. In upholding the students’ right to engage in a nondisruptive, passive expression of a political viewpoint in Tinker, this Court was careful to note that the case did “not concern speech or action that intrudes upon the work of the schools or the rights of other students.” Id., at 508. [478 U.S. 675, 681]
It is against this background that we turn to consider the level of First Amendment protection accorded to Fraser’s utterances and actions before an official high school assembly attended by 600 students.
III
The role and purpose of the American public school system were well described by two historians, who stated: “[P]ublic education must prepare pupils for citizenship in the Republic. . . . It must inculcate the habits and manners of civility as values in themselves conducive to happiness and as indispensable to the practice of self-government in the community and the nation.” C. Beard & M. Beard, New Basic History of the United States 228 (1968). In Ambach v. Norwick, 441 U.S. 68, 76-77 (1979), we echoed the essence of this statement of the objectives of public education as the “inculcat[ion of] fundamental values necessary to the maintenance of a democratic political system.”
These fundamental values of “habits and manners of civility” essential to a democratic society must, of course, include tolerance of divergent political and religious views, even when the views expressed may be unpopular. But these “fundamental values” must also take into account consideration of the sensibilities of others, and, in the case of a school, the sensibilities of fellow students. The undoubted freedom to advocate unpopular and controversial views in schools and classrooms must be balanced against the society’s countervailing interest in teaching students the boundaries of socially appropriate behavior. Even the most heated political discourse in a democratic society requires consideration for the personal sensibilities of the other participants and audiences.
In our Nation’s legislative halls, where some of the most vigorous political debates in our society are carried on, there are rules prohibiting the use of expressions offensive to other participants in the debate. The Manual of Parliamentary [478 U.S. 675, 682] Practice, drafted by Thomas Jefferson and adopted by the House of Representatives to govern the proceedings in that body, prohibits the use of “impertinent” speech during debate and likewise provides that “[n]o person is to use indecent language against the proceedings of the House.” Jefferson’s Manual of Parliamentary Practice §§ 359, 360, reprinted in Manual and Rules of House of Representatives, H. R. Doc. No. 97-271, pp. 158-159 (1982); see id., at 111, n. a (Jefferson’s Manual governs the House in all cases to which it applies). The Rules of Debate applicable in the Senate likewise provide that a Senator may be called to order for imputing improper motives to another Senator or for referring offensively to any state. See Senate Procedure, S. Doc. No. 97-2, Rule XIX, pp. 568-569, 588-591 (1981). Senators have been censured for abusive language directed at other Senators. See Senate Election, Expulsion and Censure Cases from 1793 to 1972, S. Doc. No. 92-7, pp. 95-98 (1972) (Sens. McLaurin and Tillman); id., at 152-153 (Sen. McCarthy). Can it be that what is proscribed in the halls of Congress is beyond the reach of school officials to regulate?
The First Amendment guarantees wide freedom in matters of adult public discourse. A sharply divided Court upheld the right to express an antidraft viewpoint in a public place, albeit in terms highly offensive to most citizens. See Cohen v. California, 403 U.S. 15 (1971). It does not follow, however, that simply because the use of an offensive form of expression may not be prohibited to adults making what the speaker considers a political point, the same latitude must be permitted to children in a public school. In New Jersey v. T. L. O., 469 U.S. 325, 340-342 (1985), we reaffirmed that the constitutional rights of students in public school are not automatically coextensive with the rights of adults in other settings. As cogently expressed by Judge Newman, “the First Amendment gives a high school student the classroom right to wear Tinker’s armband, but not Cohen’s jacket.” Thomas v. Board of Education, Granville Central School [478 U.S. 675, 683] Dist., 607 F.2d 1043, 1057 (CA2 1979) (opinion concurring in result).
Surely it is a highly appropriate function of public school education to prohibit the use of vulgar and offensive terms in public discourse. Indeed, the “fundamental values necessary to the maintenance of a democratic political system” disfavor the use of terms of debate highly offensive or highly threatening to others. Nothing in the Constitution prohibits the states from insisting that certain modes of expression are inappropriate and subject to sanctions. The inculcation of these values is truly the “work of the schools.” Tinker, 393 U.S., at 508; see Ambach v. Norwick, supra. The determination of what manner of speech in the classroom or in school assembly is inappropriate properly rests with the school board.
The process of educating our youth for citizenship in public schools is not confined to books, the curriculum, and the civics class; schools must teach by example the shared values of a civilized social order. Consciously or otherwise, teachers—and indeed the older students—demonstrate the appropriate form of civil discourse and political expression by their conduct and deportment in and out of class. Inescapably, like parents, they are role models. The schools, as instruments of the state, may determine that the essential lessons of civil, mature conduct cannot be conveyed in a school that tolerates lewd, indecent, or offensive speech and conduct such as that indulged in by this confused boy.
The pervasive sexual innuendo in Fraser’s speech was plainly offensive to both teachers and students—indeed to any mature person. By glorifying male sexuality, and in its verbal content, the speech was acutely insulting to teenage girl students. See App. 77-81. The speech could well be seriously damaging to its less mature audience, many of whom were only 14 years old and on the threshold of awareness of human sexuality. Some students were reported as [478 U.S. 675, 684] bewildered by the speech and the reaction of mimicry it provoked.
This Court’s First Amendment jurisprudence has acknowledged limitations on the otherwise absolute interest of the speaker in reaching an unlimited audience where the speech is sexually explicit and the audience may include children. In Ginsberg v. New York, 390 U.S. 629 (1968), this Court upheld a New York statute banning the sale of sexually oriented material to minors, even though the material in question was entitled to First Amendment protection with respect to adults. And in addressing the question whether the First Amendment places any limit on the authority of public schools to remove books from a public school library, all Members of the Court, otherwise sharply divided, acknowledged that the school board has the authority to remove books that are vulgar. Board of Education v. Pico, 457 U.S. 853, 871-872 (1982) (plurality opinion); id., at 879-881 (BLACKMUN, J., concurring in part and in judgment); id., at 918-920 (REHNQUIST, J., dissenting). These cases recognize the obvious concern on the part of parents, and school authorities acting in loco parentis, to protect children—especially in a captive audience—from exposure to sexually explicit, indecent, or lewd speech.
We have also recognized an interest in protecting minors from exposure to vulgar and offensive spoken language. In FCC v. Pacifica Foundation, 438 U.S. 726 (1978), we dealt with the power of the Federal Communications Commission to regulate a radio broadcast described as “indecent but not obscene.” There the Court reviewed an administrative condemnation of the radio broadcast of a selfstyled “humorist” who described his own performance as being in “the words you couldn’t say on the public, ah, airwaves, um, the ones you definitely wouldn’t say ever.” Id., at 729; see also id., at 751-755 (Appendix to opinion of the Court). The Commission concluded that “certain words depicted sexual and excretory activities in a patently offensive manner, [and] noted [478 U.S. 675, 685] that they ‘were broadcast at a time when children were undoubtedly in the audience.’” The Commission issued an order declaring that the radio station was guilty of broadcasting indecent language in violation of 18 U.S.C. 1464. 438 U.S., at 732. The Court of Appeals set aside the Commission’s determination, and we reversed, reinstating the Commission’s citation of the station. We concluded that the broadcast was properly considered “obscene, indecent, or profane” within the meaning of the statute. The plurality opinion went on to reject the radio station’s assertion of a First Amendment right to broadcast vulgarity:
“These words offend for the same reasons that obscenity offends. Their place in the hierarchy of First Amendment values was aptly sketched by Mr. Justice Murphy when he said: ‘[S]uch utterances are no essential part of any exposition of ideas, and are of such slight social value as a step to truth that any benefit that may be derived from them is clearly outweighed by the social interest in order and morality.’ Chaplinsky v. New Hampshire, 315 U.S., at 572.” Id., at 746.
We hold that petitioner School District acted entirely within its permissible authority in imposing sanctions upon Fraser in response to his offensively lewd and indecent speech. Unlike the sanctions imposed on the students wearing armbands in Tinker, the penalties imposed in this case were unrelated to any political viewpoint. The First Amendment does not prevent the school officials from determining that to permit a vulgar and lewd speech such as respondent’s would undermine the school’s basic educational mission. A high school assembly or classroom is no place for a sexually explicit monologue directed towards an unsuspecting audience of teenage students. Accordingly, it was perfectly appropriate for the school to disassociate itself to make the point to the pupils that vulgar speech and lewd conduct is wholly inconsistent with the “fundamental values” of public [478 U.S. 675, 686] school education. Justice Black, dissenting in Tinker, made a point that is especially relevant in this case:
“I wish therefore, . . . to disclaim any purpose . . . to hold that the Federal Constitution compels the teachers, parents, and elected school officials to surrender control of the American public school system to public school students.” 393 U.S., at 526.
IV
Respondent contends that the circumstances of his suspension violated due process because he had no way of knowing that the delivery of the speech in question would subject him to disciplinary sanctions. This argument is wholly without merit. We have recognized that “maintaining security and order in the schools requires a certain degree of flexibility in school disciplinary procedures, and we have respected the value of preserving the informality of the student-teacher relationship.” New Jersey v. T. L. O., 469 U.S., at 340. Given the school’s need to be able to impose disciplinary sanctions for a wide range of unanticipated conduct disruptive of the educational process, the school disciplinary rules need not be as detailed as a criminal code which imposes criminal sanctions. Cf. Arnett v. Kennedy, 416 U.S. 134, 161 (1974) (REHNQUIST, J., concurring). Two days’ suspension from school does not rise to the level of a penal sanction calling for the full panoply of procedural due process protections applicable to a criminal prosecution. Cf. Goss v. Lopez, 419 U.S. 565 (1975). The school disciplinary rule proscribing “obscene” language and the prespeech admonitions of teachers gave adequate warning to Fraser that his lewd speech could subject him to sanctions. * [478 U.S. 675, 687]
The judgment of the Court of Appeals for the Ninth Circuit is Reversed.
JUSTICE BLACKMUN concurs in the result.
[ * ] Petitioners also challenge the ruling of the District Court that the removal of Fraser’s name from the ballot for graduation speaker violated his due process rights because that sanction was not indicated as a potential punishment in the school’s disciplinary rules. We agree with the Court of Appeals that this issue has become moot, since the graduation ceremony has long since passed and Fraser was permitted to speak in accordance [478 U.S. 675, 687] with the District Court’s injunction. No part of the damages award was based upon the removal of Fraser’s name from the list, since damages were based upon the loss of two days’ schooling.
JUSTICE BRENNAN, concurring in the judgment.
Respondent gave the following speech at a high school assembly in support of a candidate for student government office:
“‘I know a man who is firm—he’s firm in his pants, he’s firm in his shirt, his character is firm— but most . . . of all, his belief in you, the students of Bethel, is firm.
“‘Jeff Kuhlman is a man who takes his point and pounds it in. If necessary, he’ll take an issue and nail it to the wall. He doesn’t attack things in spurts—he drives hard, pushing and pushing until finally—he succeeds.
“‘Jeff is a man who will go to the very end—even the climax, for each and every one of you
“‘So vote for Jeff for A. S. B. vice-president—he’ll never come between you and the best our high school can be.’” App. 47.
The Court, referring to these remarks as “obscene,” “vulgar,” “lewd,” and “offensively lewd,” concludes that school officials properly punished respondent for uttering the speech. Having read the full text of respondent’s remarks, I find it difficult to believe that it is the same speech the Court describes. To my mind, the most that can be said about respondent’s speech—and all that need be said—is that in light of the discretion school officials have to teach high school students how to conduct civil and effective public discourse, and to prevent disruption of school educational activities, it was [478 U.S. 675, 688] not unconstitutional for school officials to conclude, under the circumstances of this case, that respondent’s remarks exceeded permissible limits. Thus, while I concur in the Court’s judgment, I write separately to express my understanding of the breadth of the Court’s holding.
The Court today reaffirms the unimpeachable proposition that students do not “‘shed their constitutional rights to freedom of speech or expression at the schoolhouse gate.’” Ante, at 680 (quoting Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503, 506 (1969)). If respondent had given the same speech outside of the school environment, he could not have been penalized simply because government officials considered his language to be inappropriate, see Cohen v. California, 403 U.S. 15 (1971); the Court’s opinion does not suggest otherwise. 2.1 Moreover, despite the Court’s characterizations, the language respondent used is far removed from the very narrow class of “obscene” speech which the Court has held is not protected by the First Amendment. Ginsberg v. New York, 390 U.S. 629, 635 (1968); Roth v. United States, 354 U.S. 476, 485 (1957). It is true, however, that the State has interests in teaching high school students how to conduct civil and effective public discourse and in avoiding disruption of educational school activities. Thus, the Court holds that under certain circumstances, high school students may properly be reprimanded for giving a speech at a high school assembly which school officials conclude disrupted the school’s educational [478 U.S. 675, 689] mission. 2.2 Respondent’s speech may well have been protected had he given it in school but under different circumstances, where the school’s legitimate interests in teaching and maintaining civil public discourse were less weighty.
In the present case, school officials sought only to ensure that a high school assembly proceed in an orderly manner. There is no suggestion that school officials attempted to regulate respondent’s speech because they disagreed with the views he sought to express. Cf. Tinker, supra. Nor does this case involve an attempt by school officials to ban written materials they consider “inappropriate” for high school students, cf. Board of Education v. Pico, 457 U.S. 853 (1982), or to limit what students should hear, read, or learn about. Thus, the Court’s holding concerns only the authority that school officials have to restrict a high school student’s use of disruptive language in a speech given to a high school assembly.
The authority school officials have to regulate such speech by high school students is not limitless. See Thomas v. Board of Education, Granville Central School Dist., 607 F.2d 1043, 1057 (CA2 1979) (Newman, J., concurring in result) (“[S]chool officials . . . do [not] have limitless discretion to apply their own notions of indecency. Courts have a First [478 U.S. 675, 690] Amendment responsibility to insure that robust rhetoric . . . is not suppressed by prudish failures to distinguish the vigorous from the vulgar”). Under the circumstances of this case, however, I believe that school officials did not violate the First Amendment in determining that respondent should be disciplined for the disruptive language he used while addressing a high school assembly. 2.3 Thus, I concur in the judgment reversing the decision of the Court of Appeals.
Footnotes
[ 2.1 ] In the course of its opinion, the Court makes certain remarks concerning the authority of school officials to regulate student language in public schools. For example, the Court notes that “[n]othing in the Constitution prohibits the states from insisting that certain modes of expression are inappropriate and subject to sanctions.” Ante, at 683. These statements obviously do not, and indeed given our prior precedents could not, refer to the government’s authority generally to regulate the language used in public debate outside of the school environment.
[ 2.2 ] The Court speculates that the speech was “insulting” to female students, and “seriously damaging” to 14-year-olds, so that school officials could legitimately suppress such expression in order to protect these groups. Ante, at 683. There is no evidence in the record that any students, male or female, found the speech “insulting.” And while it was not unreasonable for school officials to conclude that respondent’s remarks were inappropriate for a school-sponsored assembly, the language respondent used does not even approach the sexually explicit speech regulated in Ginsberg v. New York, 390 U.S. 629 (1968), or the indecent speech banned in FCC v. Pacifica Foundation, 438 U.S. 726 (1978). Indeed, to my mind, respondent’s speech was no more “obscene,” “lewd,” or “sexually explicit” than the bulk of programs currently appearing on prime time television or in the local cinema. Thus, I disagree with the Court’s suggestion that school officials could punish respondent’s speech out of a need to protect younger students.
[ 2.3 ] Respondent served two days’ suspension and had his name removed from the list of candidates for graduation speaker at the school’s commencement exercises, although he was eventually permitted to speak at the graduation. While I find this punishment somewhat severe in light of the nature of respondent’s transgression, I cannot conclude that school officials exceeded the bounds of their disciplinary authority.
JUSTICE MARSHALL, dissenting.
I agree with the principles that JUSTICE BRENNAN sets out in his opinion concurring in the judgment. I dissent from the Court’s decision, however, because in my view the School District failed to demonstrate that respondent’s remarks were indeed disruptive. The District Court and Court of Appeals conscientiously applied Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503 (1969), and concluded that the School District had not demonstrated any disruption of the educational process. I recognize that the school administration must be given wide latitude to determine what forms of conduct are inconsistent with the school’s educational mission, nevertheless, where speech is involved, we may not unquestioningly accept a teacher’s or administrator’s assertion that certain pure speech interfered with education. Here the School District, despite a clear opportunity to do so, failed to bring in evidence sufficient to convince either of the two lower courts that education at Bethel School was disrupted by respondent’s speech. I therefore see no reason to disturb the Court of Appeals’ judgment. [478 U.S. 675, 691]
JUSTICE STEVENS, dissenting.
“Frankly, my dear, I don’t give a damn.”
When I was a high school student, the use of those words in a public forum shocked the Nation. Today Clark Gable’s four-letter expletive is less offensive than it was then. Nevertheless, I assume that high school administrators may prohibit the use of that word in classroom discussion and even in extracurricular activities that are sponsored by the school and held on school premises. For I believe a school faculty must regulate the content as well as the style of student speech in carrying out its educational mission. 3.1 It does seem to me, however, that if a student is to be punished for using offensive speech, he is entitled to fair notice of the scope of the prohibition and the consequences of its violation. [478 U.S. 675, 692] The interest in free speech protected by the First Amendment and the interest in fair procedure protected by the Due Process Clause of the Fourteenth Amendment combine to require this conclusion.
This respondent was an outstanding young man with a fine academic record. The fact that he was chosen by the student body to speak at the school’s commencement exercises demonstrates that he was respected by his peers. This fact is relevant for two reasons. It confirms the conclusion that the discipline imposed on him—a 3-day suspension and ineligibility to speak at the school’s graduation exercises—was sufficiently serious to justify invocation of the School District’s grievance procedures. See Goss v. Lopez, 419 U.S. 565, 574-575 (1975). More importantly, it indicates that he was probably in a better position to determine whether an audience composed of 600 of his contemporaries would be offended by the use of a four-letter word—or a sexual metaphor—than is a group of judges who are at least two generations and 3,000 miles away from the scene of the crime. 3.2
The fact that the speech may not have been offensive to his audience—or that he honestly believed that it would be inoffensive—does not mean that he had a constitutional right to deliver it. For the school not the student—must prescribe the rules of conduct in an educational institution. 3.3 But it [478 U.S. 675, 693] does mean that he should not be disciplined for speaking frankly in a school assembly if he had no reason to anticipate punitive consequences.
One might conclude that respondent should have known that he would be punished for giving this speech on three quite different theories: (1) It violated the “Disruptive Conduct” rule published in the student handbook; (2) he was specifically warned by his teachers; or (3) the impropriety is so obvious that no specific notice was required. I discuss each theory in turn.
The Disciplinary Rule
At the time the discipline was imposed, as well as in its defense of this lawsuit, the school took the position that respondent violated the following published rule:
“In addition to the criminal acts defined above, the commission of, or participation in certain noncriminal activities or acts may lead to disciplinary action. Generally, these are acts which disrupt and interfere with the educational process.
. . . . .
“‘Disruptive Conduct. Conduct which materially and substantially interferes with the educational process is prohibited, including the use of obscene, profane language or gestures.’” 755 F.2d 1356, 1357, n. 1 (CA9 1985).
Based on the findings of fact made by the District Court, the Court of Appeals concluded that the evidence did not show “that the speech had a materially disruptive effect on the educational process.” Id., at 1361. The Court of Appeals explained the basis for this conclusion:
“[T]he record now before us yields no evidence that Fraser’s use of a sexual innuendo in his speech materially interfered with activities at Bethel High School. While the students’ reaction to Fraser’s speech may fairly be characterized as boisterous, it was hardly disruptive [478 U.S. 675, 694] of the educational process. In the words of Mr. McCutcheon, the school counselor whose testimony the District relies upon, the reaction of the student body ‘was not atypical to a high school auditorium assembly.’ In our view, a noisy response to the speech and sexually suggestive movements by three students in a crowd of 600 fail to rise to the level of a material interference with the educational process that justifies impinging upon Fraser’s First Amendment right to express himself freely.
“We find it significant that although four teachers delivered written statements to an assistant principal commenting on Fraser’s speech, none of them suggested that the speech disrupted the assembly or otherwise interfered with school activities. See, Finding of Fact No. 8. Nor can a finding of material disruption be based upon the evidence that the speech proved to be a lively topic of conversation among students the following day.” Id., at 1360-1361.
Thus, the evidence in the record, as interpreted by the District Court and the Court of Appeals, makes it perfectly clear that respondent’s speech was not “conduct” prohibited by the disciplinary rule. 3.4 Indeed, even if the language of the rule could be stretched to encompass the nondisruptive use of obscene or profane language, there is no such language in respondent’s speech. What the speech does contain is a sexual metaphor that may unquestionably be offensive to some listeners in some settings. But if an impartial judge puts his [478 U.S. 675, 695] or her own views about the metaphor to one side, I simply cannot understand how he or she could conclude that it is embraced by the above-quoted rule. At best, the rule is sufficiently ambiguous that without a further explanation or construction it could not advise the reader of the student handbook that the speech would be forbidden. 3.5
The Specific Warning by the Teachers
Respondent read his speech to three different teachers before he gave it. Mrs. Irene Hicks told him that she thought the speech “was inappropriate and that he probably should not deliver it.” App. 30. Steven DeHart told respondent “that this would indeed cause problems in that it would raise eyebrows.” Id., at 61. The third teacher, Shawn Madden, did not testify. None of the three suggested that the speech might violate a school rule. Id., at 49-50.
The fact that respondent reviewed the text of his speech with three different teachers before he gave it does indicate that he must have been aware of the possibility that it would provoke an adverse reaction, but the teachers’ responses certainly did not give him any better notice of the likelihood of discipline than did the student handbook itself. In my opinion, therefore, the most difficult question is whether the speech was so obviously offensive that an intelligent high school student must be presumed to have realized that he would be punished for giving it. [478 U.S. 675, 696]
Obvious Impropriety
Justice Sutherland taught us that a “nuisance may be merely a right thing in the wrong place—like a pig in the parlor instead of the barnyard.” Euclid v. Ambler Realty Co., 272 U.S. 365, 388 (1926). Vulgar language, like vulgar animals, may be acceptable in some contexts and intolerable in others. See FCC v. Pacifica Foundation, 438 U.S. 726, 750 (1978). Indeed, even ordinary, inoffensive speech may be wholly unacceptable in some settings. See Schenck v. United States, 249 U.S. 47, 52 (1919); Pacifica, supra, at 744-745.
It seems fairly obvious that respondent’s speech would be inappropriate in certain classroom and formal social settings. On the other hand, in a locker room or perhaps in a school corridor the metaphor in the speech might be regarded as rather routine comment. If this be true, and if respondent’s audience consisted almost entirely of young people with whom he conversed on a daily basis, can we—at this distance—confidently assert that he must have known that the school administration would punish him for delivering it?
For three reasons, I think not. First, it seems highly unlikely that he would have decided to deliver the speech if he had known that it would result in his suspension and disqualification from delivering the school commencement address. Second, I believe a strong presumption in favor of free expression should apply whenever an issue of this kind is arguable. Third, because the Court has adopted the policy of applying contemporary community standards in evaluating expression with sexual connotations, this Court should defer to the views of the district and circuit judges who are in a much better position to evaluate this speech than we are.
I would affirm the judgment of the Court of Appeals.
Footnotes
[ 3.1 ] “Because every university’s resources are limited, an educational institution must routinely make decisions concerning the use of the time and space that is available for extracurricular activities. In my judgment, it is both necessary and appropriate for those decisions to evaluate the content of a proposed student activity. I should think it obvious, for example, that if two groups of 25 students requested the use of a room at a particular time—one to view Mickey Mouse cartoons and the other to rehearse an amateur performance of Hamlet—the First Amendment would not require that the room be reserved for the group that submitted its application first. Nor do I see why a university should have to establish a ‘compelling state interest’ to defend its decision to permit one group to use the facility and not the other. In my opinion, a university should be allowed to decide for itself whether a program that illuminates the genius of Walt Disney should be given precedence over one that may duplicate material adequately covered in the classroom. Judgments of this kind should be made by academicians, not by federal judges, and their standards for decision should not be encumbered with ambiguous phrases like ‘compelling state interest.’ ” Widmar v. Vincent, 454 U.S. 263, 278-279 (1981) (STEVENS, J., concurring in judgment) (footnotes omitted).
“Any student of history who has been reprimanded for talking about the World Series during a class discussion of the First Amendment knows that it is incorrect to state that a ‘time, place, or manner restriction may not be based upon either the content or subject matter of speech.’ ” Consolidated Edison Co. v. Public Service Comm’n of N. Y., 447 U.S. 530, 544-545 (1980) (STEVENS, J., concurring in judgment).
[ 3.2 ] As the Court of Appeals noted, there “is no evidence in the record indicating that any students found the speech to be offensive.” 755 F.2d 1356, 1361, n. 4 (CA9 1985).
In its opinion today, the Court describes respondent as a “confused boy,” ante, at 683, and repeatedly characterizes his audience of high school students as “children,” ante, at 682, 684. When a more orthodox message is being conveyed to a similar audience, four Members of today’s majority would treat high school students like college students rather than like children. See Bender v. Williamsport Area School Dist., 475 U.S. 534 (1986) (dissenting opinions).
[ 3.3 ] See Arnold v. Carpenter, 459 F.2d 939, 944 (CA7 1972) (STEVENS, J., dissenting).
[ 3.4 ] The Court’s reliance on the school’s authority to prohibit “unanticipated conduct disruptive of the educational process,” ante, at 686, is misplaced. The findings of the District Court, which were upheld by the Court of Appeals, established that the speech was not “disruptive.” Departing from our normal practice concerning factual findings, the Court’s decision rests on “utterly unproven, subjective impressions of some hypothetical students.” Bender v. Williamsport Area School Dist., 475 U.S., at 553 (BURGER, C. J., dissenting).
[ 3.5 ] The school’s disruptive conduct rule is entirely concerned with “the educational process.” It does not expressly refer to extracurricular activities in general, or to student political campaigns or student debates. In contrast, “[i]n our Nation’s legislative halls, where some of the most vigorous political debates in our society are carried on, there are rules prohibiting the use of expressions offensive to other participants in the debate.” See ante, at 681. If a written rule is needed to forewarn a United States Senator that the use of offensive speech may give rise to discipline, a high school student should be entitled to an equally unambiguous warning. Unlike the Manual of Parliamentary Practice drafted by Thomas Jefferson, this School District’s rules of conduct contain no unequivocal prohibition against the use of “impertinent” speech or “indecent language.” [478 U.S. 675, 697]
1.04: New Page
Among other cherished values, the First Amendment protects freedom of speech. The U.S. Supreme Court often has struggled to determine what exactly constitutes protected speech. The following are examples of speech, both direct (words) and symbolic (actions), that the Court has decided are either entitled to First Amendment protections, or not.
The First Amendment states, in relevant part, that:
“Congress shall make no law . . . abridging freedom of speech.”
Freedom of speech includes the right:
• Not to speak (specifically, the right not to salute the flag). West Virginia Board of Education v. Barnette, 319 U.S. 624 (1943).
• Of students to wear black armbands to school to protest a war (“Students do not shed their constitutional rights at the schoolhouse gate.”). Tinker v. Des Moines, 393 U.S. 503 (1969).
• To use certain offensive words and phrases to convey political messages. Cohen v. California, 403 U.S. 15 (1971).
• To contribute money (under certain circumstances) to political campaigns. Buckley v. Valeo, 424 U.S. 1 (1976).
• To advertise commercial products and professional services (with some restrictions). Virginia Board of Pharmacy v. Virginia Consumer Council, 425 U.S. 748 (1976); Bates v. State Bar of Arizona, 433 U.S. 350 (1977).
• To engage in symbolic speech, (e.g., burning the flag in protest). Texas v. Johnson, 491 U.S. 397 (1989); United States v. Eichman, 496 U.S. 310 (1990).
Freedom of speech does not include the right:
• To incite actions that would harm others (e.g., “[S]hout[ing] ‘fire’ in a crowded theater.”). Schenck v. United States, 249 U.S. 47 (1919).
• To make or distribute obscene materials. Roth v. United States, 354 U.S. 476 (1957).
• To burn draft cards as an anti-war protest. United States v. O’Brien, 391 U.S. 367 (1968).
• To permit students to print articles in a school newspaper over the objections of the school administration.
Hazelwood School District v. Kuhlmeier, 484 U.S. 260 (1988).
• Of students to make an obscene speech at a school-sponsored event.
Bethel School District #43 v. Fraser, 478 U.S. 675 (1986).
• Of students to advocate illegal drug use at a school-sponsored event.
Morse v. Frederick, __ U.S. __ (2007).
The above text is from
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Supreme Court Landmark Case Tinker v. Des Moines
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Learning Objectives
New Jersey v. T. L. O.
469 U.S. 325 (1985)
United States Supreme Court, Docket No. 83-712
Argued: March 28, 1984 Decided: January 15, 1985
A teacher at a New Jersey high school, upon discovering respondent, then a 14-year-old freshman, and her companion smoking cigarettes in a school lavatory in violation of a school rule, took them to the Principal’s office, where they met with the Assistant Vice Principal. When respondent, in response to the Assistant Vice Principal’s questioning, denied that she had been smoking and claimed that she did not smoke at all, the Assistant Vice Principal demanded to see her purse. Upon opening the purse, he found a pack of cigarettes and also noticed a package of cigarette rolling papers that are commonly associated with the use of marihuana. He then proceeded to search the purse thoroughly and found some marihuana, a pipe, plastic bags, a fairly substantial amount of money, an index card containing a list of students who owed respondent money, and two letters that implicated her in marihuana dealing. Thereafter, the State brought delinquency charges against respondent in the Juvenile Court, which, after denying respondent’s motion to suppress the evidence found in her purse, held that the Fourth Amendment applied to searches by school officials but that the search in question was a reasonable one, and adjudged respondent to be a delinquent. The Appellate Division of the New Jersey Superior Court affirmed the trial court’s finding that there had been no Fourth Amendment violation but vacated the adjudication of delinquency and remanded on other grounds. The New Jersey Supreme Court reversed and ordered the suppression of the evidence found in respondent’s purse, holding that the search of the purse was unreasonable.
Held:
1. The Fourth Amendment’s prohibition on unreasonable searches and seizures applies to searches conducted by public school officials and is not limited to searches carried out by law enforcement officers. Nor are school officials exempt from the Amendment’s dictates by virtue of the special nature of their authority over schoolchildren. In carrying out searches and other functions pursuant to disciplinary policies mandated by state statutes, school officials act as representatives of the State, not merely as surrogates for the parents of students, and they cannot claim the parents’ immunity from the Fourth Amendment’s strictures. Pp. 333-337. [469 U.S. 325, 326]
2. Schoolchildren have legitimate expectations of privacy. They may find it necessary to carry with them a variety of legitimate, non-contraband items, and there is no reason to conclude that they have necessarily waived all rights to privacy in such items by bringing them onto school grounds. But striking the balance between schoolchildren’s legitimate expectations of privacy and the school’s equally legitimate need to maintain an environment in which learning can take place requires some easing of the restrictions to which searches by public authorities are ordinarily subject. Thus, school officials need not obtain a warrant before searching a student who is under their authority. Moreover, school officials need not be held subject to the requirement that searches be based on probable cause to believe that the subject of the search has violated or is violating the law. Rather, the legality of a search of a student should depend simply on the reasonableness, under all the circumstances, of the search. Determining the reasonableness of any search involves a determination of whether the search was justified at its inception and whether, as conducted, it was reasonably related in scope to the circumstances that justified the interference in the first place. Under ordinary circumstances the search of a student by a school official will be justified at its inception where there are reasonable grounds for suspecting that the search will turn up evidence that the student has violated or is violating either the law or the rules of the school. And such a search will be permissible in its scope when the measures adopted are reasonably related to the objectives of the search and not excessively intrusive in light of the student’s age and sex and the nature of the infraction. Pp. 337-343.
3. Under the above standard, the search in this case was not unreasonable for Fourth Amendment purposes. First, the initial search for cigarettes was reasonable. The report to the Assistant Vice Principal that respondent had been smoking warranted a reasonable suspicion that she had cigarettes in her purse, and thus the search was justified despite the fact that the cigarettes, if found, would constitute “mere evidence” of a violation of the no-smoking rule. Second, the discovery of the rolling papers then gave rise to a reasonable suspicion that respondent was carrying marihuana as well as cigarettes in her purse, and this suspicion justified the further exploration that turned up more evidence of drug-related activities. Pp. 343-347.
94 N. J. 331, 463 A. 2d 934, reversed.
WHITE, J., delivered the opinion of the Court, in which BURGER, C. J., and POWELL, REHNQUIST, and O’CONNOR, JJ., joined, and in Part II of which BRENNAN, MARSHALL, and STEVENS, JJ., joined. POWELL, J., filed a concurring opinion, in which O’CONNOR, J., joined, post, p. 348. [469 U.S. 325, 327] BLACKMUN, J., filed an opinion concurring in the judgment, post, p. 351. BRENNAN, J., filed an opinion concurring in part and dissenting in part, in which MARSHALL, J., joined, post, p. 353. STEVENS, J., filed an opinion concurring in part and dissenting in part, in which MARSHALL, J., joined, and in Part I of which BRENNAN, J., joined, post, p. 370.
Allan J. Nodes, Deputy Attorney General of New Jersey, reargued the cause for petitioner. With him on the brief on reargument were Irwin J. Kimmelman, Attorney General, and Victoria Curtis Bramson, Linda L. Yoder, and Gilbert G. Miller, Deputy Attorneys General. With him on the briefs on the original argument were Mr. Kimmelman and Ms. Bramson.
Lois De Julio reargued the cause for respondent. With her on the briefs were Joseph H. Rodriguez and Andrew Dillmann. *
[ * ] Briefs of amici curiae urging reversal were filed for the United States by Solicitor General Lee, Deputy Solicitor General Frey, and Kathryn A. Oberly; for the National Association of Secondary School Principals et al. by Ivan B. Gluckman; for the National School Boards Association by Gwendolyn H. Gregory, August W. Steinhilber, and Thomas A. Shannon; for the Washington Legal Foundation by Daniel J. Popeo and Paul D. Kamenar; and for the New Jersey School Boards Association by Paula A. Mullaly and Thomas F. Scully.
Briefs of amici curiae urging affirmance were filed for the American Civil Liberties Union et al. by Mary L. Heen, Burt Neuborne, E. Richard Larson, Barry S. Goodman, and Charles S. Sims; and for the Legal Aid Society of the City of New York et al. by Janet Fink and Henry Weintraub.
Julia Penny Clark and Robert Chanin filed a brief for the National Education Association as amicus curiae.
JUSTICE WHITE delivered the opinion of the Court.
We granted certiorari in this case to examine the appropriateness of the exclusionary rule as a remedy for searches carried out in violation of the Fourth Amendment by public school authorities. Our consideration of the proper application of the Fourth Amendment to the public schools, however, has led us to conclude that the search that gave rise to [469 U.S. 325, 328] the case now before us did not violate the Fourth Amendment. Accordingly, we here address only the questions of the proper standard for assessing the legality of searches conducted by public school officials and the application of that standard to the facts of this case.
I
On March 7, 1980, a teacher at Piscataway High School in Middlesex County, N. J., discovered two girls smoking in a lavatory. One of the two girls was the respondent T. L. O., who at that time was a 14-year-old high school freshman. Because smoking in the lavatory was a violation of a school rule, the teacher took the two girls to the Principal’s office, where they met with Assistant Vice Principal Theodore Choplick. In response to questioning by Mr. Choplick, T. L. O.’s companion admitted that she had violated the rule. T. L. O., however, denied that she had been smoking in the lavatory and claimed that she did not smoke at all.
Mr. Choplick asked T. L. O. to come into his private office and demanded to see her purse. Opening the purse, he found a pack of cigarettes, which he removed from the purse and held before T. L. O. as he accused her of having lied to him. As he reached into the purse for the cigarettes, Mr. Choplick also noticed a package of cigarette rolling papers. In his experience, possession of rolling papers by high school students was closely associated with the use of marihuana. Suspecting that a closer examination of the purse might yield further evidence of drug use, Mr. Choplick proceeded to search the purse thoroughly. The search revealed a small amount of marihuana, a pipe, a number of empty plastic bags, a substantial quantity of money in one-dollar bills, an index card that appeared to be a list of students who owed T. L. O. money, and two letters that implicated T. L. O. in marihuana dealing.
Mr. Choplick notified T. L. O.’s mother and the police, and turned the evidence of drug dealing over to the police. At [469 U.S. 325, 329] the request of the police, T. L. O.’s mother took her daughter to police headquarters, where T. L. O. confessed that she had been selling marihuana at the high school. On the basis of the confession and the evidence seized by Mr. Choplick, the State brought delinquency charges against T. L. O. in the Juvenile and Domestic Relations Court of Middlesex County. 1.1 Contending that Mr. Choplick’s search of her purse violated the Fourth Amendment, T. L. O. moved to suppress the evidence found in her purse as well as her confession, which, she argued, was tainted by the allegedly unlawful search. The Juvenile Court denied the motion to suppress. State ex rel. T. L. O., 178 N. J. Super. 329, 428 A. 2d 1327 (1980). Although the court concluded that the Fourth Amendment did apply to searches carried out by school officials, it held that
“a school official may properly conduct a search of a student’s person if the official has a reasonable suspicion that a crime has been or is in the process of being committed, or reasonable cause to believe that the search is necessary to maintain school discipline or enforce school policies.” Id., at 341, 428 A. 2d, at 1333 (emphasis in original).
Applying this standard, the court concluded that the search conducted by Mr. Choplick was a reasonable one. The initial decision to open the purse was justified by Mr. Choplick’s well-founded suspicion that T. L. O. had violated the rule forbidding smoking in the lavatory. Once the purse [469 U.S. 325, 330] was open, evidence of marihuana violations was in plain view, and Mr. Choplick was entitled to conduct a thorough search to determine the nature and extent of T. L. O.’s drugrelated activities. Id., at 343, 428 A. 2d, at 1334. Having denied the motion to suppress, the court on March 23, 1981, found T. L. O. to be a delinquent and on January 8, 1982, sentenced her to a year’s probation.
On appeal from the final judgment of the Juvenile Court, a divided Appellate Division affirmed the trial court’s finding that there had been no Fourth Amendment violation, but vacated the adjudication of delinquency and remanded for a determination whether T. L. O. had knowingly and voluntarily waived her Fifth Amendment rights before confessing. State ex rel. T. L. O., 185 N. J. Super. 279, 448 A. 2d 493 (1982). T. L. O. appealed the Fourth Amendment ruling, and the Supreme Court of New Jersey reversed the judgment of the Appellate Division and ordered the suppression of the evidence found in T. L. O.’s purse. State ex rel. T. L. O., 94 N. J. 331, 463 A. 2d 934 (1983).
The New Jersey Supreme Court agreed with the lower courts that the Fourth Amendment applies to searches conducted by school officials. The court also rejected the State of New Jersey’s argument that the exclusionary rule should not be employed to prevent the use in juvenile proceedings of evidence unlawfully seized by school officials. Declining to consider whether applying the rule to the fruits of searches by school officials would have any deterrent value, the court held simply that the precedents of this Court establish that “if an official search violates constitutional rights, the evidence is not admissible in criminal proceedings.” Id., at 341, 463 A. 2d, at 939 (footnote omitted).
With respect to the question of the legality of the search before it, the court agreed with the Juvenile Court that a warrantless search by a school official does not violate the Fourth Amendment so long as the official “has reasonable grounds to believe that a student possesses evidence of illegal [469 U.S. 325, 331] activity or activity that would interfere with school discipline and order.” Id., at 346, 463 A. 2d, at 941-942. However, the court, with two justices dissenting, sharply disagreed with the Juvenile Court’s conclusion that the search of the purse was reasonable. According to the majority, the contents of T. L. O.’s purse had no bearing on the accusation against T. L. O., for possession of cigarettes (as opposed to smoking them in the lavatory) did not violate school rules, and a mere desire for evidence that would impeach T. L. O.’s claim that she did not smoke cigarettes could not justify the search. Moreover, even if a reasonable suspicion that T. L. O. had cigarettes in her purse would justify a search, Mr. Choplick had no such suspicion, as no one had furnished him with any specific information that there were cigarettes in the purse. Finally, leaving aside the question whether Mr. Choplick was justified in opening the purse, the court held that the evidence of drug use that he saw inside did not justify the extensive “rummaging” through T. L. O.’s papers and effects that followed. Id., at 347, 463 A. 2d, at 942-943.
We granted the State of New Jersey’s petition for certiorari. 464 U.S. 991 (1983). Although the State had argued in the Supreme Court of New Jersey that the search of T. L. O.’s purse did not violate the Fourth Amendment, the petition for certiorari raised only the question whether the exclusionary rule should operate to bar consideration in juvenile delinquency proceedings of evidence unlawfully seized by a school official without the involvement of law enforcement officers. When this case was first argued last Term, the State conceded for the purpose of argument that the standard devised by the New Jersey Supreme Court for determining the legality of school searches was appropriate and that the court had correctly applied that standard; the State contended only that the remedial purposes of the exclusionary rule were not well served by applying it to searches conducted by public authorities not primarily engaged in law enforcement. [469 U.S. 325, 332]
Although we originally granted certiorari to decide the issue of the appropriate remedy in juvenile court proceedings for unlawful school searches, our doubts regarding the wisdom of deciding that question in isolation from the broader question of what limits, if any, the Fourth Amendment places on the activities of school authorities prompted us to order reargument on that question. 1.2 Having heard argument on [469 U.S. 325, 333] the legality of the search of T. L. O.’s purse, we are satisfied that the search did not violate the Fourth Amendment. 1.3
II
In determining whether the search at issue in this case violated the Fourth Amendment, we are faced initially with the question whether that Amendment’s prohibition on unreasonable searches and seizures applies to searches conducted by public school officials. We hold that it does. [469 U.S. 325, 334]
It is now beyond dispute that “the Federal Constitution, by virtue of the Fourteenth Amendment, prohibits unreasonable searches and seizures by state officers.” Elkins v. United States, 364 U.S. 206, 213 (1960); accord, Mapp v. Ohio, 367 U.S. 643 (1961); Wolf v. Colorado, 338 U.S. 25 (1949). Equally indisputable is the proposition that the Fourteenth Amendment protects the rights of students against encroachment by public school officials:
“The Fourteenth Amendment, as now applied to the States, protects the citizen against the State itself and all of its creatures—Boards of Education not excepted. These have, of course, important, delicate, and highly discretionary functions, but none that they may not perform within the limits of the Bill of Rights. That they are educating the young for citizenship is reason for scrupulous protection of Constitutional freedoms of the individual, if we are not to strangle the free mind at its source and teach youth to discount important principles of our government as mere platitudes.” West Virginia State Bd. of Ed. v. Barnette, 319 U.S. 624, 637 (1943).
These two propositions—that the Fourth Amendment applies to the States through the Fourteenth Amendment, and that the actions of public school officials are subject to the limits placed on state action by the Fourteenth Amendment—might appear sufficient to answer the suggestion that the Fourth Amendment does not proscribe unreasonable searches by school officials. On reargument, however, the State of New Jersey has argued that the history of the Fourth Amendment indicates that the Amendment was intended to regulate only searches and seizures carried out by law enforcement officers; accordingly, although public school officials are concededly state agents for purposes of the Fourteenth Amendment, the Fourth Amendment creates no rights enforceable against them. 1.4 [469 U.S. 325, 335]
It may well be true that the evil toward which the Fourth Amendment was primarily directed was the resurrection of the pre-Revolutionary practice of using general warrants or “writs of assistance” to authorize searches for contraband by officers of the Crown. See United States v. Chadwick, 433 U.S. 1, 7-8 (1977); Boyd v. United States, 116 U.S. 616, 624-629 (1886). But this Court has never limited the Amendment’s prohibition on unreasonable searches and seizures to operations conducted by the police. Rather, the Court has long spoken of the Fourth Amendment’s strictures as restraints imposed upon “governmental action”—that is, “upon the activities of sovereign authority.” Burdeau v. McDowell, 256 U.S. 465, 475 (1921). Accordingly, we have held the Fourth Amendment applicable to the activities of civil as well as criminal authorities: building inspectors, see Camara v. Municipal Court, 387 U.S. 523, 528 (1967), Occupational Safety and Health Act inspectors, see Marshall v. Barlow’s, Inc., 436 U.S. 307, 312-313 (1978), and even firemen entering privately owned premises to battle a fire, see Michigan v. Tyler, 436 U.S. 499, 506 (1978), are all subject to the restraints imposed by the Fourth Amendment. As we observed in Camara v. Municipal Court, supra, “[t]he basic purpose of this Amendment, as recognized in countless decisions of this Court, is to safeguard the privacy and security of individuals against arbitrary invasions by governmental officials.” 387 U.S., at 528. Because the individual’s interest in privacy and personal security “suffers whether the government’s motivation is to investigate violations of criminal laws or breaches of other statutory or regulatory standards,” Marshall v. Barlow’s, Inc., supra, at 312-313, it would be “anomalous to say that the individual and his private property are fully protected by the Fourth Amendment only when the individual is suspected of criminal behavior.” Camara v. Municipal Court, supra, at 530. [469 U.S. 325, 336]
Notwithstanding the general applicability of the Fourth Amendment to the activities of civil authorities, a few courts have concluded that school officials are exempt from the dictates of the Fourth Amendment by virtue of the special nature of their authority over schoolchildren. See, e.g., R. C. M. v. State, 660 S. W. 2d 552 (Tex. App. 1983). Teachers and school administrators, it is said, act in loco parentis in their dealings with students: their authority is that of the parent, not the State, and is therefore not subject to the limits of the Fourth Amendment. Ibid.
Such reasoning is in tension with contemporary reality and the teachings of this Court. We have held school officials subject to the commands of the First Amendment, see Tinker v. Des Moines Independent Community School District, 393 U.S. 503 (1969), and the Due Process Clause of the Fourteenth Amendment, see Goss v. Lopez, 419 U.S. 565 (1975). If school authorities are state actors for purposes of the constitutional guarantees of freedom of expression and due process, it is difficult to understand why they should be deemed to be exercising parental rather than public authority when conducting searches of their students. More generally, the Court has recognized that “the concept of parental delegation” as a source of school authority is not entirely “consonant with compulsory education laws.” Ingraham v. Wright, 430 U.S. 651, 662 (1977). Today’s public school officials do not merely exercise authority voluntarily conferred on them by individual parents; rather, they act in furtherance of publicly mandated educational and disciplinary policies. See, e.g., the opinion in State ex rel. T. L. O., 94 N. J., at 343, 463 A. 2d, at 934, 940, describing the New Jersey statutes regulating school disciplinary policies and establishing the authority of school officials over their students. In carrying out searches and other disciplinary functions pursuant to such policies, school officials act as representatives of the State, not merely as surrogates for the parents, and they [469 U.S. 325, 337] cannot claim the parents’ immunity from the strictures of the Fourth Amendment.
III
To hold that the Fourth Amendment applies to searches conducted by school authorities is only to begin the inquiry into the standards governing such searches. Although the underlying command of the Fourth Amendment is always that searches and seizures be reasonable, what is reasonable depends on the context within which a search takes place. The determination of the standard of reasonableness governing any specific class of searches requires “balancing the need to search against the invasion which the search entails.” Camara v. Municipal Court, supra, at 536-537. On one side of the balance are arrayed the individual’s legitimate expectations of privacy and personal security; on the other, the government’s need for effective methods to deal with breaches of public order.
We have recognized that even a limited search of the person is a substantial invasion of privacy. Terry v. Ohio, 392 U.S. 1, 24-25 (1967). We have also recognized that searches of closed items of personal luggage are intrusions on protected privacy interests, for “the Fourth Amendment provides protection to the owner of every container that conceals its contents from plain view.” United States v. Ross, 456 U.S. 798, 822-823 (1982). A search of a child’s person or of a closed purse or other bag carried on her person, 1.5 no less [469 U.S. 325, 338] than a similar search carried out on an adult, is undoubtedly a severe violation of subjective expectations of privacy.
Of course, the Fourth Amendment does not protect subjective expectations of privacy that are unreasonable or otherwise “illegitimate.” See, e.g., Hudson v. Palmer, 468 U.S. 517 (1984); Rawlings v. Kentucky, 448 U.S. 98 (1980). To receive the protection of the Fourth Amendment, an expectation of privacy must be one that society is “prepared to recognize as legitimate.” Hudson v. Palmer, supra, at 526. The State of New Jersey has argued that because of the pervasive supervision to which children in the schools are necessarily subject, a child has virtually no legitimate expectation of privacy in articles of personal property “unnecessarily” carried into a school. This argument has two factual premises: (1) the fundamental incompatibility of expectations of privacy with the maintenance of a sound educational environment; and (2) the minimal interest of the child in bringing any items of personal property into the school. Both premises are severely flawed.
Although this Court may take notice of the difficulty of maintaining discipline in the public schools today, the situation is not so dire that students in the schools may claim no legitimate expectations of privacy. We have recently recognized that the need to maintain order in a prison is such that prisoners retain no legitimate expectations of privacy in their cells, but it goes almost without saying that “[t]he prisoner and the schoolchild stand in wholly different circumstances, separated by the harsh facts of criminal conviction and incarceration.” Ingraham v. Wright, supra, at 669. We are not [469 U.S. 325, 339] yet ready to hold that the schools and the prisons need be equated for purposes of the Fourth Amendment.
Nor does the State’s suggestion that children have no legitimate need to bring personal property into the schools seem well anchored in reality. Students at a minimum must bring to school not only the supplies needed for their studies, but also keys, money, and the necessaries of personal hygiene and grooming. In addition, students may carry on their persons or in purses or wallets such nondisruptive yet highly personal items as photographs, letters, and diaries. Finally, students may have perfectly legitimate reasons to carry with them articles of property needed in connection with extracurricular or recreational activities. In short, schoolchildren may find it necessary to carry with them a variety of legitimate, noncontraband items, and there is no reason to conclude that they have necessarily waived all rights to privacy in such items merely by bringing them onto school grounds.
Against the child’s interest in privacy must be set the substantial interest of teachers and administrators in maintaining discipline in the classroom and on school grounds. Maintaining order in the classroom has never been easy, but in recent years, school disorder has often taken particularly ugly forms: drug use and violent crime in the schools have become major social problems. See generally 1 NIE, U.S. Dept. of Health, Education and Welfare, Violent Schools—Safe Schools: The Safe School Study Report to the Congress (1978). Even in schools that have been spared the most severe disciplinary problems, the preservation of order and a proper educational environment requires close supervision of schoolchildren, as well as the enforcement of rules against conduct that would be perfectly permissible if undertaken by an adult. “Events calling for discipline are frequent occurrences and sometimes require immediate, effective action.” Goss v. Lopez, 419 U.S., at 580. Accordingly, we have recognized [469 U.S. 325, 340] that maintaining security and order in the schools requires a certain degree of flexibility in school disciplinary procedures, and we have respected the value of preserving the informality of the student-teacher relationship. See id., at 582-583; Ingraham v. Wright, 430 U.S., at 680-682.
How, then, should we strike the balance between the schoolchild’s legitimate expectations of privacy and the school’s equally legitimate need to maintain an environment in which learning can take place? It is evident that the school setting requires some easing of the restrictions to which searches by public authorities are ordinarily subject. The warrant requirement, in particular, is unsuited to the school environment: requiring a teacher to obtain a warrant before searching a child suspected of an infraction of school rules (or of the criminal law) would unduly interfere with the maintenance of the swift and informal disciplinary procedures needed in the schools. Just as we have in other cases dispensed with the warrant requirement when “the burden of obtaining a warrant is likely to frustrate the governmental purpose behind the search,” Camara v. Municipal Court, 387 U.S., at 532-533, we hold today that school officials need not obtain a warrant before searching a student who is under their authority.
The school setting also requires some modification of the level of suspicion of illicit activity needed to justify a search. Ordinarily, a search—even one that may permissibly be carried out without a warrant—must be based upon “probable cause” to believe that a violation of the law has occurred. See, e.g., Almeida-Sanchez v. United States, 413 U.S. 266, 273 (1973); Sibron v. New York, 392 U.S. 40, 62-66 (1968). However, “probable cause” is not an irreducible requirement of a valid search. The fundamental command of the Fourth Amendment is that searches and seizures be reasonable, and although “both the concept of probable cause and the requirement of a warrant bear on the reasonableness of a search, . . . in certain limited circumstances neither is required.” AlmeidaSanchez v. United States, supra, at 277 (POWELL, [469 U.S. 325, 341] J., concurring). Thus, we have in a number of cases recognized the legality of searches and seizures based on suspicions that, although “reasonable,” do not rise to the level of probable cause. See, e.g., Terry v. Ohio, 392 U.S. 1 (1968); United States v. Brignoni-Ponce, 422 U.S. 873, 881 (1975); Delaware v. Prouse, 440 U.S. 648, 654-655 (1979); United States v. Martinez-Fuerte, 428 U.S. 543 (1976); cf. Camara v. Municipal Court, supra, at 534-539. Where a careful balancing of governmental and private interests suggests that the public interest is best served by a Fourth Amendment standard of reasonableness that stops short of probable cause, we have not hesitated to adopt such a standard.
We join the majority of courts that have examined this issue 1.6 in concluding that the accommodation of the privacy interests of schoolchildren with the substantial need of teachers and administrators for freedom to maintain order in the schools does not require strict adherence to the requirement that searches be based on probable cause to believe that the subject of the search has violated or is violating the law. Rather, the legality of a search of a student should depend simply on the reasonableness, under all the circumstances, of the search. Determining the reasonableness of any search involves a twofold inquiry: first, one must consider “whether the . . . action was justified at its inception,” Terry v. Ohio, 392 U.S., at 20; second, one must determine whether the search as actually conducted “was reasonably related in scope to the circumstances which justified the interference in the first place,” ibid. Under ordinary circumstances, a search of a student by a teacher or other school official 1.7 will be [469 U.S. 325, 342] “justified at its inception” when there are reasonable grounds for suspecting that the search will turn up evidence that the student has violated or is violating either the law or the rules of the school. 1.8 Such a search will be permissible in its scope when the measures adopted are reasonably related to the objectives of the search and not excessively intrusive in light of the age and sex of the student and the nature of the infraction. 1.9
This standard will, we trust, neither unduly burden the efforts of school authorities to maintain order in their schools [469 U.S. 325, 343] nor authorize unrestrained intrusions upon the privacy of schoolchildren. By focusing attention on the question of reasonableness, the standard will spare teachers and school administrators the necessity of schooling themselves in the niceties of probable cause and permit them to regulate their conduct according to the dictates of reason and common sense. At the same time, the reasonableness standard should ensure that the interests of students will be invaded no more than is necessary to achieve the legitimate end of preserving order in the schools.
IV
There remains the question of the legality of the search in this case. We recognize that the “reasonable grounds” standard applied by the New Jersey Supreme Court in its consideration of this question is not substantially different from the standard that we have adopted today. Nonetheless, we believe that the New Jersey court’s application of that standard to strike down the search of T. L. O.’s purse reflects a somewhat crabbed notion of reasonableness. Our review of the facts surrounding the search leads us to conclude that the search was in no sense unreasonable for Fourth Amendment purposes. 1.10
The incident that gave rise to this case actually involved two separate searches, with the first—the search for cigarettes—providing the suspicion that gave rise to the second [469 U.S. 325, 344]—the search for marihuana. Although it is the fruits of the second search that are at issue here, the validity of the search for marihuana must depend on the reasonableness of the initial search for cigarettes, as there would have been no reason to suspect that T. L. O. possessed marihuana had the first search not taken place. Accordingly, it is to the search for cigarettes that we first turn our attention.
The New Jersey Supreme Court pointed to two grounds for its holding that the search for cigarettes was unreasonable. First, the court observed that possession of cigarettes was not in itself illegal or a violation of school rules. Because the contents of T. L. O.’s purse would therefore have “no direct bearing on the infraction” of which she was accused (smoking in a lavatory where smoking was prohibited), there was no reason to search her purse. 1.11 Second, even assuming that a search of T. L. O.’s purse might under some circumstances be reasonable in light of the accusation made against T. L. O., the New Jersey court concluded that Mr. Choplick in this particular case had no reasonable grounds to suspect that T. L. O. had cigarettes in her purse. At best, according [469 U.S. 325, 345] to the court, Mr. Choplick had “a good hunch.” 94 N. J., at 347, 463 A. 2d, at 942.
Both these conclusions are implausible. T. L. O. had been accused of smoking, and had denied the accusation in the strongest possible terms when she stated that she did not smoke at all. Surely it cannot be said that under these circumstances, T. L. O.’s possession of cigarettes would be irrelevant to the charges against her or to her response to those charges. T. L. O.’s possession of cigarettes, once it was discovered, would both corroborate the report that she had been smoking and undermine the credibility of her defense to the charge of smoking. To be sure, the discovery of the cigarettes would not prove that T. L. O. had been smoking in the lavatory; nor would it, strictly speaking, necessarily be inconsistent with her claim that she did not smoke at all. But it is universally recognized that evidence, to be relevant to an inquiry, need not conclusively prove the ultimate fact in issue, but only have “any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.” Fed. Rule Evid. 401. The relevance of T. L. O.’s possession of cigarettes to the question whether she had been smoking and to the credibility of her denial that she smoked supplied the necessary “nexus” between the item searched for and the infraction under investigation. See Warden v. Hayden, 387 U.S. 294, 306-307 (1967). Thus, if Mr. Choplick in fact had a reasonable suspicion that T. L. O. had cigarettes in her purse, the search was justified despite the fact that the cigarettes, if found, would constitute “mere evidence” of a violation. Ibid.
Of course, the New Jersey Supreme Court also held that Mr. Choplick had no reasonable suspicion that the purse would contain cigarettes. This conclusion is puzzling. A teacher had reported that T. L. O. was smoking in the lavatory. Certainly this report gave Mr. Choplick reason to suspect that T. L. O. was carrying cigarettes with her; and [469 U.S. 325, 346] if she did have cigarettes, her purse was the obvious place in which to find them. Mr. Choplick’s suspicion that there were cigarettes in the purse was not an “inchoate and unparticularized suspicion or ‘hunch,’” Terry v. Ohio, 392 U.S., at 27; rather, it was the sort of “common-sense conclusio[n] about human behavior” upon which “practical people”—including government officials—are entitled to rely. United States v. Cortez, 449 U.S. 411, 418 (1981). Of course, even if the teacher’s report were true, T. L. O. might not have had a pack of cigarettes with her; she might have borrowed a cigarette from someone else or have been sharing a cigarette with another student. But the requirement of reasonable suspicion is not a requirement of absolute certainty: “sufficient probability, not certainty, is the touchstone of reasonableness under the Fourth Amendment. . . .” Hill v. California, 401 U.S. 797, 804 (1971). Because the hypothesis that T. L. O. was carrying cigarettes in her purse was itself not unreasonable, it is irrelevant that other hypotheses were also consistent with the teacher’s accusation. Accordingly, it cannot be said that Mr. Choplick acted unreasonably when he examined T. L. O.’s purse to see if it contained cigarettes. 1.12 [469 U.S. 325, 347]
Our conclusion that Mr. Choplick’s decision to open T. L. O.’s purse was reasonable brings us to the question of the further search for marihuana once the pack of cigarettes was located. The suspicion upon which the search for marihuana was founded was provided when Mr. Choplick observed a package of rolling papers in the purse as he removed the pack of cigarettes. Although T. L. O. does not dispute the reasonableness of Mr. Choplick’s belief that the rolling papers indicated the presence of marihuana, she does contend that the scope of the search Mr. Choplick conducted exceeded permissible bounds when he seized and read certain letters that implicated T. L. O. in drug dealing. This argument, too, is unpersuasive. The discovery of the rolling papers concededly gave rise to a reasonable suspicion that T. L. O. was carrying marihuana as well as cigarettes in her purse. This suspicion justified further exploration of T. L. O.’s purse, which turned up more evidence of drugrelated activities: a pipe, a number of plastic bags of the type commonly used to store marihuana, a small quantity of marihuana, and a fairly substantial amount of money. Under these circumstances, it was not unreasonable to extend the search to a separate zippered compartment of the purse; and when a search of that compartment revealed an index card containing a list of “people who owe me money” as well as two letters, the inference that T. L. O. was involved in marihuana trafficking was substantial enough to justify Mr. Choplick in examining the letters to determine whether they contained any further evidence. In short, we cannot conclude that the search for marihuana was unreasonable in any respect.
Because the search resulting in the discovery of the evidence of marihuana dealing by T. L. O. was reasonable, the New Jersey Supreme Court’s decision to exclude that evidence [469 U.S. 325, 348] from T. L. O.’s juvenile delinquency proceedings on Fourth Amendment grounds was erroneous. Accordingly, the judgment of the Supreme Court of New Jersey is Reversed.
Footnotes
[ 1.1 ] T. L. O. also received a 3-day suspension from school for smoking cigarettes in a nonsmoking area and a 7-day suspension for possession of marihuana. On T. L. O.’s motion, the Superior Court of New Jersey, Chancery Division, set aside the 7-day suspension on the ground that it was based on evidence seized in violation of the Fourth Amendment. (T. L. O.) v. Piscataway Bd. of Ed., No. C. 2865-79 (Super. Ct. N. J., Ch. Div., Mar. 31, 1980). The Board of Education apparently did not appeal the decision of the Chancery Division.
[ 1.2 ] State and federal courts considering these questions have struggled to accommodate the interests protected by the Fourth Amendment and the interest of the States in providing a safe environment conducive to education in the public schools. Some courts have resolved the tension between these interests by giving full force to one or the other side of the balance. Thus, in a number of cases courts have held that school officials conducting in-school searches of students are private parties acting in loco parentis and are therefore not subject to the constraints of the Fourth Amendment. See, e.g., D. R. C. v. State, 646 P.2d 252 (Alaska App. 1982); In re G., 11 Cal. App. 3d 1193, 90 Cal. Rptr. 361 (1970); In re Donaldson, 269 Cal. App. 2d 509, 75 Cal. Rptr. 220 (1969); R. C. M. v. State, 660 S. W. 2d 552 (Tex. App 1983); Mercer v. State, 450 S. W. 2d 715 (Tex. Civ. App. 1970). At least one court has held, on the other hand, that the Fourth Amendment applies in full to in-school searches by school officials and that a search conducted without probable cause is unreasonable, see State v. Mora, 307 So.2d 317 (La.), vacated, 423 U.S. 809 (1975), on remand, 330 So.2d 900 (La. 1976); others have held or suggested that the probablecause standard is applicable at least where the police are involved in a search, see M. v. Board of Ed. BallChatham Community Unit School Dist. No. 5, 429 F. Supp. 288, 292 (SD Ill. 1977); Picha v. Wielgos, 410 F. Supp. 1214, 1219-1221 (ND Ill. 1976); State v. Young, 234 Ga. 488, 498, 216 S. E. 2d 586, 594 (1975); or where the search is highly intrusive, see M. M. v. Anker, 607 F.2d 588, 589 (CA2 1979).
The majority of courts that have addressed the issue of the Fourth Amendment in the schools have, like the Supreme Court of New Jersey in this case, reached a middle position: the Fourth Amendment applies to searches conducted by school authorities, but the special needs of the school environment require assessment of the legality of such searches against a standard less exacting than that of probable cause. These courts have, by and large, upheld warrantless searches by school authorities provided that they are supported by a reasonable suspicion that the search will uncover evidence of an infraction of school disciplinary rules or a violation of the law. See, e.g., Tarter v. Raybuck, No. 83-3174 (CA6, Aug. 31, 1984); Bilbrey v. Brown, 738 F.2d 1462 (CA9 1984); Horton v. Goose Creek [469 U.S. 325, 333] Independent School Dist., 690 F.2d 470 (CA5 1982); Bellnier v. Lund, 438 F. Supp. 47 (NDNY 1977); M. v. Board of Ed. BallChatham Community Unit School Dist. No. 5, supra; In re W., 29 Cal. App. 3d 777, 105 Cal. Rptr. 775 (1973); State v. Baccino, 282 A. 2d 869 (Del. Super. 1971); State v. D. T. W., 425 So.2d 1383 (Fla. App. 1983); State v. Young, supra; In re J. A., 85 Ill. App. 3d 567, 406 N. E. 2d 958 (1980); People v. Ward, 62 Mich. App. 46, 233 N. W. 2d 180 (1975); Doe v. State, 88 N. M. 347, 540 P.2d 827 (App. 1975); People v. D., 34 N. Y. 2d 483, 315 N. E. 2d 466 (1974); State v. McKinnon, 88 Wash. 2d 75, 558 P.2d 781 (1977); In re L. L., 90 Wis. 2d 585, 280 N. W. 2d 343 (App. 1979).
Although few have considered the matter, courts have also split over whether the exclusionary rule is an appropriate remedy for Fourth Amendment violations committed by school authorities. The Georgia courts have held that although the Fourth Amendment applies to the schools, the exclusionary rule does not. See, e.g., State v. Young, supra; State v. Lamb, 137 Ga. App. 437, 224 S. E. 2d 51 (1976). Other jurisdictions have applied the rule to exclude the fruits of unlawful school searches from criminal trials and delinquency proceedings. See State v. Mora, supra; People v. D., supra.
[ 1.3 ] In holding that the search of T. L. O.’s purse did not violate the Fourth Amendment, we do not implicitly determine that the exclusionary rule applies to the fruits of unlawful searches conducted by school authorities. The question whether evidence should be excluded from a criminal proceeding involves two discrete inquiries: whether the evidence was seized in violation of the Fourth Amendment, and whether the exclusionary rule is the appropriate remedy for the violation. Neither question is logically antecedent to the other, for a negative answer to either question is sufficient to dispose of the case. Thus, our determination that the search at issue in this case did not violate the Fourth Amendment implies no particular resolution of the question of the applicability of the exclusionary rule.
[ 1.4 ] Cf. Ingraham v. Wright, 430 U.S. 651 (1977) (holding that the Eighth Amendment’s prohibition of cruel and unusual punishment applies only to [469 U.S. 325, 335] punishments imposed after criminal convictions and hence does not apply to the punishment of schoolchildren by public school officials).
[ 1.5 ] We do not address the question, not presented by this case, whether a schoolchild has a legitimate expectation of privacy in lockers, desks, or other school property provided for the storage of school supplies. Nor do we express any opinion on the standards (if any) governing searches of such areas by school officials or by other public authorities acting at the request of school officials. Compare Zamora v. Pomeroy, 639 F.2d 662, 670 (CA10 1981) (“Inasmuch as the school had assumed joint control of the locker it cannot be successfully maintained that the school did not have a right to inspect it”), and People v. Overton, 24 N. Y. 2d 522, 249 N. E. 2d 366 (1969) (school administrators have power to consent to search of a [469 U.S. 325, 338] student’s locker), with State v. Engerud, 94 N. J. 331, 348, 463 A. 2d 934, 943 (1983) (“We are satisfied that in the context of this case the student had an expectation of privacy in the contents of his locker. . . . For the four years of high school, the school locker is a home away from home. In it the student stores the kind of personal ‘effects’ protected by the Fourth Amendment”).
[ 1.6 ] See cases cited in n. 2, supra.
[ 1.7 ] We here consider only searches carried out by school authorities acting alone and on their own authority. This case does not present the question of the appropriate standard for assessing the legality of searches conducted by school officials in conjunction with or at the behest of law enforcement agencies, and we express no opinion on that question. Cf. Picha v. Wielgos, 410 F. Supp. 1214, 1219-1221 (ND Ill. 1976) (holding probable cause standard applicable to searches involving the police).
[ 1.8 ] We do not decide whether individualized suspicion is an essential element of the reasonableness standard we adopt for searches by school authorities. In other contexts, however, we have held that although “some quantum of individualized suspicion is usually a prerequisite to a constitutional search or seizure[,] . . . the Fourth Amendment imposes no irreducible requirement of such suspicion.” United States v. Martinez-Fuerte, 428 U.S. 543, 560-561 (1976). See also Camara v. Municipal Court, 387 U.S. 523 (1967). Exceptions to the requirement of individualized suspicion are generally appropriate only where the privacy interests implicated by a search are minimal and where “other safeguards” are available “to assure that the individual’s reasonable expectation of privacy is not ‘subject to the discretion of the official in the field.’ ” Delaware v. Prouse, 440 U.S. 648, 654-655 (1979) (citation omitted). Because the search of T. L. O.’s purse was based upon an individualized suspicion that she had violated school rules, see infra, at 343- 347, we need not consider the circumstances that might justify school authorities in conducting searches unsupported by individualized suspicion.
[ 1.9 ] Our reference to the nature of the infraction is not intended as an endorsement of JUSTICE STEVENS’ suggestion that some rules regarding student conduct are by nature too “trivial” to justify a search based upon reasonable suspicion. See post, at 377-382. We are unwilling to adopt a standard under which the legality of a search is dependent upon a judge’s evaluation of the relative importance of various school rules. The maintenance of discipline in the schools requires not only that students be restrained from assaulting one another, abusing drugs and alcohol, and committing other crimes, but also that students conform themselves to the standards of conduct prescribed by school authorities. We have “repeatedly emphasized the need for affirming the comprehensive authority of the States and of school officials, consistent with fundamental constitutional safeguards, to prescribe and control conduct in the schools.” Tinker v. Des Moines Independent Community School District, 393 U.S. 503, 507 [469 U.S. 325, 343] (1969). The promulgation of a rule forbidding specified conduct presumably reflects a judgment on the part of school officials that such conduct is destructive of school order or of a proper educational environment. Absent any suggestion that the rule violates some substantive constitutional guarantee, the courts should, as a general matter, defer to that judgment and refrain from attempting to distinguish between rules that are important to the preservation of order in the schools and rules that are not.
[ 1.10 ] Of course, New Jersey may insist on a more demanding standard under its own Constitution or statutes. In that case, its courts would not purport to be applying the Fourth Amendment when they invalidate a search.
[ 1.11 ] JUSTICE STEVENS interprets these statements as a holding that enforcement of the school’s smoking regulations was not sufficiently related to the goal of maintaining discipline or order in the school to justify a search under the standard adopted by the New Jersey court. See post, at 382-384. We do not agree that this is an accurate characterization of the New Jersey Supreme Court’s opinion. The New Jersey court did not hold that the school’s smoking rules were unrelated to the goal of maintaining discipline or order, nor did it suggest that a search that would produce evidence bearing directly on an accusation that a student had violated the smoking rules would be impermissible under the court’s reasonable-suspicion standard; rather, the court concluded that any evidence a search of T. L. O.’s purse was likely to produce would not have a sufficiently direct bearing on the infraction to justify a search—a conclusion with which we cannot agree for the reasons set forth infra, at 345. JUSTICE STEVENS’ suggestion that the New Jersey Supreme Court’s decision rested on the perceived triviality of the smoking infraction appears to be a reflection of his own views rather than those of the New Jersey court.
[ 1.12 ] T. L. O. contends that even if it was reasonable for Mr. Choplick to open her purse to look for cigarettes, it was not reasonable for him to reach in and take the cigarettes out of her purse once he found them. Had he not removed the cigarettes from the purse, she asserts, he would not have observed the rolling papers that suggested the presence of marihuana, and the search for marihuana could not have taken place. T. L. O.’s argument is based on the fact that the cigarettes were not “contraband,” as no school rule forbade her to have them. Thus, according to T. L. O., the cigarettes were not subject to seizure or confiscation by school authorities, and Mr. Choplick was not entitled to take them out of T. L. O.’s purse regardless of whether he was entitled to peer into the purse to see if they were there. Such hairsplitting argumentation has no place in an inquiry addressed to the issue of reasonableness. If Mr. Choplick could permissibly search T. L. O.’s purse for cigarettes, it hardly seems reasonable to suggest that his natural reaction to finding them—picking them up—could [469 U.S. 325, 347] be a constitutional violation. We find that neither in opening the purse nor in reaching into it to remove the cigarettes did Mr. Choplick violate the Fourth Amendment.
JUSTICE POWELL, with whom JUSTICE O’CONNOR joins, concurring.
I agree with the Court’s decision, and generally with its opinion. I would place greater emphasis, however, on the special characteristics of elementary and secondary schools that make it unnecessary to afford students the same constitutional protections granted adults and juveniles in a nonschool setting.
I agree with the Court’s decision, and generally with its opinion. I would place greater emphasis, however, on the special characteristics of elementary and secondary schools that make it unnecessary to afford students the same constitutional protections granted adults and juveniles in a nonschool setting.
However one may characterize their privacy expectations, students properly are afforded some constitutional protections. In an often quoted statement, the Court said that students do not “shed their constitutional rights . . . at the schoolhouse gate.” Tinker v. Des Moines Independent Community School District, 393 U.S. 503, 506 (1969). The Court also has “emphasized the need for affirming the comprehensive authority of the states and of school officials . . . [469 U.S. 325, 349] to prescribe and control conduct in the schools.” Id., at 507. See also Epperson v. Arkansas, 393 U.S. 97, 104 (1968). The Court has balanced the interests of the student against the school officials’ need to maintain discipline by recognizing qualitative differences between the constitutional remedies to which students and adults are entitled.
In Goss v. Lopez, 419 U.S. 565 (1975), the Court recognized a constitutional right to due process, and yet was careful to limit the exercise of this right by a student who challenged a disciplinary suspension. The only process found to be “due” was notice and a hearing described as “rudimentary”; it amounted to no more than “the disciplinarian . . . informally discuss[ing] the alleged misconduct with the student minutes after it has occurred.” Id., at 581-582. In Ingraham v. Wright, 430 U.S. 651 (1977), we declined to extend the Eighth Amendment to prohibit the use of corporal punishment of schoolchildren as authorized by Florida law. We emphasized in that opinion that familiar constraints in the school, and also in the community, provide substantial protection against the violation of constitutional rights by school authorities. “[A]t the end of the school day, the child is invariably free to return home. Even while at school, the child brings with him the support of family and friends and is rarely apart from teachers and other pupils who may witness and protest any instances of mistreatment.” Id., at 670. The Ingraham Court further pointed out that the “openness of the public school and its supervision by the community afford significant safeguards” against the violation of constitutional rights. Ibid.
The special relationship between teacher and student also distinguishes the setting within which schoolchildren operate. Law enforcement officers function as adversaries of criminal suspects. These officers have the responsibility to investigate criminal activity, to locate and arrest those who violate our laws, and to facilitate the charging and bringing of such persons to trial. Rarely does this type of adversarial [469 U.S. 325, 350] relationship exist between school authorities and pupils. 2.1 Instead, there is a commonality of interests between teachers and their pupils. The attitude of the typical teacher is one of personal responsibility for the student’s welfare as well as for his education.
The primary duty of school officials and teachers, as the Court states, is the education and training of young people. A State has a compelling interest in assuring that the schools meet this responsibility. Without first establishing discipline and maintaining order, teachers cannot begin to educate their students. And apart from education, the school has the obligation to protect pupils from mistreatment by other children, and also to protect teachers themselves from violence by the few students whose conduct in recent years has prompted national concern. For me, it would be unreasonable and at odds with history to argue that the full panoply of constitutional rules applies with the same force and effect in the schoolhouse as it does in the enforcement of criminal laws. 2.2
In sum, although I join the Court’s opinion and its holding, 2.3 my emphasis is somewhat different.
Footnotes
[ 2.1 ] Unlike police officers, school authorities have no law enforcement responsibility or indeed any obligation to be familiar with the criminal laws. Of course, as illustrated by this case, school authorities have a layman’s familiarity with the types of crimes that occur frequently in our schools: the distribution and use of drugs, theft, and even violence against teachers as well as fellow students.
[ 2.2 ] As noted above, decisions of this Court have never held to the contrary. The law recognizes a host of distinctions between the rights and duties of children and those of adults. See Goss v. Lopez, 419 U.S. 565, 591 (1975) (POWELL, J., dissenting.)
[ 2.3 ] The Court’s holding is that “when there are reasonable grounds for suspecting that [a] search will turn up evidence that the student has violated or is violating either the law or the rules of the school,” a search of the student’s person or belongings is justified. Ante, at 342. This is in accord with the Court’s summary of the views of a majority of the state and federal courts that have addressed this issue. See ante, at 332-333, n. 2. [469 U.S. 325, 351]
JUSTICE BLACKMUN, concurring in the judgment.
I join the judgment of the Court and agree with much that is said in its opinion. I write separately, however, because I believe the Court omits a crucial step in its analysis of whether a school search must be based upon probable cause. The Court correctly states that we have recognized limited exceptions to the probable-cause requirement “[w]here a careful balancing of governmental and private interests suggests that the public interest is best served” by a lesser standard. Ante, at 341. I believe that we have used such a balancing test, rather than strictly applying the Fourth Amendment’s Warrant and Probable-Cause Clause, only when we were confronted with “a special law enforcement need for greater flexibility.” Florida v. Royer, 460 U.S. 491, 514 (1983) (BLACKMUN, J., dissenting). I pointed out in United States v. Place, 462 U.S. 696 (1983):
“While the Fourth Amendment speaks in terms of freedom from unreasonable [searches], the Amendment does not leave the reasonableness of most [searches] to the judgment of courts or government officers; the Framers of the Amendment balanced the interests involved and decided that a [search] is reasonable only if supported by a judicial warrant based on probable cause. See Texas v. Brown, 460 U.S. 730, 744-745 (1983) (POWELL, J., concurring); United States v. Rabinowitz, 339 U.S. 56, 70 (1950) (Frankfurter, J., dissenting).” Id., at 722 (opinion concurring in judgment).
See also Dunaway v. New York, 442 U.S. 200, 213-214 (1979); United States v. United States District Court, 407 U.S. 297, 315-316 (1972). Only in those exceptional circumstances in which special needs, beyond the normal need for law enforcement, make the warrant and probable-cause requirement impracticable, is a court entitled to substitute its balancing of interests for that of the Framers. [469 U.S. 325, 352]
Thus, for example, in determining that police can conduct a limited “stop and frisk” upon less than probable cause, this Court relied upon the fact that “as a practical matter” the stop and frisk could not be subjected to a warrant and probable-cause requirement, because a law enforcement officer must be able to take immediate steps to assure himself that the person he has stopped to question is not armed with a weapon that could be used against him. Terry v. Ohio, 392 U.S. 1, 20-21, 23-24 (1968). Similarly, this Court’s holding that a roving Border Patrol may stop a car and briefly question its occupants upon less than probable cause was based in part upon “the absence of practical alternatives for policing the border.” United States v. Brignoni-Ponce, 422 U.S. 873, 881 (1975). See also Michigan v. Long, 463 U.S. 1032, 1049, n. 14 (1983); United States v. Martinez-Fuerte, 428 U.S. 543, 557 (1976); Camara v. Municipal Court, 387 U.S. 523, 537 (1967).
The Court’s implication that the balancing test is the rule rather than the exception is troubling for me because it is unnecessary in this case. The elementary and secondary school setting presents a special need for flexibility justifying a departure from the balance struck by the Framers. As JUSTICE POWELL notes, “[w]ithout first establishing discipline and maintaining order, teachers cannot begin to educate their students.” Ante, at 350. Maintaining order in the classroom can be a difficult task. A single teacher often must watch over a large number of students, and, as any parent knows, children at certain ages are inclined to test the outer boundaries of acceptable conduct and to imitate the misbehavior of a peer if that misbehavior is not dealt with quickly. Every adult remembers from his own schooldays the havoc a water pistol or peashooter can wreak until it is taken away. Thus, the Court has recognized that “[e]vents calling for discipline are frequent occurrences and sometimes require immediate, effective action.” Goss v. Lopez, 419 U.S. 565, 580 (1975). Indeed, because drug use and possession of weapons have become increasingly common [469 U.S. 325, 353] among young people, an immediate response frequently is required not just to maintain an environment conducive to learning, but to protect the very safety of students and school personnel.
Such immediate action obviously would not be possible if a teacher were required to secure a warrant before searching a student. Nor would it be possible if a teacher could not conduct a necessary search until the teacher thought there was probable cause for the search. A teacher has neither the training nor the day-to-day experience in the complexities of probable cause that a law enforcement officer possesses, and is ill-equipped to make a quick judgment about the existence of probable cause. The time required for a teacher to ask the questions or make the observations that are necessary to turn reasonable grounds into probable cause is time during which the teacher, and other students, are diverted from the essential task of education. A teacher’s focus is, and should be, on teaching and helping students, rather than on developing evidence against a particular troublemaker.
Education “is perhaps the most important function” of government, Brown v. Board of Education, 347 U.S. 483, 493 (1954), and government has a heightened obligation to safeguard students whom it compels to attend school. The special need for an immediate response to behavior that threatens either the safety of schoolchildren and teachers or the educational process itself justifies the Court in excepting school searches from the warrant and probable-cause requirement, and in applying a standard determined by balancing the relevant interests. I agree with the standard the Court has announced, and with its application of the standard to the facts of this case. I therefore concur in its judgment.
JUSTICE BRENNAN, with whom JUSTICE MARSHALL joins, concurring in part and dissenting in part.
I fully agree with Part II of the Court’s opinion. Teachers, like all other government officials, must conform their [469 U.S. 325, 354] conduct to the Fourth Amendment’s protections of personal privacy and personal security. As JUSTICE STEVENS points out, post, at 373-374, 385-386, this principle is of particular importance when applied to schoolteachers, for children learn as much by example as by exposition. It would be incongruous and futile to charge teachers with the task of embuing their students with an understanding of our system of constitutional democracy, while at the same time immunizing those same teachers from the need to respect constitutional protections. See Board of Education v. Pico, 457 U.S. 853, 864-865 (1982) (plurality opinion); West Virginia State Board of Education v. Barnette, 319 U.S. 624, 637 (1943).
I do not, however, otherwise join the Court’s opinion. Today’s decision sanctions school officials to conduct fullscale searches on a “reasonableness” standard whose only definite content is that it is not the same test as the “probable cause” standard found in the text of the Fourth Amendment. In adopting this unclear, unprecedented, and unnecessary departure from generally applicable Fourth Amendment standards, the Court carves out a broad exception to standards that this Court has developed over years of considering Fourth Amendment problems. Its decision is supported neither by precedent nor even by a fair application of the “balancing test” it proclaims in this very opinion.
I
Three basic principles underly this Court’s Fourth Amendment jurisprudence. First, warrantless searches are per se unreasonable, subject only to a few specifically delineated and well-recognized exceptions. See, e.g., Katz v. United States, 389 U.S. 347, 357 (1967); accord, Welsh v. Wisconsin, 466 U.S. 740, 748-749 (1984); United States v. Place, 462 U.S. 696, 701 (1983); Steagald v. United States, 451 U.S. 204, 211-212 (1981); Mincey v. Arizona, 437 U.S. 385 (1978); Terry v. Ohio, 392 U.S. 1, 20 (1968); Johnson v. United States, 333 U.S. 10, 13-14 (1948). Second, full-scale searches—whether conducted in accordance with the warrant [469 U.S. 325, 355] requirement or pursuant to one of its exceptions—are “reasonable” in Fourth Amendment terms only on a showing of probable cause to believe that a crime has been committed and that evidence of the crime will be found in the place to be searched. Beck v. Ohio, 379 U.S. 89, 91 (1964); Wong Sun v. United States, 371 U.S. 471, 479 (1963); Brinegar v. United States, 338 U.S. 160, 175-176 (1949). Third, categories of intrusions that are substantially less intrusive than full-scale searches or seizures may be justifiable in accordance with a balancing test even absent a warrant or probable cause, provided that the balancing test used gives sufficient weight to the privacy interests that will be infringed. Dunaway v. New York, 442 U.S. 200, 210 (1979); Terry v. Ohio, supra.
Assistant Vice Principal Choplick’s thorough excavation of T. L. O.’s purse was undoubtedly a serious intrusion on her privacy. Unlike the searches in Terry v. Ohio, supra, or Adams v. Williams, 407 U.S. 143 (1972), the search at issue here encompassed a detailed and minute examination of respondent’s pocketbook, in which the contents of private papers and letters were thoroughly scrutinized. 3.1 Wisely, neither petitioner nor the Court today attempts to justify the search of T. L. O.’s pocketbook as a minimally intrusive search in the Terry line. To be faithful to the Court’s settled doctrine, the inquiry therefore must focus on the warrant and probable-cause requirements.
A
I agree that schoolteachers or principals, when not acting as agents of law enforcement authorities, generally may conduct a search of their students’ belongings without first [469 U.S. 325, 356] obtaining a warrant. To agree with the Court on this point is to say that school searches may justifiably be held to that extent to constitute an exception to the Fourth Amendment’s warrant requirement. Such an exception, however, is not to be justified, as the Court apparently holds, by assessing net social value through application of an unguided “balancing test” in which “the individual’s legitimate expectations of privacy and personal security” are weighed against “the government’s need for effective methods to deal with breaches of public order.” Ante, at 337. The Warrant Clause is something more than an exhortation to this Court to maximize social welfare as we see fit. It requires that the authorities must obtain a warrant before conducting a full-scale search. The undifferentiated governmental interest in law enforcement is insufficient to justify an exception to the warrant requirement. Rather, some special governmental interest beyond the need merely to apprehend lawbreakers is necessary to justify a categorical exception to the warrant requirement. For the most part, special governmental needs sufficient to override the warrant requirement flow from “exigency”—that is, from the press of time that makes obtaining a warrant either impossible or hopelessly infeasible. See United States v. Place, supra, at 701-702; Mincey v. Arizona, supra, at 393-394; Johnson v. United States, supra, at 15. Only after finding an extraordinary governmental interest of this kind do we—or ought we—engage in a balancing test to determine if a warrant should nonetheless be required. 3.2 [469 U.S. 325, 357]
To require a showing of some extraordinary governmental interest before dispensing with the warrant requirement is not to undervalue society’s need to apprehend violators of the criminal law. To be sure, forcing law enforcement personnel to obtain a warrant before engaging in a search will predictably deter the police from conducting some searches that they would otherwise like to conduct. But this is not an unintended result of the Fourth Amendment’s protection of privacy; rather, it is the very purpose for which the Amendment was thought necessary. Only where the governmental interests at stake exceed those implicated in any ordinary law enforcement context— that is, only where there is some extraordinary governmental interest involved—is it legitimate to engage in a balancing test to determine whether a warrant is indeed necessary.
In this case, such extraordinary governmental interests do exist and are sufficient to justify an exception to the warrant requirement. Students are necessarily confined for most of the schoolday in close proximity to each other and to the school staff. I agree with the Court that we can take judicial notice of the serious problems of drugs and violence that plague our schools. As JUSTICE BLACKMUN notes, teachers must not merely “maintain an environment conducive to learning” among children who “are inclined to test the outer boundaries of acceptable conduct,” but must also “protect the very safety of students and school personnel.” Ante, at 352-353. A teacher or principal could neither carry out essential teaching functions nor adequately protect students’ safety if required to wait for a warrant before conducting a necessary search.
B
I emphatically disagree with the Court’s decision to cast aside the constitutional probable-cause standard when assessing the constitutional validity of a schoolhouse search. The Court’s decision jettisons the probable-cause standard—the only standard that finds support in the text of the Fourth [469 U.S. 325, 358] Amendment—on the basis of its Rohrschach-like “balancing test.” Use of such a “balancing test” to determine the standard for evaluating the validity of a full-scale search represents a sizable innovation in Fourth Amendment analysis. This innovation finds support neither in precedent nor policy and portends a dangerous weakening of the purpose of the Fourth Amendment to protect the privacy and security of our citizens. Moreover, even if this Court’s historic understanding of the Fourth Amendment were mistaken and a balancing test of some kind were appropriate, any such test that gave adequate weight to the privacy and security interests protected by the Fourth Amendment would not reach the preordained result the Court’s conclusory analysis reaches today. Therefore, because I believe that the balancing test used by the Court today is flawed both in its inception and in its execution, I respectfully dissent.
1.
An unbroken line of cases in this Court have held that probable cause is a prerequisite for a fullscale search. In Carroll v. United States, 267 U.S. 132, 149 (1925), the Court held that “[o]n reason and authority the true rule is that if the search and seizure . . . are made upon probable cause . . . the search and seizure are valid.” Under our past decisions probable cause—which exists where “the facts and circumstances within [the officials’] knowledge and of which they had reasonably trustworthy information [are] sufficient in themselves to warrant a man of reasonable caution in the belief ” that a criminal offense had occurred and the evidence would be found in the suspected place, id., at 162—is the constitutional minimum for justifying a full-scale search, regardless of whether it is conducted pursuant to a warrant or, as in Carroll, within one of the exceptions to the warrant requirement. Henry v. United States, 361 U.S. 98, 104 (1959) (Carroll “merely relaxed the requirements for a warrant on grounds of practicality,” but “did not dispense [469 U.S. 325, 359] with the need for probable cause”); accord, Chambers v. Maroney, 399 U.S. 42, 51 (1970) (“In enforcing the Fourth Amendment’s prohibition against unreasonable searches and seizures, the Court has insisted upon probable cause as a minimum requirement for a reasonable search permitted by the Constitution”). 3.3
Our holdings that probable cause is a prerequisite to a full-scale search are based on the relationship between the two Clauses of the Fourth Amendment. The first Clause (“The right of the people to be secure in their persons, houses, papers and effects, against unreasonable searches and seizures, shall not be violated . . .”) states the purpose of the Amendment and its coverage. The second Clause (“. . . and no Warrants shall issue but upon probable cause . . .”) gives content to the word “unreasonable” in the first Clause. “For all but . . . narrowly defined intrusions, the requisite ‘balancing’ has been performed in centuries of precedent and is embodied in the principle that seizures are ‘reasonable’ only if supported by probable cause.” Dunaway v. New York, 442 U.S., at 214.
I therefore fully agree with the Court that “the underlying command of the Fourth Amendment is always that searches and seizures be reasonable.” Ante, at 337. But this “underlying command” is not directly interpreted in each category of cases by some amorphous “balancing test.” Rather, the provisions of the Warrant Clause—a warrant and probable cause—provide the yardstick against which official searches [469 U.S. 325, 360] and seizures are to be measured. The Fourth Amendment neither requires nor authorizes the conceptual free-for-all that ensues when an unguided balancing test is used to assess specific categories of searches. If the search in question is more than a minimally intrusive Terry stop, the constitutional probable-cause standard determines its validity.
To be sure, the Court recognizes that probable cause “ordinarily” is required to justify a full-scale search and that the existence of probable cause “bears on” the validity of the search. Ante, at 340-341. Yet the Court fails to cite any case in which a full-scale intrusion upon privacy interests has been justified on less than probable cause. The line of cases begun by Terry v. Ohio, 392 U.S. 1 (1968), provides no support, for they applied a balancing test only in the context of minimally intrusive searches that served crucial law enforcement interests. The search in Terry itself, for instance, was a “limited search of the outer clothing.” Id., at 30. The type of border stop at issue in United States v. Brignoni-Ponce, 422 U.S. 873, 880 (1975), usually “consume[d] no more than a minute”; the Court explicitly noted that “any further detention . . . must be based on consent or probable cause.” Id., at 882. See also United States v. Hensley, ante, at 224 (momentary stop); United States v. Place, 462 U.S., at 706-707 (brief detention of luggage for canine “sniff ”); Pennsylvania v. Mimms, 434 U.S. 106 (1977) (per curiam) (brief frisk after stop for traffic violation); United States v. Martinez-Fuerte, 428 U.S. 543, 560 (1976) (characterizing intrusion as “minimal”); Adams v. Williams, 407 U.S. 143 (1972) (stop and frisk). In short, all of these cases involved “‘seizures’ so substantially less intrusive than arrests that the general rule requiring probable cause to make Fourth Amendment ‘seizures’ reasonable could be replaced by a balancing test.” Dunaway, supra, at 210.
Nor do the “administrative search” cases provide any comfort for the Court. In Camara v. Municipal Court, 387 U.S. 523 (1967), the Court held that the probable-cause standard governed even administrative searches. Although [469 U.S. 325, 361] the Camara Court recognized that probable-cause standards themselves may have to be somewhat modified to take into account the special nature of administrative searches, the Court did so only after noting that “because [housing code] inspections are neither personal in nature nor aimed at the discovery of evidence of crime, they involve a relatively limited invasion of the urban citizen’s privacy.” Id., at 537. Subsequent administrative search cases have similarly recognized that such searches intrude upon areas whose owners harbor a significantly decreased expectation of privacy, see, e.g., Donovan v. Dewey, 452 U.S. 594, 598-599 (1981), thus circumscribing the injury to Fourth Amendment interests caused by the search.
Considerations of the deepest significance for the freedom of our citizens counsel strict adherence to the principle that no search may be conducted where the official is not in possession of probable cause—that is, where the official does not know of “facts and circumstances [that] warrant a prudent man in believing that the offense has been committed.” Henry v. United States, 361 U.S., at 102; see also id., at 100-101 (discussing history of probable-cause standard). The Fourth Amendment was designed not merely to protect against official intrusions whose social utility was less as measured by some “balancing test” than its intrusion on individual privacy; it was designed in addition to grant the individual a zone of privacy whose protections could be breached only where the “reasonable” requirements of the probable-cause standard were met. Moved by whatever momentary evil has aroused their fears, officials—perhaps even supported by a majority of citizens—may be tempted to conduct searches that sacrifice the liberty of each citizen to assuage the perceived evil. 3.4 But the Fourth Amendment [469 U.S. 325, 362] rests on the principle that a true balance between the individual and society depends on the recognition of “the right to be let alone—the most comprehensive of rights and the right most valued by civilized men.” Olmstead v. United States, 277 U.S. 438, 478 (1928) (Brandeis, J., dissenting). That right protects the privacy and security of the individual unless the authorities can cross a specific threshold of need, designated by the term “probable cause.” I cannot agree with the Court’s assertions today that a “balancing test” can replace the constitutional threshold with one that is more convenient for those enforcing the laws but less protective of the citizens’ liberty; the Fourth Amendment’s protections should not be defaced by “a balancing process that overwhelms the individual’s protection against unwarranted official intrusion by a governmental interest said to justify the search and seizure.” United States v. Martinez-Fuerte, supra, at 570 (BRENNAN, J., dissenting).
2.
I thus do not accept the majority’s premise that “[t]o hold that the Fourth Amendment applies to searches conducted by school authorities is only to begin the inquiry into the standards governing such searches.” Ante, at 337. For me, the finding that the Fourth Amendment applies, coupled with the observation that what is at issue is a full-scale search, is the end of the inquiry. But even if I believed that a “balancing test” appropriately replaces the judgment of the Framers of the Fourth Amendment, I would nonetheless object to the cursory and shortsighted “test” that the Court employs to justify its predictable weakening of Fourth Amendment protections. In particular, the test employed by the Court vastly overstates the social costs that a probable-cause standard entails and, though it plausibly articulates the serious privacy interests at stake, inexplicably fails to accord them adequate weight in striking the balance. [469 U.S. 325, 363]
The Court begins to articulate its “balancing test” by observing that “the government’s need for effective methods to deal with breaches of public order” is to be weighed on one side of the balance. Ibid. Of course, this is not correct. It is not the government’s need for effective enforcement methods that should weigh in the balance, for ordinary Fourth Amendment standards—including probable cause—may well permit methods for maintaining the public order that are perfectly effective. If that were the case, the governmental interest in having effective standards would carry no weight at all as a justification for departing from the probable-cause standard. Rather, it is the costs of applying probable cause as opposed to applying some lesser standard that should be weighed on the government’s side. 3.5
In order to tote up the costs of applying the probable-cause standard, it is thus necessary first to take into account the nature and content of that standard, and the likelihood that it would hamper achievement of the goal—vital not just to “teachers and administrators,” see ante, at 339—of maintaining an effective educational setting in the public schools. The seminal statement concerning the nature of the probable-cause standard is found in Carroll v. United States, 267 U.S. 132 (1925). Carroll held that law enforcement authorities have probable cause to search where “the facts and circumstances within their knowledge and of which they had reasonably trustworthy information [are] sufficient in themselves to [469 U.S. 325, 364] warrant a man of reasonable caution in the belief ” that a criminal offense had occurred. Id., at 162. In Brinegar v. United States, 338 U.S. 160 (1949), the Court amplified this requirement, holding that probable cause depends upon “the factual and practical considerations of everyday life on which reasonable and prudent men, not legal technicians, act.” Id., at 175.
Two Terms ago, in Illinois v. Gates, 462 U.S. 213 (1983), this Court expounded at some length its view of the probable-cause standard. Among the adjectives used to describe the standard were “practical,” “fluid,” “flexible,” “easily applied,” and “nontechnical.” See id., at 232, 236, 239. The probable-cause standard was to be seen as a “common-sense” test whose application depended on an evaluation of the “totality of the circumstances.” Id., at 238.
Ignoring what Gates took such great pains to emphasize, the Court today holds that a new “reasonableness” standard is appropriate because it “will spare teachers and school administrators the necessity of schooling themselves in the niceties of probable cause and permit them to regulate their conduct according to the dictates of reason and common sense.” Ante, at 343. I had never thought that our pre-Gates understanding of probable cause defied either reason or common sense. But after Gates, I would have thought that there could be no doubt that this “nontechnical,” “practical,” and “easily applied” concept was eminently serviceable in a context like a school, where teachers require the flexibility to respond quickly and decisively to emergencies.
A consideration of the likely operation of the probable-cause standard reinforces this conclusion. Discussing the issue of school searches, Professor LaFave has noted that the cases that have reached the appellate courts “strongly suggest that in most instances the evidence of wrongdoing prompting teachers or principals to conduct searches is sufficiently detailed and specific to meet the traditional probable cause test.” 3 W. LaFave, Search and Seizure § 10.11, [469 U.S. 325, 365] pp. 459-460 (1978). 3.6 The problems that have caused this Court difficulty in interpreting the probable-cause standard have largely involved informants, see, e.g., Illinois v. Gates, supra; Spinelli v. United States, 393 U.S. 410 (1969); Aguilar v. Texas, 378 U.S. 108 (1964); Draper v. United States, 358 U.S. 307 (1959). However, three factors make it likely that problems involving informants will not make it difficult for teachers and school administrators to make probable-cause decisions. This Court’s decision in Gates applying a “totality of the circumstances” test to determine whether an informant’s tip can constitute probable cause renders the test easy for teachers to apply. The fact that students and teachers interact daily in the school building makes it more likely that teachers will get to know students who supply information; the problem of informants who remain anonymous even to the teachers—and who are therefore unavailable for verification or further questioning—is unlikely to arise. Finally, teachers can observe the behavior of students under suspicion to corroborate any doubtful tips they do receive.
As compared with the relative ease with which teachers can apply the probable-cause standard, the amorphous “reasonableness under all the circumstances” standard freshly coined by the Court today will likely spawn increased litigation and greater uncertainty among teachers and administrators. Of course, as this Court should know, an essential purpose of developing and articulating legal norms is to enable individuals to conform their conduct to those norms. A school system conscientiously attempting to obey the Fourth Amendment’s dictates under a probable-cause standard could, for example, consult decisions and other legal materials and prepare a booklet expounding the rough outlines of the concept. Such a booklet could be distributed to [469 U.S. 325, 366] teachers to provide them with guidance as to when a search may be lawfully conducted. I cannot but believe that the same school system faced with interpreting what is permitted under the Court’s new “reasonableness” standard would be hopelessly adrift as to when a search may be permissible. The sad result of this uncertainty may well be that some teachers will be reluctant to conduct searches that are fully permissible and even necessary under the constitutional probable-cause standard, while others may intrude arbitrarily and unjustifiably on the privacy of students. 3.7
One further point should be taken into account when considering the desirability of replacing the constitutional probable-cause standard. The question facing the Court is not whether the probablecause standard should be replaced by a test of “reasonableness under all the circumstances.” Rather, it is whether traditional Fourth Amendment standards should recede before the Court’s new standard. Thus, although the Court today paints with a broad brush and holds its undefined “reasonableness” standard applicable to all school searches, I would approach the question with considerably more reserve. I would not think it necessary to develop a single standard to govern all school searches, any more [469 U.S. 325, 367] than traditional Fourth Amendment law applies even the probable-cause standard to all searches and seizures. For instance, just as police officers may conduct a brief stop and frisk on something less than probable cause, so too should teachers be permitted the same flexibility. A teacher or administrator who had reasonable suspicion that a student was carrying a gun would no doubt have authority under ordinary Fourth Amendment doctrine to conduct a limited search of the student to determine whether the threat was genuine. The “costs” of applying the traditional probable-cause standard must therefore be discounted by the fact that, where additional flexibility is necessary and where the intrusion is minor, traditional Fourth Amendment jurisprudence itself displaces probable cause when it determines the validity of a search.
A legitimate balancing test whose function was something more substantial than reaching a predetermined conclusion acceptable to this Court’s impressions of what authority teachers need would therefore reach rather a different result than that reached by the Court today. On one side of the balance would be the costs of applying traditional Fourth Amendment standards—the “practical” and “flexible” probable-cause standard where a full-scale intrusion is sought, a lesser standard in situations where the intrusion is much less severe and the need for greater authority compelling. Whatever costs were toted up on this side would have to be discounted by the costs of applying an unprecedented and ill-defined “reasonableness under all the circumstances” test that will leave teachers and administrators uncertain as to their authority and will encourage excessive fact-based litigation.
On the other side of the balance would be the serious privacy interests of the student, interests that the Court admirably articulates in its opinion, ante, at 337-339, but which the Court’s new ambiguous standard places in serious jeopardy. I have no doubt that a fair assessment of the two [469 U.S. 325, 368] sides of the balance would necessarily reach the same conclusion that, as I have argued above, the Fourth Amendment’s language compels—that school searches like that conducted in this case are valid only if supported by probable cause.
II
Applying the constitutional probable-cause standard to the facts of this case, I would find that Mr. Choplick’s search violated T. L. O.’s Fourth Amendment rights. After escorting T. L. O. into his private office, Mr. Choplick demanded to see her purse. He then opened the purse to find evidence of whether she had been smoking in the bathroom. When he opened the purse, he discovered the pack of cigarettes. At this point, his search for evidence of the smoking violation was complete.
Mr. Choplick then noticed, below the cigarettes, a pack of cigarette rolling papers. Believing that such papers were “associated,” see ante, at 328, with the use of marihuana, he proceeded to conduct a detailed examination of the contents of her purse, in which he found some marihuana, a pipe, some money, an index card, and some private letters indicating that T. L. O. had sold marihuana to other students. The State sought to introduce this latter material in evidence at a criminal proceeding, and the issue before the Court is whether it should have been suppressed.
On my view of the case, we need not decide whether the initial search conducted by Mr. Choplick— the search for evidence of the smoking violation that was completed when Mr. Choplick found the pack of cigarettes—was valid. For Mr. Choplick at that point did not have probable cause to continue to rummage through T. L. O.’s purse. Mr. Choplick’s suspicion of marihuana possession at this time was based solely on the presence of the package of cigarette papers. The mere presence without more of such a staple item of commerce is insufficient to warrant a person of reasonable caution in inferring both that T. L. O. had violated the law [469 U.S. 325, 369] by possessing marihuana and that evidence of that violation would be found in her purse. Just as a police officer could not obtain a warrant to search a home based solely on his claim that he had seen a package of cigarette papers in that home, Mr. Choplick was not entitled to search possibly the most private possessions of T. L. O. based on the mere presence of a package of cigarette papers. Therefore, the fruits of this illegal search must be excluded and the judgment of the New Jersey Supreme Court affirmed.
III
In the past several Terms, this Court has produced a succession of Fourth Amendment opinions in which “balancing tests” have been applied to resolve various questions concerning the proper scope of official searches. The Court has begun to apply a “balancing test” to determine whether a particular category of searches intrudes upon expectations of privacy that merit Fourth Amendment protection. See Hudson v. Palmer, 468 U.S. 517, 527 (1984) (“Determining whether an expectation of privacy is ‘legitimate’ or ‘reasonable’ necessarily entails a balancing of interests”). It applies a “balancing test” to determine whether a warrant is necessary to conduct a search. See ante, at 340; United States v. Martinez-Fuerte, 428 U.S., at 564-566. In today’s opinion, it employs a “balancing test” to determine what standard should govern the constitutionality of a given category of searches. See ante, at 340- 341. Should a search turn out to be unreasonable after application of all of these “balancing tests,” the Court then applies an additional “balancing test” to decide whether the evidence resulting from the search must be excluded. See United States v. Leon, 468 U.S. 897 (1984).
All of these “balancing tests” amount to brief nods by the Court in the direction of a neutral utilitarian calculus while the Court in fact engages in an unanalyzed exercise of judicial will. Perhaps this doctrinally destructive nihilism is merely [469 U.S. 325, 370] a convenient umbrella under which a majority that cannot agree on a genuine rationale can conceal its differences. Compare ante, p. 327 (WHITE, J., delivering the opinion of the Court), with ante, p. 348 (POWELL, J., joined by O’CONNOR, J., concurring), and ante, p. 351 (BLACKMUN, J., concurring in judgment). And it may be that the real force underlying today’s decision is the belief that the Court purports to reject— the belief that the unique role served by the schools justifies an exception to the Fourth Amendment on their behalf. If so, the methodology of today’s decision may turn out to have as little influence in future cases as will its result, and the Court’s departure from traditional Fourth Amendment doctrine will be confined to the schools.
On my view, the presence of the word “unreasonable” in the text of the Fourth Amendment does not grant a shifting majority of this Court the authority to answer all Fourth Amendment questions by consulting its momentary vision of the social good. Full-scale searches unaccompanied by probable cause violate the Fourth Amendment. I do not pretend that our traditional Fourth Amendment doctrine automatically answers all of the difficult legal questions that occasionally arise. I do contend, however, that this Court has an obligation to provide some coherent framework to resolve such questions on the basis of more than a conclusory recitation of the results of a “balancing test.” The Fourth Amendment itself supplies that framework and, because the Court today fails to heed its message, I must respectfully dissent.
Footnotes
[ 3.1 ] A purse typically contains items of highly personal nature. Especially for shy or sensitive adolescents, it could prove extremely embarrassing for a teacher or principal to rummage through its contents, which could include notes from friends, fragments of love poems, caricatures of school authorities, and items of personal hygiene.
[ 3.2 ] Administrative search cases involving inspection schemes have recognized that “if inspection is to be effective and serve as a credible deterrent, unannounced, even frequent, inspections are essential. In this context, the prerequisite of a warrant could easily frustrate inspection. . . .” United States v. Biswell, 406 U.S. 311, 316 (1972); accord, Donovan v. Dewey, 452 U.S. 594, 603 (1981). Cf. Marshall v. Barlow’s, Inc., 436 U.S. 307 (1978) (holding that a warrant is nonetheless necessary in some administrative search contexts).
[ 3.3 ] In fact, despite the somewhat diminished expectation of privacy that this Court has recognized in the automobile context, see South Dakota v. Opperman, 428 U.S. 364, 367-368 (1976), we have required probable cause even to justify a warrantless automobile search, see United States v. Ortiz, 422 U.S. 891, 896 (1975) (“A search, even of an automobile, is a substantial invasion of privacy. To protect that privacy from official arbitrariness, the Court always has regarded probable cause as the minimum requirement for a lawful search”) (footnote omitted); Chambers v. Maroney, 399 U.S., at 51.
[ 3.4 ] As Justice Stewart said in Coolidge v. New Hampshire, 403 U.S. 443, 455 (1971): “In times of unrest, whether caused by crime or racial conflict or fear of internal subversion, this basic law and the values that it represents may appear unrealistic or ‘extravagant’ to some. But the values were those of the authors of our fundamental constitutional concepts.”
[ 3.5 ] I speak of the “government’s side” only because it is the terminology used by the Court. In my view, this terminology itself is seriously misleading. The government is charged with protecting the privacy and security of the citizen, just as it is charged with apprehending those who violate the criminal law. Consequently, the government has no legitimate interest in conducting a search that unduly intrudes on the privacy and security of the citizen. The balance is not between the rights of the government and the rights of the citizen, but between opposing conceptions of the constitutionally legitimate means of carrying out the government’s varied responsibilities.
[ 3.6 ] It should be noted that Professor LaFave reached this conclusion in 1978, before this Court’s decision in Gates made clear the “flexibility” of the probable-cause concept.
[ 3.7 ] A comparison of the language of the standard (“reasonableness under all the circumstances”) with the traditional language of probable cause (“facts sufficient to warrant a person of reasonable caution in believing that a crime had been committed and the evidence would be found in the designated place”) suggests that the Court’s new standard may turn out to be probable cause under a new guise. If so, the additional uncertainty caused by this Court’s innovation is surely unjustifiable; it would be naive to expect that the addition of this extra dose of uncertainty would do anything other than “burden the efforts of school authorities to maintain order in their schools,” ante, at 342. If, on the other hand, the new standard permits searches of students in instances when probable cause is absent—instances, according to this Court’s consistent formulations, when a person of reasonable caution would not think it likely that a violation existed or that evidence of that violation would be found—the new standard is genuinely objectionable and impossible to square with the premise that our citizens have the right to be free from arbitrary intrusions on their privacy.
JUSTICE STEVENS, with whom JUSTICE MARSHALL joins, and with whom JUSTICE BRENNAN joins as to Part I, concurring in part and dissenting in part.
Assistant Vice Principal Choplick searched T. L. O.’s purse for evidence that she was smoking in the girls’ restroom. Because T. L. O.’s suspected misconduct was not illegal and did not pose a serious threat to school discipline, the New Jersey Supreme Court held that Choplick’s search [469 U.S. 325, 371] of her purse was an unreasonable invasion of her privacy and that the evidence which he seized could not be used against her in criminal proceedings. The New Jersey court’s holding was a careful response to the case it was required to decide.
The State of New Jersey sought review in this Court, first arguing that the exclusionary rule is wholly inapplicable to searches conducted by school officials, and then contending that the Fourth Amendment itself provides no protection at all to the student’s privacy. The Court has accepted neither of these frontal assaults on the Fourth Amendment. It has, however, seized upon this “no smoking” case to announce “the proper standard” that should govern searches by school officials who are confronted with disciplinary problems far more severe than smoking in the restroom. Although I join Part II of the Court’s opinion, I continue to believe that the Court has unnecessarily and inappropriately reached out to decide a constitutional question. See 468 U.S. 1214 (1984) (STEVENS, J., dissenting from reargument order). More importantly, I fear that the concerns that motivated the Court’s activism have produced a holding that will permit school administrators to search students suspected of violating only the most trivial school regulations and guidelines for behavior.
I
The question the Court decides today—whether Mr. Choplick’s search of T. L. O.’s purse violated the Fourth Amendment—was not raised by the State’s petition for writ of certiorari. That petition only raised one question: “Whether the Fourth Amendment’s exclusionary rule applies to searches made by public school officials and teachers in school.” 4.1 The State quite properly declined to submit the former question because “[it] did not wish to present what might appear to be solely a factual dispute to this Court.” 4.2 [469 U.S. 325, 372] Since this Court has twice had the threshold question argued, I believe that it should expressly consider the merits of the New Jersey Supreme Court’s ruling that the exclusionary rule applies.
The New Jersey Supreme Court’s holding on this question is plainly correct. As the state court noted, this case does not involve the use of evidence in a school disciplinary proceeding; the juvenile proceedings brought against T. L. O. involved a charge that would have been a criminal offense if committed by an adult. 4.3 Accordingly, the exclusionary rule issue decided by that court and later presented to this Court concerned only the use in a criminal proceeding of evidence obtained in a search conducted by a public school administrator.
Having confined the issue to the law enforcement context, the New Jersey court then reasoned that this Court’s cases have made it quite clear that the exclusionary rule is equally applicable “whether the public official who illegally obtained the evidence was a municipal inspector, See v. Seattle 387 U.S. 541 (1967); Camara [v. Municipal Court,] 387 U.S. 523 (1967); a firefighter, Michigan v. Tyler, 436 U.S. 499, 506 (1978); or a school administrator or law enforcement official.” 4.4 It correctly concluded “that if an official search violates constitutional rights, the evidence is not admissible in criminal proceedings.” 4.5
When a defendant in a criminal proceeding alleges that she was the victim of an illegal search by a school administrator, the application of the exclusionary rule is a simple corollary of the principle that “all evidence obtained by searches and seizures in violation of the Constitution is, by that same authority, inadmissible in a state court.” Mapp v. Ohio, 367 U.S. 643, 655 (1961). The practical basis for this principle is, in part, its deterrent effect, see id., at 656, and as a general [469 U.S. 325, 373] matter it is tolerably clear to me, as it has been to the Court, that the existence of an exclusionary remedy does deter the authorities from violating the Fourth Amendment by sharply reducing their incentive to do so. 4.6 In the case of evidence obtained in school searches, the “overall educative effect” 4.7 of the exclusionary rule adds important symbolic force to this utilitarian judgment.
Justice Brandeis was both a great student and a great teacher. It was he who wrote:
“Our Government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the Government becomes a lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.” Olmstead v. United States, 277 U.S. 438, 485 (1928) (dissenting opinion).
Those of us who revere the flag and the ideals for which it stands believe in the power of symbols. We cannot ignore that rules of law also have a symbolic power that may vastly exceed their utility.
Schools are places where we inculcate the values essential to the meaningful exercise of rights and responsibilities by a self-governing citizenry. 4.8 If the Nation’s students can be convicted through the use of arbitrary methods destructive of personal liberty, they cannot help but feel that they have [469 U.S. 325, 374] been dealt with unfairly. 4.9 The application of the exclusionary rule in criminal proceedings arising from illegal school searches makes an important statement to young people that “our society attaches serious consequences to a violation of constitutional rights,” 4.10 and that this is a principle of “liberty and justice for all.” 4.11
Thus, the simple and correct answer to the question presented by the State’s petition for certiorari would have required affirmance of a state court’s judgment suppressing evidence. That result would have been dramatically out of character for a Court that not only grants prosecutors relief from suppression orders with distressing regularity, 4.12 but [469 U.S. 325, 375] also is prone to rely on grounds not advanced by the parties in order to protect evidence from exclusion. 4.13 In characteristic disregard of the doctrine of judicial restraint, the Court avoided that result in this case by ordering reargument and directing the parties to address a constitutional question that the parties, with good reason, had not asked the Court to decide. Because judicial activism undermines the Court’s power to perform its central mission in a legitimate way, I dissented from the reargument order. See 468 U.S. 1214 (1984). I have not modified the views expressed in that dissent, but since the majority has brought the question before us, I shall explain why I believe the Court has misapplied the standard of reasonableness embodied in the Fourth Amendment.
II
The search of a young woman’s purse by a school administrator is a serious invasion of her legitimate expectations of privacy. A purse “is a common repository for one’s personal effects and therefore is inevitably associated with the expectation of privacy.” Arkansas v. Sanders, 442 U.S. 753, 762 (1979). Although such expectations must sometimes yield to the legitimate requirements of government, in assessing the constitutionality of a warrantless search, our decision must be guided by the language of the Fourth Amendment: “The right of the people to be secure in their persons, houses, [469 U.S. 325, 376] papers and effects, against unreasonable searches and seizures, shall not be violated. . . .” In order to evaluate the reasonableness of such searches, “it is necessary ‘first to focus upon the governmental interest which allegedly justifies official intrusion upon the constitutionally protected interests of the private citizen,’ for there is ‘no ready test for determining reasonableness other than by balancing the need to search [or size] against the invasion which the search [or seizure] entails.’” Terry v. Ohio, 392 U.S. 1, 20-21 (1968) (quoting Camara v. Municipal Court, 387 U.S. 523, 528, 534-537 (1967)). 4.14
The “limited search for weapons” in Terry was justified by the “immediate interest of the police officer in taking steps to assure himself that the person with whom he is dealing is not armed with a weapon that could unexpectedly and fatally be used against him.” 392 U.S., at 23, 25. When viewed from the institutional perspective, “the substantial need of teachers and administrators for freedom to maintain order in the schools,” ante, at 341 (majority opinion), is no less acute. Violent, unlawful, or seriously disruptive conduct is fundamentally inconsistent with the principal function of teaching institutions which is to educate young people and prepare them for citizenship. 4.15 When such conduct occurs amidst a sizable group of impressionable young people, it creates an explosive atmosphere that requires a prompt and effective response.
Thus, warrantless searches of students by school administrators are reasonable when undertaken for those purposes. [469 U.S. 325, 377] But the majority’s statement of the standard for evaluating the reasonableness of such searches is not suitably adapted to that end. The majority holds that “a search of a student by a teacher or other school official will be ‘justified at its inception’ when there are reasonable grounds for suspecting that the search will turn up evidence that the student has violated or is violating either the law or the rules of the school.” Ante, at 341-342. This standard will permit teachers and school administrators to search students when they suspect that the search will reveal evidence of even the most trivial school regulation or precatory guideline for student behavior. The Court’s standard for deciding whether a search is justified “at its inception” treats all violations of the rules of the school as though they were fungible. For the Court, a search for curlers and sunglasses in order to enforce the school dress code 4.16 is apparently just as important as a search for evidence of heroin addiction or violent gang activity.
The majority, however, does not contend that school administrators have a compelling need to search students in [469 U.S. 325, 378] order to achieve optimum enforcement of minor school regulations. 4.17 To the contrary, when minor violations are involved, there is every indication that the informal school disciplinary process, with only minimum requirements of due process, 4.18 can function effectively without the power to search for enough evidence to prove a criminal case. In arguing that teachers and school administrators need the power to search students based on a lessened standard, the United States as amicus curiae relies heavily on empirical evidence of a contemporary crisis of violence and unlawful behavior that is seriously undermining the process of education in American schools. 4.19 A standard better attuned to this concern would permit teachers and school administrators to search a student when they have reason to believe that the search will uncover evidence that the student is violating the law or engaging in conduct that is seriously disruptive of school order, or the educational process.
This standard is properly directed at “[t]he sole justification for the [warrantless] search.” 4.20 In addition, a standard [469 U.S. 325, 379] that varies the extent of the permissible intrusion with the gravity of the suspected offense is also more consistent with common-law experience and this Court’s precedent. Criminal law has traditionally recognized a distinction between essentially regulatory offenses and serious violations of the peace, and graduated the response of the criminal justice system depending on the character of the violation. 4.21 The application of a similar distinction in evaluating the reasonableness of warrantless searches and seizures “is not a novel idea.” Welsh v. Wisconsin, 466 U.S. 740, 750 (1984). 4.22
In Welsh, police officers arrived at the scene of a traffic accident and obtained information indicating that the driver of the automobile involved was guilty of a first offense of [469 U.S. 325, 380] driving while intoxicated—a civil violation with a maximum fine of \$200. The driver had left the scene of the accident, and the officers followed the suspect to his home where they arrested him without a warrant. Absent exigent circumstances, the warrantless invasion of the home was a clear violation of Payton v. New York, 445 U.S. 573 (1980). In holding that the warrantless arrest for the “noncriminal, traffic offense” in Welsh was unconstitutional, the Court noted that “application of the exigentcircumstances exception in the context of a home entry should rarely be sanctioned when there is probable cause to believe that only a minor offense . . . has been committed.” 466 U.S., at 753.
The logic of distinguishing between minor and serious offenses in evaluating the reasonableness of school searches is almost too clear for argument. In order to justify the serious intrusion on the persons and privacy of young people that New Jersey asks this Court to approve, the State must identify “some real immediate and serious consequences.” McDonald v. United States, 335 U.S. 451, 460 (1948) (Jackson, J., concurring, joined by Frankfurter, J.). 4.23 While school administrators have entirely legitimate reasons for adopting school regulations and guidelines for student behavior, the authorization of searches to enforce them “displays a shocking lack of all sense of proportion.” Id., 459. 4.24 [469 U.S. 325, 381]
The majority offers weak deference to these principles of balance and decency by announcing that school searches will only be reasonable in scope “when the measures adopted are reasonably related to the objectives of the search and not excessively intrusive in light of the age and sex of the student and the nature of the infraction.” Ante, at 342 (emphasis added). The majority offers no explanation why a two-part standard is necessary to evaluate the reasonableness of the ordinary school search. Significantly, in the balance of its opinion the Court pretermits any discussion of the nature of T. L. O.’s infraction of the “no smoking” rule.
The “rider” to the Court’s standard for evaluating the reasonableness of the initial intrusion apparently is the Court’s perception that its standard is overly generous and does not, by itself, achieve a fair balance between the administrator’s right to search and the student’s reasonable expectations of privacy. The Court’s standard for evaluating the “scope” of reasonable school searches is obviously designed to prohibit physically intrusive searches of students by persons of the opposite sex for relatively minor offenses. The Court’s effort to establish a standard that is, at once, clear enough to allow searches to be upheld in nearly every case, and flexible enough to prohibit obviously unreasonable intrusions of young adults’ privacy only creates uncertainty in the extent of its resolve to prohibit the latter. Moreover, the majority’s application of its standard in this case—to permit a male administrator to rummage through the purse of a female high school student in order to obtain evidence that she was smoking [469 U.S. 325, 382] in a bathroom—raises grave doubts in my mind whether its effort will be effective. 4.25 Unlike the Court, I believe the nature of the suspected infraction is a matter of first importance in deciding whether any invasion of privacy is permissible.
III
The Court embraces the standard applied by the New Jersey Supreme Court as equivalent to its own, and then deprecates the state court’s application of the standard as reflecting “a somewhat crabbed notion of reasonableness.” Ante, at 343. There is no mystery, however, in the state court’s finding that the search in this case was unconstitutional; the decision below was not based on a manipulation of reasonable suspicion, but on the trivial character of the activity that promoted the official search. The New Jersey Supreme Court wrote:
“We are satisfied that when a school official has reasonable grounds to believe that a student possesses evidence of illegal activity or activity that would interfere with school discipline and order, the school official has the right to conduct a reasonable search for such evidence.
“In determining whether the school official has reasonable grounds, courts should consider ‘the child’s age, history, and school record, the prevalence and seriousness of the problem in the school to which the search was [469 U.S. 325, 383] directed, the exigency to make the search without delay, and the probative value and reliability of the information used as a justification for the search.’” 4.26
The emphasized language in the state court’s opinion focuses on the character of the rule infraction that is to be the object of the search.
In the view of the state court, there is a quite obvious and material difference between a search for evidence relating to violent or disruptive activity, and a search for evidence of a smoking rule violation. This distinction does not imply that a no-smoking rule is a matter of minor importance. Rather, like a rule that prohibits a student from being tardy, its occasional violation in a context that poses no threat of disrupting school order and discipline offers no reason to believe that an immediate search is necessary to avoid unlawful conduct, violence, or a serious impairment of the educational process.
A correct understanding of the New Jersey court’s standard explains why that court concluded in T. L. O.’s case that “the assistant principal did not have reasonable grounds to believe that the student was concealing in her purse evidence of criminal activity or evidence of activity that would seriously interfere with school discipline or order.” 4.27 The importance of the nature of the rule infraction to the New Jersey Supreme Court’s holding is evident from its brief explanation of the principal basis for its decision:
“A student has an expectation of privacy in the contents of her purse. Mere possession of cigarettes did not violate school rule or policy, since the school allowed smoking in designated areas. The contents of the handbag had no direct bearing on the infraction.
“The assistant principal’s desire, legal in itself, to gather evidence to impeach the student’s credibility at a [469 U.S. 325, 384] hearing on the disciplinary infraction does not validate the search.” 4.28
Like the New Jersey Supreme Court, I would view this case differently if the Assistant Vice Principal had reason to believe T. L. O.’s purse contained evidence of criminal activity, or of an activity that would seriously disrupt school discipline. There was, however, absolutely no basis for any such assumption—not even a “hunch.”
In this case, Mr. Choplick overreacted to what appeared to be nothing more than a minor infraction—a rule prohibiting smoking in the bathroom of the freshmen’s and sophomores’ building. 4.29 It is, of course, true that he actually found evidence of serious wrongdoing by T. L. O., but no one claims that the prior search may be justified by his unexpected discovery. As far as the smoking infraction is concerned, the search for cigarettes merely tended to corroborate a teacher’s eyewitness account of T. L. O.’s violation of a minor regulation designed to channel student smoking behavior into designated locations. Because this conduct was neither unlawful nor significantly disruptive of school order or the educational process, the invasion of privacy associated with the forcible opening of T. L. O.’s purse was entirely unjustified at its inception.
A review of the sampling of school search cases relied on by the Court demonstrates how different this case is from those [469 U.S. 325, 385] in which there was indeed a valid justification for intruding on a student’s privacy. In most of them the student was suspected of a criminal violation; 4.30 in the remainder either violence or substantial disruption of school order or the integrity of the academic process was at stake. 4.31 Few involved matters as trivial as the no-smoking rule violated by T. L. O. 4.32 The rule the Court adopts today is so open-ended that it may make the Fourth Amendment virtually meaningless in the school context. Although I agree that school administrators must have broad latitude to maintain order and discipline in our classrooms, that authority is not unlimited.
IV
The schoolroom is the first opportunity most citizens have to experience the power of government. Through it passes every citizen and public official, from schoolteachers to [469 U.S. 325, 386] policemen and prison guards. The values they learn there, they take with them in life. One of our most cherished ideals is the one contained in the Fourth Amendment: that the government may not intrude on the personal privacy of its citizens without a warrant or compelling circumstance. The Court’s decision today is a curious moral for the Nation’s youth. Although the search of T. L. O.’s purse does not trouble today’s majority, I submit that we are not dealing with “matters relatively trivial to the welfare of the Nation. There are village tyrants as well as village Hampdens, but none who acts under color of law is beyond reach of the Constitution.” West Virginia State Board of Education v. Barnette, 319 U.S. 624, 638 (1943).
I respectfully dissent.
Footnotes
[ 4.1 ] Pet. for Cert. i.
[ 4.2 ] Supplemental Brief for Petitioner 6.
[ 4.3 ] State ex rel. T. L. O., 94 N. J. 331, 337, nn. 1 and 2, 342, n. 5, 463 A. 2d 934, 937, nn. 1 and 2, 939, n. 5 (1983).
[ 4.4 ] Id., at 341, 463 A. 2d, at 939.
[ 4.5 ] Id., at 341-342, 463 A. 2d, at 939.
[ 4.6 ] See, e.g., Stone v. Powell, 428 U.S. 465, 492 (1976); United States v. Janis, 428 U.S. 433, 453 (1976); United States v. Calandra, 414 U.S. 338, 347-348 (1974); Alderman v. United States, 394 U.S. 165, 174-175 (1969).
[ 4.7 ] Stone v. Powell, 428 U.S., at 493.
[ 4.8 ] See Board of Education v. Pico, 457 U.S. 853, 864-865 (1982) (BRENNAN, J., joined by MARSHALL and STEVENS, JJ.); id., at 876, 880 (BLACKMUN, J., concurring in part and concurring in judgment); Plyler v. Doe, 457 U.S. 202, 221 (1982); Ambach v. Norwick, 441 U.S. 68, 76 (1979); Tinker v. Des Moines Independent Community School Dist., 393 U.S. 503, 507, 511-513 (1969); Brown v. Board of Education, 347 U.S. 483, 493 (1954); West Virginia State Board of Education v. Barnette, 319 U.S. 624, 637 (1943).
[ 4.9 ] Cf. In re Gault, 387 U.S. 1, 26-27 (1967). JUSTICE BRENNAN has written of an analogous case:
“We do not know what class petitioner was attending when the police and dogs burst in, but the lesson the school authorities taught her that day will undoubtedly make a greater impression than the one her teacher had hoped to convey. I would grant certiorari to teach petitioner another lesson: that the Fourth Amendment protects ‘[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures’. . . . Schools cannot expect their students to learn the lessons of good citizenship when the school authorities themselves disregard the fundamental principles underpinning our constitutional freedoms.” Doe v. Renfrow, 451 U.S. 1022, 1027-1028 (1981) (dissenting from denial of certiorari).
[ 4.10 ] Stone v. Powell, 428 U.S., at 492.
[ 4.11 ] 36 U.S.C. § 172 (pledge of allegiance to the flag).
[ 4.12 ] A brief review of the Fourth Amendment cases involving criminal prosecutions since the October Term, 1982, supports the proposition. Compare Florida v. Rodriguez, ante, p. 1 (per curiam); United States v. Leon, 468 U.S. 897 (1984); Massachusetts v. Sheppard, 468 U.S. 981 (1984); Segura v. United States, 468 U.S. 796 (1984); United States v. Karo, 468 U.S. 705 (1984); Oliver v. United States, 466 U.S. 170 (1984); United States v. Jacobsen, 466 U.S. 109 (1984); Massachusetts v. Upton, 466 U.S. 727 (1984) (per curiam); Florida v. Meyers, 466 U.S. 380 (1984) (per curiam); Michigan v. Long, 463 U.S. 1032 (1983); Illinois v. Andreas, 463 U.S. 765 (1983); Illinois v. Lafayette, 462 U.S. 640 (1983); United States v. VillamonteMarquez, 462 U.S. 579 (1983); Illinois v. Gates, 462 U.S. 213 (1983); Texas v. Brown, 460 U.S. 730 (1983); United States v. Knotts, [469 U.S. 325, 375] 460 U.S. 276 (1983); Illinois v. Batchelder, 463 U.S. 1112 (1983) (per curiam); Cardwell v. Taylor, 461 U.S. 571 (1983) (per curiam), with Thompson v. Louisiana, ante, p. 17 (per curiam); Welsh v. Wisconsin, 466 U.S. 740 (1984); Michigan v. Clifford, 464 U.S. 287 (1984); United States v. Place, 462 U.S. 696 (1983); Florida v. Royer, 460 U.S. 491 (1983).
[ 4.13 ] E.g. United States v. Karo, 468 U.S., at 719-721; see also Segura v. United States, 468 U.S., at 805-813 (opinion of BURGER, C. J., joined by O’CONNOR, J.); cf. Illinois v. Gates, 459 U.S. 1028 (1982) (STEVENS, J., dissenting from reargument order, joined by BRENNAN and MARSHALL, JJ.)
[ 4.14 ] See also United States v. Brigoni-Ponce, 422 U.S. 873, 881-882 (1975); United States v. MartinezFuerte, 428 U.S. 543, 567 (1976).
[ 4.15 ] Cf. ante, at 353 (BLACKMUN, J., concurring in judgment) (“The special need for an immediate response to behavior that threatens either the safety of schoolchildren and teachers or the educational process itself justifies the Court in excepting school searches from the warrant and probable-cause requirement”); ante, at 350 (POWELL, J., concurring, joined by O’CONNOR, J.) (“Without first establishing discipline and maintaining order, teachers cannot begin to educate their students”).
[ 4.16 ] Parent-Student Handbook of Piscataway [N. J.] H. S. (1979), Record Doc. S-1, p. 7. A brief survey of school rule books reveals that, under the majority’s approach, teachers and school administrators may also search students to enforce school rules regulating:
“(i) secret societies; (ii) students driving to school; (iii) parking and use of parking lots during school hours; (iv) smoking on campus; (v) the direction of traffic in the hallways; (vi) student presence in the hallways during class hours without a pass; (vii) profanity; (viii) school attendance of interscholastic athletes on the day of a game, meet or match; (ix) cafeteria use and cleanup; (x) eating lunch offcampus; and (xi) unauthorized absence.”
See id., at 7-18; Student Handbook of South Windsor [Conn.] H. S. (1984); Fairfax County [Va.] Public Schools, Student Responsibilities and Rights (1980); Student Handbook of Chantilly [Va.] H. S. (1984).
[ 4.17 ] Cf. Camara v. Municipal Court, 387 U.S. 523, 535-536 (1967) (“There is unanimous agreement among those most familiar with this field that the only effective way to seek universal compliance with the minimum standards required by municipal codes is through routine periodic inspections of all structures. . . . [I]f the probable cause standard . . . is adopted, . . . the reasonable goals of code enforcement will be dealt a crushing blow”).
[ 4.18 ] See Goss v. Lopez, 419 U.S. 565, 583-584 (1975).
[ 4.19 ] “The sad truth is that many classrooms across the country are not temples of learning teaching the lessons of good will, civility, and wisdom that are central to the fabric of American life. To the contrary, many schools are in such a state of disorder that not only is the educational atmosphere polluted, but the very safety of students and teachers is imperiled.” Brief for United States as Amicus Curiae 23.
See also Brief for National Education Association as Amicus Curiae 21 (“If a suspected violation of a rule threatens to disrupt the school or threatens to harm students, school officials should be free to search for evidence of it”).
[ 4.20 ] Terry v. Ohio, 392 U.S. 1, 29 (1968); United States v. Brignoni-Ponce, 422 U.S., at 881-882.
[ 4.21 ] Throughout the criminal law this dichotomy has been expressed by classifying crimes as misdemeanors or felonies, malum prohibitum or malum in se, crimes that do not involve moral turpitude or those that do, and major or petty offenses. See generally W. LaFave, Handbook on Criminal Law § 6 (1972)
Some codes of student behavior also provide a system of graduated response by distinguishing between violent, unlawful, or seriously disruptive conduct, and conduct that will only warrant serious sanctions when the student engages in repetitive offenses. See, e.g., Parent-Student Handbook of Piscataway [N. J.] H. S. (1979), Record Doc. S-1, pp. 15-16; Student Handbook of South Windsor [Conn.] H. S. ¶ E (1984); Rules of the Board of Education of the District of Columbia, Ch. IV, §§ 431.1-.10 (1982). Indeed, at Piscataway High School a violation of smoking regulations that is “[a] student’s first offense will result in assignment of up to three (3) days of after school classes concerning hazards of smoking.” Record Doc. S-1, supra, at 15.
[ 4.22 ] In Goss v. Lopez, 419 U.S., at 582-583 (emphasis added), the Court noted that similar considerations require some variance in the requirements of due process in the school disciplinary context:
“[A]s a general rule notice and hearing should precede removal of the student from school. We agree . . ., however, that there are recurring situations in which prior notice and hearing cannot be insisted upon. Students whose presence poses a continuing danger to persons or property or an ongoing threat of disrupting the academic process may be immediately removed from school. In such cases the necessary notice and rudimentary hearing should follow as soon as practicable. . . .”
[ 4.23 ] In McDonald police officers made a warrantless search of the office of an illegal “numbers” operation. Justice Jackson rejected the view that the search could be supported by exigent circumstances:
“Even if one were to conclude that urgent circumstances might justify a forced entry without a warrant, no such emergency was present in this case. . . . Whether there is reasonable necessity for a search without waiting to obtain a warrant certainly depends somewhat upon the gravity of the offense thought to be in progress as well as the hazards of the method of attempting to reach it. . . . [The defendant’s] criminal operation, while a shabby swindle that the police are quite right in suppressing, was not one which endangered life or limb or the peace and good order of the community. . . .” 335 U.S., at 459-460.
[ 4.24 ] While a policeman who sees a person smoking in an elevator in violation of a city ordinance may conduct a full-blown search for evidence of the [469 U.S. 325, 381] smoking violation in the unlikely event of a custodial arrest, United States v. Robinson, 414 U.S. 218, 236 (1973); Gustafson v. Florida, 414 U.S. 260, 265-266 (1973), it is more doubtful whether a search of this kind would be reasonable if the officer only planned to issue a citation to the offender and depart, see Robinson, 414 U.S., at 236, n. 6. In any case, the majority offers no rationale supporting its conclusion that a student detained by school officials for questioning, on reasonable suspicion that she has violated a school rule, is entitled to no more protection under the Fourth Amendment than a criminal suspect under custodial arrest.
[ 4.25 ] One thing is clear under any standard—the shocking strip searches that are described in some cases have no place in the schoolhouse. See Doe v. Renfrow, 631 F.2d 91, 92-93 (CA7 1980) (“It does not require a constitutional scholar to conclude that a nude search of a 13-year-old child is an invasion of constitutional rights of some magnitude”), cert. denied, 451 U.S. 1022 (1981); Bellnier v. Lund, 438 F. Supp. 47 (NDNY 1977); People v. D., 34 N. Y. 2d 483, 315 N. E. 2d 466 (1974); M. J. v. State, 399 So.2d 996 (Fla. App. 1981). To the extent that deeply intrusive searches are ever reasonable outside the custodial context, it surely must only be to prevent imminent, and serious harm.
[ 4.26 ] 94 N. J., at 346, 463 A. 2d, at 941-942 (quoting State v. McKinnon, 88 Wash. 2d 75, 81, 558 P.2d 781, 784 (1977)) (emphasis added).
[ 4.27 ] 94 N. J., at 347, 463 A. 2d, at 942 (emphasis added).
[ 4.28 ] Ibid. The court added:
“Moreover, there were not reasonable grounds to believe that the purse contained cigarettes, if they were the object of the search. No one had furnished information to that effect to the school official. He had, at best, a good hunch. No doubt good hunches would unearth much more evidence of crime on the persons of students and citizens as a whole. But more is required to sustain a search.” Id., at 347, 463 A. 2d, at 942-943.
It is this portion of the New Jersey Supreme Court’s reasoning—a portion that was not necessary to its holding—to which this Court makes its principal response. See ante, at 345-346.
[ 4.29 ] See Parent-Student Handbook of Piscataway [N. J.] H. S. 15, 18 (1979), Record Doc. S-1. See also Tr. of Mar. 31, 1980, Hearing 13-14.
[ 4.30 ] See, e.g., Tarter v. Raybuck, 742 F.2d 977 (CA6 1984) (search for marihuana); M. v. Board of Education Ball-Chatham Community Unit School Dist. No. 5, 429 F. Supp. 288 (SD Ill. 1977) (drugs and large amount of money); D. R. C. v. State, 646 P.2d 252 (Alaska App. 1982) (stolen money); In re W., 29 Cal. App. 3d 777, 105 Cal. Rptr. 775 (1973) (marihuana); In re G., 11 Cal. App. 3d 1193, 90 Cal. Rptr. 361 (1970) (amphetamine pills); In re Donaldson, 269 Cal. App. 2d 509, 75 Cal. Rptr. 220 (1969) (methedrine pills); State v. Baccino, 282 A. 2d 869 (Del. Super. 1971) (drugs); State v. D. T. W., 425 So.2d 1383 (Fla. App. 1983) (drugs); In re J. A., 85 Ill. App. 3d 567, 406 N. E. 2d 958 (1980) (marihuana); People v. Ward, 62 Mich. App. 46, 233 N. W. 2d 180 (1975) (drug pills); Mercer v. State, 450 S. W. 2d 715 (Tex. Civ. App. 1970) (marihuana); State v. McKinnon, 88 Wash. 2d 75, 558 P.2d 781 (1977) (“speed”).
[ 4.31 ] See, e.g., In re L. L., 90 Wis. 2d 585, 280 N. W. 2d 343 (App. 1979) (search for knife or razor blade); R. C. M. v. State, 660 S. W. 2d 552 (Tex. App. 1983) (student with bloodshot eyes wandering halls in violation of school rule requiring students to remain in examination room or at home during midterm examinations).
[ 4.32 ] See, e.g., State v. Young, 234 Ga. 488, 216 S. E. 2d 586 (three students searched when they made furtive gestures and displayed obvious consciousness of guilt), cert. denied, 423 U.S. 1039 (1975); Doe v. State, 88 N. M. 347, 540 P.2d 827 (1975) (student searched for pipe when a teacher saw him using it to violate smoking regulations). [469 U.S. 325, 387] | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/02%3A_The_Fourth_Amendment/2.01%3A_New_Page.txt |
The Constitution, through the Fourth Amendment, protects people from unreasonable searches and seizures by the government. The Fourth Amendment, however, is not a guarantee against all searches and seizures, but only those that are deemed unreasonable under the law.
Whether a particular type of search is considered reasonable in the eyes of the law, is determined by balancing two important interests. On one side of the scale is the intrusion on an individual’s Fourth Amendment rights. On the other side of the scale are legitimate government interests, such as public safety.
The extent to which an individual is protected by the Fourth Amendment depends, in part, on the location of the search or seizure.
Minnesota v. Carter, 525 U.S. 83 (1998)
Home
Searches and seizures inside a home without a warrant are presumptively unreasonable. Payton v. New York, 445 U.S. 573 (1980).
However, there are some exceptions. A warrantless search may be lawful:
• If an officer is given consent to search Davis v. United States, 328 U.S. 582 (1946)
• If the search is incident to a lawful arrest United States v. Robinson, 414 U.S. 218 (1973)
• If there is probable cause to search and exigent circumstances Payton v. New York, 445 U.S. 573 (1980)
• If the items are in plain view Maryland v. Macon, 472 U.S. 463 (1985).
A Person
When an officer observes unusual conduct which leads him reasonably to conclude that criminal activity may be afoot, the officer may briefly stop the suspicious person and make reasonable inquiries aimed at confirming or dispelling the officer’s suspicions.
Terry v. Ohio, 392 U.S. 1 (1968)
Minnesota v. Dickerson, 508 U.S. 366 (1993)
Schools
School officials need not obtain a warrant before searching a student who is under their authority; rather, a search of a student need only be reasonable under all the circumstances.
New Jersey v. TLO, 469 U.S. 325 (1985)
Cars
Where there is probable cause to believe that a vehicle contains evidence of a criminal activity, an officer may lawfully search any area of the vehicle in which the evidence might be found.
Arizona v. Gant, 129 S. Ct. 1710 (2009),
An officer may conduct a traffic stop if he has reasonable suspicion that a traffic violation has occurred or that criminal activity is afoot.
Berekmer v. McCarty, 468 U.S. 420 (1984)
United States v. Arvizu, 534 U.S. 266 (2002).
An officer may conduct a pat-down of the driver and passengers during a lawful traffic stop; the police need not believe that any occupant of the vehicle is involved in a criminal activity.
Arizona v. Johnson, 555 U.S. 323 (2009).
The use of a narcotics detection dog to walk around the exterior of a car subject to a valid traffic stop does not require reasonable, explainable suspicion.
Illinois v. Cabales, 543 U.S. 405 (2005).
Special law enforcement concerns will sometimes justify highway stops without any individualized suspicion.
Illinois v. Lidster, 540 U.S. 419 (2004).
An officer at an international border may conduct routine stops and searches.
United States v. Montoya de Hernandez, 473 U.S. 531 (1985).
A state may use highway sobriety checkpoints for the purpose of combating drunk driving.
Michigan Dept. of State Police v. Sitz, 496 U.S. 444 (1990).
A state may set up highway checkpoints where the stops are brief and seek voluntary cooperation in the investigation of a recent crime that has occurred on that highway.
Illinois v. Lidster, 540 U.S. 419 (2004).
However, a state may not use a highway checkpoint program whose primary purpose is the discovery and interdiction of illegal narcotics.
City of Indianapolis v. Edmond, 531 U.S. 32 (2000).
The above text is from:
https://www.uscourts.gov/about-federal-courts/educational-resources/about-educational-outreach/ activity-resources/what-does-0
Missouri’s Search and Seizure Pamphlet
https://ago.mo.gov/docs/default-source/publications/searchandseizurelaws.pdf?sfvrsn=4 | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/02%3A_The_Fourth_Amendment/2.02%3A_New_Page.txt |
Learning Objectives
Ingraham v. Wright 430
U.S. 651 (1977)
United States Supreme Court, Docket No. 75-6527
Argued: November 2-3, 1976 Decided: April 19, 1977
Petitioners, pupils in a Dade County, Fla., junior high school, filed this action in Federal District Court pursuant to 42 U.S.C. §§ 1981-1988 for damages and injunctive and declaratory relief against respondent school officials, alleging that petitioners and other students had been subjected to disciplinary corporal punishment in violation of their constitutional rights. The Florida statute then in effect authorized corporal punishment after the teacher had consulted with the principal or teacher in charge of the school, specifying that the punishment was not to be “degrading or unduly severe.” A School Board regulation contained specific directions and limitations, authorizing punishment administered to a recalcitrant student’s buttocks with a wooden paddle. The evidence showed that the paddling of petitioners was exceptionally harsh. The District Court granted respondents’ motion to dismiss the complaint, finding no basis for constitutional relief. The Court of Appeals affirmed.
Held:
1. The Cruel and Unusual Punishments Clause of the Eighth Amendment does not apply to disciplinary corporal punishment in public schools. Pp. 664-671.
(a) The history of the Eighth Amendment and the decisions of this Court make it clear that the prohibition against cruel and unusual punishment was designed to protect those convicted of crime. Pp. 664-668.
(b) There is no need to wrench the Eighth Amendment from its historical context and extend it to public school disciplinary practices. The openness of the public school and its supervision by the community afford significant safeguards against the kinds of abuses from which that Amendment protects convicted criminals. These safeguards are reinforced by the legal constraints of the common law, whereby any punishment going beyond that which is reasonably necessary for the proper education and discipline of the child may result in both civil and criminal liability. Pp. 668-671.
2. The Due Process Clause of the Fourteenth Amendment does not require notice and hearing prior to imposition of corporal punishment as that practice is authorized and limited by the common law. Pp. 672-682. [430 U.S. 651, 652]
(a) Liberty within the meaning of the Fourteenth Amendment is implicated where public school authorities, acting under color of state law, deliberately punish a child for misconduct by restraint and infliction of appreciable physical pain. Freedom from bodily restraint and punishment is within the liberty interest in personal security that has historically been protected from state deprivation without due process of law. Pp. 672-674.
(b) Under the longstanding accommodation between the child’s interest in personal security and the traditional common-law privilege, there can be no deprivation of substantive rights as long as the corporal punishment remains within the limits of that privilege. The child nonetheless has a strong interest in procedural safeguards that minimize the risk of wrongful punishment and provide for the resolution of disputed questions of justification. Pp. 675-676.
(c) The Florida scheme, considered in light of the openness of the school environment, affords significant protection against unjustified corporal punishment of schoolchildren. The teacher and principal must exercise prudence and restraint when they decide that corporal punishment is necessary for disciplinary purposes. If the punishment is later found to be excessive, they may be held liable in damages or be subject to criminal penalties. Where the State has thus preserved what “has always been the law of the land,” United States v. Barnett, 376 U.S. 681, 692, the case for administrative safeguards is significantly less compelling than it would otherwise be. Pp. 676-680.
(d) Imposing additional administrative safeguards as a constitutional requirement would significantly intrude into the area of educational responsibility that lies primarily with the public school authorities. Prior procedural safeguards require a diversion of educational resources, and school authorities may abandon corporal punishment as a disciplinary measure rather than incur the burdens of complying with procedural requirements. The incremental benefit of invoking the Constitution to impose prior notice and a hearing cannot justify the costs. Pp. 680-682. 525 F.2d 909, affirmed.
POWELL, J., delivered the opinion of the Court, in which BURGER, C. J., and STEWART, BLACKMUN, and REHNQUIST, JJ., joined. WHITE, J., filed a dissenting opinion, in which BRENNAN, MARSHALL, and STEVENS, JJ., joined, post, p. 683. STEVENS, J., filed a dissenting opinion, post, p. 700.
Bruce S. Rogow argued the cause for petitioners. With him on the briefs were Howard W. Dixon and Peter M. Siegel. [430 U.S. 651, 653]
Frank A. Howard, Jr., argued the cause and filed a brief for respondents. *
[ * ] Michael Nussbaum, Lucien Hilmer, Ronald G. Precup, and David Rubin filed a brief for the National Education Assn. as amicus curiae urging reversal. Briefs of amici curiae urging affirmance were filed by Leon Fieldman for the National School Boards Assn.: and by Tobias Simon and Elizabeth J. du Fresne for the United Teachers of Dade, Local 1974, AFT, AFL-CIO. Gertrude M. Bacon filed a brief for the American Psychological Association Task Force on the Rights of Children and Youths as amicus curiae.
MR. JUSTICE POWELL delivered the opinion of the Court.
This case presents questions concerning the use of corporal punishment in public schools: First, whether the paddling of students as a means of maintaining school discipline constitutes cruel and unusual punishment in violation of the Eighth Amendment; and, second, to the extent that paddling is constitutionally permissible, whether the Due Process Clause of the Fourteenth Amendment requires prior notice and an opportunity to be heard.
I
Petitioners James Ingraham and Roosevelt Andrews filed the complaint in this case on January 7, 1971, in the United States District Court for the Southern District of Florida. 1.1 At the time both were enrolled in the Charles R. Drew Junior High School in Dade County, Fla., Ingraham in the eighth grade and Andrews in the ninth. The complaint contained three counts, each alleging a separate cause of action for deprivation of constitutional rights, under 42 U.S.C. §§ 1981-1988. Counts one and two were individual actions for damages by Ingraham and Andrews based on paddling incidents that allegedly occurred in October 1970 at Drew Junior High School. Count three was a class action for declaratory and [430 U.S. 651, 654] injunctive relief filed on behalf of all students in the Dade County schools. 1.2 Named as defendants in all counts were respondents Willie J. Wright (principal at Drew Junior High School), Lemmie Deliford (an assistant principal), Solomon Barnes (an assistant to the principal), and Edward L. Whigham (superintendent of the Dade County School System). 1.3
Petitioners presented their evidence at a week-long trial before the District Court. At the close of petitioners’ case, respondents moved for dismissal of count three “on the ground that upon the facts and the law the plaintiff has shown no right to relief,” Fed. Rule Civ. Proc. 41 (b), and for a ruling that the evidence would be insufficient to go to a jury on counts one and two. 1.4 The District Court granted the motion as to all three counts, and dismissed the complaint without hearing evidence on behalf of the school authorities. App. 142-150. [430 U.S. 651, 655]
Petitioners’ evidence may be summarized briefly. In the 1970-1971 school year many of the 237 schools in Dade County used corporal punishment as a means of maintaining discipline pursuant to Florida legislation and a local School Board regulation. 1.5 The statute then in effect authorized limited corporal punishment by negative inference, proscribing punishment which was “degrading or unduly severe” or which was inflicted without prior consultation with the principal or the teacher in charge of the school. Fla. Stat. Ann. § 232.27 (1961). 1.6 The regulation, Dade County School Board Policy [430 U.S. 651, 656] 5144, contained explicit directions and limitations. 1.7 The authorized punishment consisted of paddling the recalcitrant student on the buttocks with a flat wooden paddle measuring less than two feet long, three to four inches wide, and about one-half inch thick. The normal punishment was limited to one to five “licks” or blows with the paddle and resulted in [430 U.S. 651, 657] no apparent physical injury to the student. School authorities viewed corporal punishment as a less drastic means of discipline than suspension or expulsion. Contrary to the procedural requirements of the statute and regulation, teachers often paddled students on their own authority without first consulting the principal. 1.8
Petitioners focused on Drew Junior High School, the school in which both Ingraham and Andrews were enrolled in the fall of 1970. In an apparent reference to Drew, the District Court found that “[t]he instances of punishment which could be characterized as severe, accepting the students’ testimony as credible, took place in one junior high school.” App. 147. The evidence, consisting mainly of the testimony of 16 students, suggests that the regime at Drew was exceptionally harsh. The testimony of Ingraham and Andrews, in support of their individual claims for damages, is illustrative. Because he was slow to respond to his teacher’s instructions, Ingraham was subjected to more than 20 licks with a paddle while being held over a table in the principal’s office. The paddling was so severe that he suffered a hematoma 1.9 requiring medical attention and keeping him out of school for several days. 1.10 Andrews was paddled several times for minor infractions. On two occasions he was struck on his arms, once depriving him of the full use of his arm for a week. 1.11 [430 U.S. 651, 658]
The District Court made no findings on the credibility of the students’ testimony. Rather, assuming their testimony to be credible, the court found no constitutional basis for relief. With respect to count three, the class action, the court concluded that the punishment authorized and practiced generally in the county schools violated no constitutional right. Id., at 143, 149. With respect to counts one and two, the individual damages actions, the court concluded that while corporal punishment could in some cases violate the Eighth Amendment, in this case a jury could not lawfully find “the elements of severity, arbitrary infliction, unacceptability in terms of contemporary standards, or gross disproportion which are necessary to bring ‘punishment’ to the constitutional level of ‘cruel and unusual punishment.’” Id., at 143.
A panel of the Court of Appeals voted to reverse. 498 F.2d 248 (CA5 1974). The panel concluded that the punishment was so severe and oppressive as to violate the Eighth and Fourteenth Amendments, and that the procedures outlined in Policy 5144 failed to satisfy the requirements of the Due Process Clause. Upon rehearing, the en banc court rejected these conclusions and affirmed the judgment of the District Court. 525 F.2d 909 (1976). The full court held that the Due Process Clause did not require notice or an opportunity to be heard:
“In essence, we refuse to set forth, as constitutionally mandated, procedural standards for an activity which is not substantial enough, on a constitutional level, to justify the time and effort which would have to be expended by the school in adhering to those procedures or to justify further interference by federal courts into the internal affairs of public schools.” Id., at 919.
The court also rejected the petitioners’ substantive contentions. The Eighth Amendment, in the court’s view, was simply inapplicable to corporal punishment in public [430 U.S. 651, 659] schools. Stressing the likelihood of civil and criminal liability in state law, if petitioners’ evidence were believed, the court held that “[t]he administration of corporal punishment in public schools, whether or not excessively administered, does not come within the scope of Eighth Amendment protection.” Id., at 915. Nor was there any substantive violation of the Due Process Clause. The court noted that “[p]addling of recalcitrant children has long been an accepted method of promoting good behavior and instilling notions of responsibility and decorum into the mischievous heads of school children.” Id., at 917. The court refused to examine instances of punishment individually:
“We think it a misuse of our judicial power to determine, for example, whether a teacher has acted arbitrarily in paddling a particular child for certain behavior or whether in a particular instance of misconduct five licks would have been a more appropriate punishment than ten licks. . . .” Ibid.
We granted certiorari, limited to the questions of cruel and unusual punishment and procedural due process. 425 U.S. 990. 1.12
II
In addressing the scope of the Eighth Amendment’s prohibition on cruel and unusual punishment, this Court has found it useful to refer to “[t]raditional common-law concepts,” Powell v. Texas, 392 U.S. 514, 535 (1968) (plurality opinion), and to the “attitude[s] which our society has traditionally taken.” Id., at 531. So, too, in defining the requirements [430 U.S. 651, 660] of procedural due process under the Fifth and Fourteenth Amendments, the Court has been attuned to what “has always been the law of the land,” United States v. Barnett, 376 U.S. 681, 692 (1964), and to “traditional ideas of fair procedure.” Greene v. McElroy, 360 U.S. 474, 508 (1959). We therefore begin by examining the way in which our traditions and our laws have responded to the use of corporal punishment in public schools.
The use of corporal punishment in this country as a means of disciplining schoolchildren dates back to the colonial period. 1.13 It has survived the transformation of primary and secondary education from the colonials’ reliance on optional private arrangements to our present system of compulsory education and dependence on public schools. 1.14 Despite the general abandonment of corporal punishment as a means of punishing criminal offenders, 1.15 the practice continues to play a role in the public education of schoolchildren in most parts of the country. 1.16 Professional and public opinion is sharply divided on the practice, 1.17 and has been for more than [430 U.S. 651, 661] a century. 1.18 Yet we can discern no trend toward its elimination.
At common law a single principle has governed the use of corporal punishment since before the American Revolution: Teachers may impose reasonable but not excessive force to discipline a child. 1.19 Blackstone catalogued among the “absolute rights of individuals” the right “to security from the corporal insults of menaces, assaults, beating, and wounding,” 1 W. Blackstone, Commentaries *134, but he did not regard it a “corporal insult” for a teacher to inflict “moderate correction” on a child in his care. To the extent that force was “necessary to answer the purposes for which [the teacher] is employed,” Blackstone viewed it as “justifiable or lawful.” Id., at *453; 3 id., at *120. The basic doctrine has not changed. The prevalent rule in this country today privileges such force as a teacher or administrator “reasonably believes to be necessary for [the child’s] proper control, training, or education.” Restatement (Second) of Torts § 147 (2) (1965); see id., § 153 (2). To the extent that the force is excessive or unreasonable, the educator in virtually all States is subject to possible civil and criminal liability. 1.20 [430 U.S. 651, 662]
Although the early cases viewed the authority of the teacher as deriving from the parents, 1.21 the concept of parental delegation has been replaced by the view—more consonant with compulsory education laws—that the State itself may impose such corporal punishment as is reasonably necessary “for the proper education of the child and for the maintenance of group discipline.” 1 F. Harper & F. James, Law of Torts § 3.20, p. 292 (1956). 1.22 All of the circumstances are to be taken into account in determining whether the punishment is reasonable in a particular case. Among the most important considerations are the seriousness of the offense, the attitude and past behavior of the child, the nature and severity of the punishment, the age and strength of the child, and the availability of less severe but equally effective means of discipline. Id., at 290-291; Restatement (Second) of Torts § 150, Comments c-e, p. 268 (1965).
Of the 23 States that have addressed the problem through legislation, 21 have authorized the moderate use of corporal punishment in public schools. 1.23 Of these States only a few [430 U.S. 651, 663] have elaborated on the common-law test of reasonableness, typically providing for approval or notification of the child’s parents, 1.24 or for infliction of punishment only by the principal 1.25 or in the presence of an adult witness. 1.26 Only two States, Massachusetts and New Jersey, have prohibited all corporal punishment in their public schools. 1.27 Where the legislatures have not acted, the state courts have uniformly preserved the common-law rule permitting teachers to use reasonable force in disciplining children in their charge. 1.28
Against this background of historical and contemporary approval of reasonable corporal punishment, we turn to the constitutional questions before us. [430 U.S. 651, 664]
III
The Eighth Amendment provides: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” Bail, fines, and punishment traditionally have been associated with the criminal process, and by subjecting the three to parallel limitations the text of the Amendment suggests an intention to limit the power of those entrusted with the criminal-law function of government. An examination of the history of the Amendment and the decisions of this Court construing the proscription against cruel and unusual punishment confirms that it was designed to protect those convicted of crimes. We adhere to this long-standing limitation and hold that the Eighth Amendment does not apply to the paddling of children as a means of maintaining discipline in public schools.
A
The history of the Eighth Amendment is well known. 1.29 The text was taken, almost verbatim, from a provision of the Virginia Declaration of Rights of 1776, which in turn derived from the English Bill of Rights of 1689. The English version, adopted after the accession of William and Mary, was intended to curb the excesses of English judges under the reign of James II. Historians have viewed the English provision as a reaction either to the “Bloody Assize,” the treason trials conducted by Chief Justice Jeffreys in 1685 after the abortive rebellion of the Duke of Monmouth, 1.30 or to the perjury prosecution of Titus Oates in the same year. 1.31 In [430 U.S. 651, 665] either case, the exclusive concern of the English version was the conduct of judges in enforcing the criminal law. The original draft introduced in the House of Commons provided: 1.32
“The requiring excessive bail of persons committed in criminal cases and imposing excessive fines, and illegal punishments, to be prevented.”
Although the reference to “criminal cases” was eliminated from the final draft, the preservation of a similar reference in the preamble 1.33 indicates that the deletion was without substantive significance. Thus, Blackstone treated each of the provision’s three prohibitions as bearing only on criminal proceedings and judgments. 1.34
The Americans who adopted the language of this part of the English Bill of Rights in framing their own State and Federal Constitutions 100 years later feared the imposition of torture and other cruel punishments not only by judges acting beyond their lawful authority, but also by legislatures engaged in making the laws by which judicial authority would be measured. Weems v. United States, 217 U.S. 349, 371-373 (1910). Indeed, the principal concern of the American Framers appears to have been with the legislative definition of crimes and punishments. In re Kemmler, 136 U.S. 436, 446-447 (1890); [430 U.S. 651, 666] Furman v. Georgia, 408 U.S. 238, 263 (1972) (BRENNAN, J., concurring). But if the American provision was intended to restrain government more broadly than its English model, the subject to which it was intended to apply—the criminal process—was the same.
At the time of its ratification, the original Constitution was criticized in the Massachusetts and Virginia Conventions for its failure to provide any protection for persons convicted of crimes. 1.35 This criticism provided the impetus for inclusion of the Eighth Amendment in the Bill of Rights. When the Eighth Amendment was debated in the First Congress, it was met by the objection that the Cruel and Unusual Punishments Clause might have the effect of outlawing what were then the common criminal punishments of hanging, whipping, and earcropping. 1 Annals of Cong. 754 (1789). The objection was not heeded, “precisely because the legislature would otherwise have had the unfettered power to prescribe punishments for crimes.” Furman v. Georgia, supra, at 263.
B
In light of this history, it is not surprising to find that every decision of this Court considering whether a punishment is “cruel and unusual” within the meaning of the Eighth and Fourteenth Amendments has dealt with a criminal punishment. [430 U.S. 651, 667] See Estelle v. Gamble, 429 U.S. 97 (1976) (incarceration without medical care); Gregg v. Georgia, 428 U.S. 153 (1976) (execution for murder); Furman v. Georgia, supra (execution for murder); Powell v. Texas, 392 U.S. 514 (1968) (plurality opinion) (\$20 fine for public drunkenness); Robinson v. California, 370 U.S. 660 (1962) (incarceration as a criminal for addiction to narcotics); Trop v. Dulles, 356 U.S. 86 (1958) (plurality opinion) (expatriation for desertion); Louisiana ex rel. Francis v. Resweber, 329 U.S. 459 (1947) (execution by electrocution after a failed first attempt); Weems v. United States, supra (15 years’ imprisonment and other penalties for falsifying an official document); Howard v. Fleming, 191 U.S. 126 (1903) (10 years’ imprisonment for conspiracy to defraud); In re Kemmler, supra (execution by electrocution); Wilkerson v. Utah, 99 U.S. 130 (1879) (execution by firing squad); Pervear v. Commonwealth, 5 Wall. 475 (1867) (fine and imprisonment at hard labor for bootlegging).
These decisions recognize that the Cruel and Unusual Punishments Clause circumscribes the criminal process in three ways: First, it limits the kinds of punishment that can be imposed on those convicted of crimes, e.g., Estelle v. Gamble supra; Trop v. Dulles, supra; second, it proscribes punishment grossly disproportionate to the severity of the crime, e.g., Weems v. United States, supra; and third, it imposes substantive limits on what can be made criminal and punished as such, e.g., Robinson v. California, supra. We have recognized the last limitation as one to be applied sparingly. “The primary purpose of [the Cruel and Unusual Punishments Clause] has always been considered, and properly so, to be directed at the method or kind of punishment imposed for the violation of criminal statutes. . . .” Powell v. Texas, supra, at 531-532 (plurality opinion).
In the few cases where the Court has had occasion to confront claims that impositions outside the criminal process constituted cruel and unusual punishment, it has had no difficulty [430 U.S. 651, 668] finding the Eighth Amendment inapplicable. Thus, in Fong Yue Ting v. United States, 149 U.S. 698 (1893), the Court held the Eighth Amendment inapplicable to the deportation of aliens on the ground that “deportation is not a punishment for crime.” Id., at 730; see Mahler v. Eby, 264 U.S. 32 (1924); Bugajewitz v. Adams, 228 U.S. 585 (1913). And in Uphaus v. Wyman, 360 U.S. 72 (1959), the Court sustained a judgment of civil contempt, resulting in incarceration pending compliance with a subpoena, against a claim that the judgment imposed cruel and unusual punishment. It was emphasized that the case involved “‘essentially a civil remedy designed for the benefit of other parties . . . exercised for centuries to secure compliance with judicial decrees.’” Id., at 81, quoting Green v. United States, 356 U.S. 165, 197 (1958) (dissenting opinion). 1.36
C
Petitioners acknowledge that the original design of the Cruel and Unusual Punishments Clause was to limit criminal punishments, but urge nonetheless that the prohibition should be extended to ban the paddling of schoolchildren. Observing that the Framers of the Eighth Amendment could not have envisioned our present system of public and compulsory education, with its opportunities for noncriminal punishments, petitioners contend that extension of the prohibition against cruel punishments is necessary lest we afford greater protection [430 U.S. 651, 669] to criminals than to schoolchildren. It would be anomalous, they say, if schoolchildren could be beaten without constitutional redress, while hardened criminals suffering the same beatings at the hands of their jailers might have a valid claim under the Eighth Amendment. See Jackson v. Bishop, 404 F.2d 571 (CA8 1968); cf. Estelle v. Gamble, supra. Whatever force this logic may have in other settings, 1.37 we find it an inadequate basis for wrenching the Eighth Amendment from its historical context and extending it to traditional disciplinary practices in the public schools.
The prisoner and the schoolchild stand in wholly different circumstances, separated by the harsh facts of criminal conviction and incarceration. The prisoner’s conviction entitles the State to classify him as a “criminal,” and his incarceration deprives him of the freedom “to be with family and friends and to form the other enduring attachments of normal life.” Morrissey v. Brewer, 408 U.S. 471, 482 (1972); see Meachum v. Fano, 427 U.S. 215, 224-225 (1976). Prison brutality, as the Court of Appeals observed in this case, is “part of the total punishment to which the individual is being subjected for his crime and, as such, is a proper subject for Eighth Amendment scrutiny.” 525 F.2d, at 915. 1.38 Even so, the protection afforded [430 U.S. 651, 670] by the Eighth Amendment is limited. After incarceration, only the “‘unnecessary and wanton infliction of pain,’” Estelle v. Gamble, 429 U.S., at 103, quoting Gregg v. Georgia, 428 U.S., at 173, constitutes cruel and unusual punishment forbidden by the Eighth Amendment.
The schoolchild has little need for the protection of the Eighth Amendment. Though attendance may not always be voluntary, the public school remains an open institution. Except perhaps when very young, the child is not physically restrained from leaving school during school hours; and at the end of the school day, the child is invariably free to return home. Even while at school, the child brings with him the support of family and friends and is rarely apart from teachers and other pupils who may witness and protest any instances of mistreatment.
The openness of the public school and its supervision by the community afford significant safeguards against the kinds of abuses from which the Eighth Amendment protects the prisoner. In virtually every community where corporal punishment is permitted in the schools, these safeguards are reinforced by the legal constraints of the common law. Public school teachers and administrators are privileged at common law to inflict only such corporal punishment as is reasonably necessary for the proper education and discipline of the child; any punishment going beyond the privilege may result in both civil and criminal liability. See Part II, supra. As long as the schools are open to public scrutiny, there is no reason to believe that the common-law constraints will not effectively remedy and deter excesses such as those alleged in this case. 1.39 [430 U.S. 651, 671]
We conclude that when public school teachers or administrators impose disciplinary corporal punishment, the Eighth Amendment is inapplicable. The pertinent constitutional question is whether the imposition is consonant with the requirements of due process. 1.40 [430 U.S. 651, 672]
IV
The Fourteenth Amendment prohibits any state deprivation of life, liberty, or property without due process of law. Application of this prohibition requires the familiar two-stage analysis: We must first ask whether the asserted individual interest are encompassed within the Fourteenth Amendment’s protection of “life, liberty or property”; if protected interests are implicated, we then must decide what procedures constitute “due process of law.” Morrissey v. Brewer, 408 U.S., at 481; Board of Regents v. Roth, 408 U.S. 564, 569-572 (1972). See Friendly, Some Kind of Hearing, 123 U. Pa. L. Rev. 1267 (1975). Following that analysis here, we find that corporal punishment in public schools implicates a constitutionally protected liberty interest, but we hold that the traditional common-law remedies are fully adequate to afford due process.
A
“[T]he range of interests protected by procedural due process is not infinite.” Board of Regents v. Roth, supra, at 570. We have repeatedly rejected “the notion that any grievous loss visited upon a person by the State is sufficient to invoke the procedural protections of the Due Process Clause.” Meachum v. Fano, 427 U.S., at 224. Due process is required only when a decision of the State implicates an interest within the protection of the Fourteenth Amendment. And “to determine whether due process requirements apply in the first place, we must look not to the ‘weight’ but to the nature of the interest at stake.” Roth, supra, at 570-571.
The Due Process Clause of the Fifth Amendment, later incorporated into the Fourteenth, was intended to give Americans [430 U.S. 651, 673] at least the protection against governmental power that they had enjoyed as Englishmen against the power of the Crown. The liberty preserved from deprivation without due process included the right “generally to enjoy those privileges long recognized at common law as essential to the orderly pursuit of happiness by free men.” Meyer v. Nebraska, 262 U.S. 390, 399 (1923); see Dent v. West Virginia, 129 U.S. 114, 123-124 (1889). Among the historic liberties so protected was a right to be free from, and to obtain judicial relief for, unjustified intrusions on personal security. 1.41
While the contours of this historic liberty interest in the context of our federal system of government have not been defined precisely, 1.42 they always have been thought to encompass [430 U.S. 651, 674] freedom from bodily restraint and punishment. See Rochin v. California, 342 U.S. 165 (1952). It is fundamental that the state cannot hold and physically punish an individual except in accordance with due process of law.
This constitutionally protected liberty interest is at stake in this case. There is, of course, a de minimis level of imposition with which the Constitution is not concerned. But at least where school authorities, acting under color of state law, deliberately decide to punish a child for misconduct by restraining the child and inflicting appreciable physical pain, we hold that Fourteenth Amendment liberty interests are implicated. 1.43
B
“[T]he question remains what process is due.” Morrissey v. Brewer, supra, at 481. Were it not for the common-law privilege permitting teachers to inflict reasonable corporal punishment on children in their care, and the availability of the traditional remedies for abuse, the case for requiring advance procedural safeguards would be strong indeed. 1.44 But here we deal with a punishment—paddling—within that tradition, [430 U.S. 651, 675] and the question is whether the common-law remedies are adequate to afford due process.
“‘[D]ue process,’ unlike some legal rules, is not a technical conception with a fixed content unrelated to time, place and circumstances. . . . Representing a profound attitude of fairness . . . ‘due process’ is compounded of history, reason, the past course of decisions, and stout confidence in the strength of the democratic faith which we profess. . . .” Anti-Fascist Comm. v. McGrath, 341 U.S. 123, 162-163 (1951) (Frankfurter, J., concurring).
Whether in this case the common-law remedies for excessive corporal punishment constitute due process of law must turn on an analysis of the competing interests at stake, viewed against the background of “history, reason, [and] the past course of decisions.” The analysis requires consideration of three distinct factors: “First, the private interest that will be affected . . .; second, the risk of an erroneous deprivation of such interest . . . and the probable value, if any, of additional or substitute procedural safeguards; and finally, the [state] interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.” Mathews v. Eldridge, 424 U.S. 319, 335 (1976). Cf. Arnett v. Kennedy, 416 U.S. 134, 167-168 (1974) (POWELL, J., concurring).
1
Because it is rooted in history, the child’s liberty interest in avoiding corporal punishment while in the care of public school authorities is subject to historical limitations. Under the common law, an invasion of personal security gave rise to a right to recover damages in a subsequent judicial proceeding. 3 W. Blackstone, Commentaries *120-121. But the right of recovery was qualified by the concept of justification. Thus, there could be no recovery against a teacher who gave only “moderate correction” to a child. Id., at *120. To the [430 U.S. 651, 676] extent that the force used was reasonable in light of its purpose, it was not wrongful, but rather “justifiable or lawful.” Ibid
The concept that reasonable corporal punishment in school is justifiable continues to be recognized in the laws of most States. See Part II, supra. It represents “the balance struck by this country,” Poe v. Ullman, 367 U.S. 497, 542 (1961) (Harlan, J., dissenting), between the child’s interest in personal security and the traditional view that some limited corporal punishment may be necessary in the course of a child’s education. Under that longstanding accommodation of interests, there can be no deprivation of substantive rights as long as disciplinary corporal punishment is within the limits of the common-law privilege.
This is not to say that the child’s interest in procedural safeguards is insubstantial. The school disciplinary process is not “a totally accurate, unerring process, never mistaken and never unfair. . . .” Goss v. Lopez, 419 U.S. 565, 579-580 (1975). In any deliberate infliction of corporal punishment on a child who is restrained for that purpose, there is some risk that the intrusion on the child’s liberty will be unjustified and therefore unlawful. In these circumstances the child has a strong interest in procedural safeguards that minimize the risk of wrongful punishment and provide for the resolution of disputed questions of justification.
We turn now to a consideration of the safeguards that are available under applicable Florida law.
2
Florida has continued to recognize, and indeed has strengthened by statute, the common-law right of a child not to be subjected to excessive corporal punishment in school. Under Florida law the teacher and principal of the school decide in the first instance whether corporal punishment is reasonably necessary under the circumstances in order to discipline [430 U.S. 651, 677] a child who has misbehaved. But they must exercise prudence and restraint. For Florida has preserved the traditional judicial proceedings for determining whether the punishment was justified. If the punishment inflicted is later found to have been excessive—not reasonably believed at the time to be necessary for the child’s discipline or training—the school authorities inflicting it may be held liable in damages to the child and, if malice is shown, they may be subject to criminal penalties. 1.45
Although students have testified in this case to specific instances of abuse, there is every reason to believe that such mistreatment is an aberration. The uncontradicted evidence suggests that corporal punishment in the Dade County schools was, “[w]ith the exception of a few cases, . . . unremarkable in physical severity.” App. 147. Moreover, because paddlings are usually inflicted in response to conduct directly [430 U.S. 651, 678] observed by teachers in their presence, the risk that a child will be paddled without cause is typically insignificant. In the ordinary case, a disciplinary paddling neither threatens seriously to violate any substantive rights nor condemns the child “to suffer grievous loss of any kind.” Anti-Fascist Comm. v. McGrath, 341 U.S., at 168 (Frankfurter, J., concurring).
In those cases where severe punishment is contemplated, the available civil and criminal sanctions for abuse—considered in light of the openness of the school environment—afford significant protection against unjustified corporal punishment. See supra, at 670. Teachers and school authorities are unlikely to inflict corporal punishment unnecessarily or excessively when a possible consequence of doing so is the institution of civil or criminal proceedings against them. 1.46
It still may be argued, of course, that the child’s liberty interest would be better protected if the common-law remedies were supplemented by the administrative safeguards of prior notice and a hearing. We have found frequently that some kind of prior hearing is necessary to guard against arbitrary impositions on interests protected by the Fourteenth Amendment. [430 U.S. 651, 679] See, e.g., Board of Regents v. Roth, 408 U.S., at 569-570; Wolff v. McDonnell, 418 U.S. 539, 557-558 (1974); cf. Friendly, 123 U. Pa. L. Rev., at 1275-1277. But where the State has preserved what “has always been the law of the land,” United States v. Barnett, 376 U.S. 681 (1964), the case for administrative safeguards is significantly less compelling. 1.47
There is a relevant analogy in the criminal law. Although the Fourth Amendment specifically proscribes “seizure” of a person without probable cause, the risk that police will act unreasonably in arresting a suspect is not thought to require an advance determination of the facts. In United States v. Watson, 423 U.S. 411 (1976), we reaffirmed the traditional common-law rule that police officers may make warrantless public arrests on probable cause. Although we observed that an advance determination of probable cause by a magistrate would be desirable, we declined “to transform this judicial preference into a constitutional rule when the judgment of the Nation and Congress has for so long been to authorize warrantless public arrests on probable cause. . . .” Id., at 423; see id., at 429 (POWELL, J., concurring). Despite the distinct possibility that a police officer may improperly assess the facts and thus unconstitutionally deprive an individual of [430 U.S. 651, 680] liberty, we declined to depart from the traditional rule by which the officer’s perception is subjected to judicial scrutiny only after the fact. 1.48 There is no more reason to depart from tradition and require advance procedural safeguards for intrusions on personal security to which the Fourth Amendment does not apply.
3
But even if the need for advance procedural safeguards were clear, the question would remain whether the incremental benefit could justify the cost. Acceptance of petitioners’ claims would work a transformation in the law governing corporal punishment in Florida and most other States. Given the impracticability of formulating a rule of procedural due process that varies with the severity of the particular imposition, 1.49 the prior hearing petitioners seek would have to precede any paddling, however moderate or trivial.
Such a universal constitutional requirement would significantly burden the use of corporal punishment as a disciplinary measure. Hearings—even informal hearings—require time, personnel, and a diversion of attention from normal school pursuits. School authorities may well choose to abandon corporal punishment rather than incur the burdens of complying with the procedural requirements. Teachers, properly concerned with maintaining authority in the classroom, may well prefer to rely on other disciplinary measures—which they may view as less effective—rather than confront the [430 U.S. 651, 681] possible disruption that prior notice and a hearing may entail. 1.50 Paradoxically, such an alteration of disciplinary policy is most likely to occur in the ordinary case where the contemplated punishment is well within the common-law privilege. 1.51
Elimination or curtailment of corporal punishment would be welcomed by many as a societal advance. But when such a policy choice may result from this Court’s determination of an asserted right to due process, rather than from the normal processes of community debate and legislative action, the societal costs cannot be dismissed as insubstantial. 1.52 We are reviewing here a legislative judgment, rooted in history and reaffirmed in the laws of many States, that corporal punishment serves important educational interests. This judgment must be viewed in light of the disciplinary problems common-place in the schools. As noted in Goss v. Lopez, 419 U.S., at 580: “Events calling for discipline are frequent occurrences and sometimes require immediate, effective action.” 1.53
Assessment [430 U.S. 651, 682] of the need for, and the appropriate means of maintaining, school discipline is committed generally to the discretion of school authorities subject to state law. “[T]he Court has repeatedly emphasized the need for affirming the comprehensive authority of the States and of school officials, consistent with fundamental constitutional safeguards, to prescribe and control conduct in the schools.” Tinker v. Des Moines School Dist., 393 U.S. 503, 507 (1969). 1.54
“At some point the benefit of an additional safeguard to the individual affected . . . and to society in terms of increased assurance that the action is just, may be outweighed by the cost.” Mathews v. Eldridge, 424 U.S., at 348. We think that point has been reached in this case. In view of the low incidence of abuse, the openness of our schools, and the common-law safeguards that already exist, the risk of error that may result in violation of a schoolchild’s substantive rights can only be regarded as minimal. Imposing additional administrative safeguards as a constitutional requirement might reduce that risk marginally, but would also entail a significant intrusion into an area of primary educational responsibility. We conclude that the Due Process Clause does not require notice and a hearing prior to the imposition of corporal punishment in the public schools, as that practice is authorized and limited by the common law. 1.55 [430 U.S. 651, 683]
V
Petitioners cannot prevail on either of the theories before us in this case. The Eighth Amendment’s prohibition against cruel and unusual punishment is inapplicable to school paddlings, and the Fourteenth Amendment’s requirement of procedural due process is satisfied by Florida’s preservation of common-law constraints and remedies. We therefore agree with the Court of Appeals that petitioners’ evidence affords no basis for injunctive relief, and that petitioners cannot recover damages on the basis of any Eighth Amendment or procedural due process violation.
Affirmed.
Footnotes
[ 1.1 ] As Ingraham and Andrews were minors, the complaint was filed in the names of Eloise Ingraham, James’ mother, and Willie Everett, Roosevelt’s father.
[ 1.2 ] The District Court certified the class, under Fed. Rules Civ. Proc. 23 (b) (2) and (c) (1), as follows: “ ‘All students of the Dade County School system who are subject to the corporal punishment policies issued by the Defendant, Dade County School Board. . . .’ ” App. 17. One student was specifically excepted from the class by request.
[ 1.3 ] The complaint also named the Dade County School Board as a defendant, but the Court of Appeals held that the Board was not amenable to suit under 42 U.S.C. §§ 1981-1988 and dismissed the suit against the Board for want of jurisdiction. 525 F.2d 909, 912 (CA5 1976). This aspect of the Court of Appeals’ judgment is not before us.
[ 1.4 ] Petitioners had waived their right to jury trial on the claims for damages in counts one and two, but respondents had not. The District Court proceeded initially to hear evidence only on count three, the claim for injunctive relief. At the close of petitioners’ case, however, the parties agreed that the evidence offered on count three (together with certain stipulated testimony) would be considered, for purposes of a motion for directed verdict, as if it had also been offered on counts one and two. It was understood that respondents could reassert a right to jury trial if the motion were denied. App. 142.
[ 1.5 ] The evidence does not show how many of the schools actually employed corporal punishment as a means of maintaining discipline. The authorization of the practice by the School Board extended to 231 of the schools in the 1970-1971 school year, but at least 10 of those schools did not administer corporal punishment as a matter of school policy. Id., at 137-139.
[ 1.6 ] In the 1970-1971 school year, § 232.27 provided:
“Each teacher or other member of the staff of any school shall assume such authority for the control of pupils as may be assigned to him by the principal and shall keep good order in the classroom and in other places in which he is assigned to be in charge of pupils, but he shall not inflict corporal punishment before consulting the principal or teacher in charge of the school, and in no case shall such punishment be degrading or unduly severe in its nature. . . .”
Effective July 1, 1976, the Florida Legislature amended the law governing corporal punishment. Section 232.27 now reads:
“Subject to law and to the rules of the district school board, each teacher or other member of the staff of any school shall have such authority for the control and discipline of students as may be assigned to him by the principal or his designated representative and shall keep good order in the classroom and in other places in which he is assigned to be in charge of students. If a teacher feels that corporal punishment is necessary, at least the following procedures shall be followed: (1) The use of corporal punishment shall be approved in principle by the principal before it is used, but approval is not necessary for each specific instance in which it is used. (2) A teacher or principal may administer corporal punishment only in the presence of another adult who is informed beforehand, and in the student’s presence, of the reason for the punishment. (3) A teacher or principal who has administered punishment shall, [430 U.S. 651, 656] upon request, provide the pupil’s parent or guardian with a written explanation of the reason for the punishment and the name of the other [adult] who was present.” Fla. Stat. Ann. § 232.27 (1977) (codifier’s notation omitted).
Corporal punishment is now defined as “the moderate use of physical force or physical contact by a teacher or principal as may be necessary to maintain discipline or to enforce school rules.” § 228.041 (28). The local school boards are expressly authorized to adopt rules governing student conduct and discipline and are directed to make available codes of student conduct. § 230.23 (6). Teachers and principals are given immunity from civil and criminal liability for enforcing disciplinary rules, “[e]xcept in the case of excessive force or cruel and unusual punishment. . . .” § 232.275.
[ 1.7 ] In the 1970-1971 school year, Policy 5144 authorized corporal punishment where the failure of other means of seeking cooperation from the student made its use necessary. The regulation specified that the principal should determine the necessity for corporal punishment, that the student should understand the seriousness of the offense and the reason for the punishment, and that the punishment should be administered in the presence of another adult in circumstances not calculated to hold the student up to shame or ridicule. The regulation cautioned against using corporal punishment against a student under psychological or medical treatment, and warned that the person administering the punishment “must realize his own personal liabilities” in any case of physical injury. App. 15.
While this litigation was pending in the District Court, the Dade County School Board amended Policy 5144 to standardize the size of the paddles used in accordance with the description in the text, to proscribe striking a child with a paddle elsewhere than on the buttocks, to limit the permissible number of “licks” (five for elementary and intermediate grades and seven for junior and senior grades), and to require a contemporaneous explanation of the need for the punishment to the student and a subsequent notification to the parents. App. 126-128.
[ 1.8 ] 498 F.2d 248, 255, and n. 7 (1974) (original panel opinion), vacated on rehearing, 525 F.2d 909 (1976); App. 48, 138, 146; Exhibits 14, 15.
[ 1.9 ] Stedman’s Medical Dictionary (23d ed. 1976) defines “hematoma” as “[a] localized mass of extravasated blood that is relatively or completely confined within an organ or tissue . . .; the blood is usually clotted (or partly clotted), and, depending on how long it has been there, may manifest various degrees of organization and decolorization.”
[ 1.10 ] App. 3-4, 18-20, 68-85, 129-136.
[ 1.11 ] Id., at 4-5, 104-113. The similar experiences of several other students at Drew, to which they individually testified in the District Court, are summarized in the original panel opinion in the Court of Appeals, 498 F.2d, at 257-259.
[ 1.12 ] We denied review of a third question presented in the petition for certiorari:
“Is the infliction of severe corporal punishment upon public school students arbitrary, capricious and unrelated to achieving any legitimate educational purpose and therefore violative of the Due Process Clause of the Fourteenth Amendment?” Pet. for Cert. 2.
[ 1.13 ] See H. Falk, Corporal Punishment 11-48 (1941); N. Edwards & H. Richey, The School in the American Social Order 115-116 (1947).
[ 1.14 ] Public and compulsory education existed in New England before the Revolution, see id., at 50-68, 78-81, 97-113, but the demand for free public schools as we now know them did not gain momentum in the country as a whole until the mid-1800’s, and it was not until 1918 that compulsory school attendance laws were in force in all the States. See Brown v. Board of Education, 347 U.S. 483, 489 n. 4 (1954), citing Cubberley, Public Education in the United States 408-423, 563-565 (1934 ed.); cf. Wisconsin v. Yoder, 406 U.S. 205, 226, and n. 15 (1972).
[ 1.15 ] See Jackson v. Bishop, 404 F.2d 571, 580 (CA8 1968); Falk, supra, at 85-88.
[ 1.16 ] See K. Larson & M. Karpas, Effective Secondary School Discipline 146 (1963); A. Reitman, J. Follman, & E. Ladd, Corporal Punishment in the Public Schools 2-5 (ACLU Report 1972).
[ 1.17 ] For samplings of scholarly opinion on the use of corporal punishment in the schools, see F. Reardon & R. Reynolds, Corporal Punishment in [430 U.S. 651, 661] Pennsylvania 1-2, 34 (1975); National Education Association, Report of the Task Force on Corporal Punishment (1972); K. James, Corporal Punishment in the Public Schools 8-16 (1963). Opinion surveys taken since 1970 have consistently shown a majority of teachers and of the general public favoring moderate use of corporal punishment in the lower grades. See Reardon & Reynolds, supra, at 2, 23-26; Delaware Department of Public Instruction, Report on the Corporal Punishment Survey 48 (1974); Reitman, Follman, & Ladd, supra, at 34-35; National Education Association, supra, at 7.
[ 1.18 ] See Falk, supra, 66-69; cf. Cooper v. McJunkin, 4 Ind. 290 (1853).
[ 1.19 ] See 1 F. Harper & F. James, Law of Torts § 3.20, pp. 288-292 (1956); Proehl, Tort Liability of Teachers, 12 Vand. L. Rev. 723, 734-738 (1959); W. Prosser, Law of Torts 136-137 (4th ed. 1971).
[ 1.20 ] See cases cited n. 28, infra. The criminal codes of many States include provisions explicitly recognizing the teacher’s common-law privilege [430 U.S. 651, 662] to inflict reasonable corporal punishment. E.g., Ariz. Rev. Stat. Ann. § 13-246 (A) (1) (1956); Conn. Gen. Stat. § 53a-18 (1977); Neb. Rev. Stat. § 28-840 (2) (1975); N. Y. Penal Law § 35.10 (McKinney 1975 and Supp. 1976); Ore. Rev. Stat. § 161.205 (1) (1975).
[ 1.21 ] See Proehl, supra, at 726, and n. 13.
[ 1.22 ] Today, corporal punishment in school is conditioned on parental approval only in California. Cal. Educ. Code § 49001 (West Supp. 1977). Cf. Morrow v. Wood, 35 Wis. 59 (1874). This Court has held in a summary affirmance that parental approval of corporal punishment is not constitutionally required. Baker v. Owen, 423 U.S. 907 (1975), aff’g 395 F. Supp. 294 (MDNC).
[ 1.23 ] Cal. Educ. Code §§ 49000-49001 (West Supp. 1977); Del. Code Ann., Tit. 14, § 701 (Supp. 1976); Fla. Stat. Ann. § 232.27 (1977); Ga. Code Ann. §§ 32-835, 32-836 (1976); Haw. Rev. Stat. §§ 298-16 (1975 Supp.), 703-309 (2) (Spec. Pamphlet 1975); Ill. Ann. Stat., c. 122, §§ 24-24, 34-84a (1977 Supp.); Ind. Code Ann. § 20-8.1-5-2 (1975); Md. Ann. Code, Art. 77, § 98B (1975) (in specified counties); Mich. Comp. Laws Ann., § 340.756 [430 U.S. 651, 663] (1970); Mont. Rev. Codes Ann. § 75-6109 (1971); Nev. Rev. Stat. § 392.465 (1973); N. C. Gen. Stat. § 115-146 (1975); Ohio Rev. Code Ann. § 3319.41 (1972); Okla. Stat. Ann., Tit. 70, § 6-114 (1972); Pa. Stat. Ann., Tit. 24, § 13-1317 (Supp. 1976); S. C. Code § 59-63-260 (1977); S. D. Compiled Laws Ann. § 13-32-2 (1975); Vt. Stat. Ann., Tit. 16, § 1161 (Supp. 1976); Va. Code Ann. § 22-231.1 (1973); W. Va. Code, § 18A-5-1 (1977); Wyo. Stat. § 21.1-64 (Supp. 1975).
[ 1.24 ] Cal. Educ. Code § 49001 (West Supp. 1977) (requiring prior parental approval in writing); Fla. Stat. Ann. § 232.27 (3) (1977) (requiring a written explanation on request); Mont. Rev. Codes Ann. § 75-6109 (1971) (requiring prior parental notification).
[ 1.25 ] Md. Ann. Code, Art. 77, § 98B (1975).
[ 1.26 ] Fla. Stat. Ann. § 232.27 (1977); Haw. Rev. Stats. § 298-16 (1975 Supp.); Mont. Rev. Codes Ann. § 75- 6109 (1971).
[ 1.27 ] Mass. Gen. Laws Ann., c. 71, § 37G (Supp. 1976); N. J. Stat. Ann. § 18A: 6-1 (1968).
[ 1.28 ] E.g., Suits v. Glover, 260 Ala. 449, 71 So.2d 49 (1954); La Frentz v. Gallagher, 105 Ariz. 255, 462 P.2d 804 (1969); Berry v. Arnold School Dist., 199 Ark. 1118, 137 S. W. 2d 256 (1940); Andreozzi v. Rubano, 145 Conn. 280, 141 A. 2d 639 (1958); Tinkham v. Kole, 252 Iowa 1303, 110 N. W. 2d 258 (1961); Carr v. Wright, 423 S. W. 2d 521 (Ky. 1968); Christman v. Hickman, 225 Mo. App. 828, 37 S. W. 2d 672 (1931); Simms v. School Dist. No. 1, 13 Ore. App. 119, 508 P.2d 236 (1973); Marlar v. Bill, 181 Tenn. 100, 178 S. W. 2d 634 (1944); Prendergast v. Masterson, 196 S. W. 246 (Tex. Civ. App. 1917). See generally sources cited n. 19, supra.
[ 1.29 ] See Gregg v. Georgia, 428 U.S. 153, 168-173 (1976) (joint opinion of STEWART, POWELL, and STEVENS, JJ.) (hereinafter joint opinion); Furman v. Georgia, 408 U.S. 238, 316-328 (1972) (MARSHALL, J., concurring); Granucci, “Nor Cruel and Unusual Punishments Inflicted:” The Original Meaning, 57 Calif. L. Rev. 839 (1969).
[ 1.30 ] See I. Brant, The Bill of Rights 155 (1965).
[ 1.31 ] See Granucci, supra, at 852-860.
[ 1.32 ] Id., at 855
[ 1.33 ] The preamble reads in part:
“WHEREAS the late King James the Second, by the assistance of divers evil counsellors, judges, and ministers employed by him, did endeavor to subvert and extirpate . . . the laws and liberties of this kingdom. . . . 10. And excessive bail hath been required of persons committed in criminal cases, to elude the benefit of the laws made for the liberty of the subjects. 11. And excessive fines have been imposed; and illegal and cruel punishments inflicted. . . .” R. Perry & J. Cooper, Sources of Our Liberties 245-246 (1959).
[ 1.34 ] 4 W. Blackstone, Commentaries *297 (bail), *379 (fines and other punishments).
[ 1.35 ] Abraham Holmes of Massachusetts complained specifically of the absence of a provision restraining Congress in its power to determine “what kind of punishments shall be inflicted on persons convicted of crimes.” 2 J. Elliot, Debates on the Federal Constitution 111 (1876). Patrick Henry was of the same mind:
“What says our [Virginia] bill of rights?—‘that excessive bail ought not to be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.’ Are you not, therefore, now calling on those gentlemen who are to compose Congress, to prescribe trials and define punishments without this control? Will they find sentiments there similar to this bill of rights? You let them loose; you do more—you depart from the genius of your country. . . .” 3 id., at 447.
[ 1.36 ] In urging us to extend the Eighth Amendment to ban school paddlings, petitioners rely on the many decisions in which this Court has held that the prohibition against “cruel and unusual” punishments is not “ ‘fastened to the obsolete but may acquire meaning as public opinion becomes enlightened by a humane justice.’ ” Gregg v. Georgia, 428 U.S., at 171 (joint opinion); see, e.g., Trop v. Dulles, 356 U.S., 86, 100-101 (1958) (plurality opinion); Weems v. United States, 217 U.S. 349, 373, 378 (1910). This reliance is misplaced. Our Eighth Amendment decisions have referred to “evolving standards of decency,” Trop v. Dulles, supra, at 101, only in determining whether criminal punishments are “cruel and unusual” under the Amendment.
[ 1.37 ] Some punishments, though not labeled “criminal” by the State, may be sufficiently analogous to criminal punishments in the circumstances in which they are administered to justify application of the Eighth Amendment. Cf. In re Gault, 387 U.S. 1 (1967). We have no occasion in this case, for example, to consider whether or under what circumstances persons involuntarily confined in mental or juvenile institutions can claim the protection of the Eighth Amendment.
[ 1.38 ] Judge Friendly similarly has observed that the Cruel and Unusual Punishments Clause “can fairly be deemed to be applicable to the manner in which an otherwise constitutional sentence . . . is carried out by an executioner, see Louisiana ex rel. Francis v. Resweber, 329 U.S. 459 . . . (1947), or to cover conditions of confinement which may make intolerable an otherwise constitutional term of imprisonment.” Johnson v. Glick, 481 F.2d 1028, 1032 (CA2), cert. denied, 414 U.S. 1033 (1973) (citation omitted).
[ 1.39 ] Putting history aside as irrelevant, the dissenting opinion of MR. JUSTICE WHITE argues that a “purposive analysis” should control the reach of the Eighth Amendment. Post, at 686-688. There is no support whatever for this approach in the decisions of this Court. Although an imposition must be “punishment” for the Cruel and Unusual Punishments Clause to apply, the Court has never held that all punishments are subject to Eighth Amendment scrutiny. See n. 40, infra. The [430 U.S. 651, 671] applicability of the Eighth Amendment always has turned on its original meaning, as demonstrated by its historical derivation. See Gregg v. Georgia, 428 U.S., at 169-173 (joint opinion); Furman v. Georgia, 408 U.S., at 315-328 (MARSHALL, J., concurring).
The dissenting opinion warns that as a consequence of our decision today, teachers may “cut off a child’s ear for being late to class.” Post, at 684. This rhetoric bears no relation to reality or to the issues presented in this case. The laws of virtually every State forbid the excessive physical punishment of schoolchildren. Yet the logic of the dissent would make the judgment of which disciplinary punishments are reasonable and which are excessive a matter of constitutional principle in every case, to be decided ultimately by this Court. The hazards of such a broad reading of the Eighth Amendment are clear. “It is always time to say that this Nation is too large, too complex and composed of too great a diversity of peoples for any one of us to have the wisdom to establish the rules by which local Americans must govern their local affairs. The constitutional rule we are urged to adopt is not merely revolutionary—it departs from the ancient faith based on the premise that experience in making local laws by local people themselves is by far the safest guide for a nation like ours to follow.” Powell v. Texas, 392 U.S. 514, 547-548 (1968) (opinion of Black, J.).
[ 1.40 ] Eighth Amendment scrutiny is appropriate only after the State has complied with the constitutional guarantees traditionally associated with criminal prosecutions. See United States v. Lovett, 328 U.S. 303, 317-318 (1946). Thus, in Trop v. Dulles, 356 U.S. 86 (1958), the plurality appropriately took the view that denationalization was an impermissible punishment for wartime desertion under the Eighth Amendment, because desertion already had been established at a criminal trial. But in Kennedy v. Mendoza-Martinez, 372 U.S. 144 (1963), where the Court considered denationalization as a punishment for evading the draft, the Court refused to reach the Eighth Amendment issue, holding instead that the punishment could be imposed only through the criminal process. Id., at 162-167, 186, and n. 43. As these cases demonstrate, the State does not acquire the power to punish with which the Eighth Amendment is concerned until after [430 U.S. 651, 672] it has secured a formal adjudication of guilt in accordance with due process of law. Where the State seeks to impose punishment without such an adjudication, the pertinent constitutional guarantee is the Due Process Clause of the Fourteenth Amendment.
[ 1.41 ] See 1 W. Blackstone, Commentaries *134. Under the 39th Article of the Magna Carta, an individual could not be deprived of this right of personal security “except by the legal judgment of his peers or by the law of the land.” Perry & Cooper, supra, n. 33, at 17. By subsequent enactments of Parliament during the time of Edward III, the right was protected from deprivation except “by due process of law.” See Shattuck, The True Meaning of the Term “Liberty,” 4 Harv. L. Rev. 365, 372-373 (1891).
[ 1.42 ] See, e.g., Skinner v. Oklahoma, 316 U.S. 535, 541 (1942) (sterilization); Jacobson v. Massachusetts, 197 U.S. 11 (1905) (vaccination); Union Pacific R. Co. v. Botsford, 141 U.S. 250, 251-252 (1891) (physical examinations); cf. ICC v. Brimson, 154 U.S. 447, 479 (1894).
The right of personal security is also protected by the Fourth Amendment, which was made applicable to the States through the Fourteenth because its protection was viewed as “implicit in ‘the concept of ordered liberty’ . . . enshrined in the history and the basic constitutional documents of English-speaking peoples.” Wolf v. Colorado, 338 U.S. 25, 27-28 (1949). It has been said of the Fourth Amendment that its “overriding function . . . is to protect personal privacy and dignity against unwarranted intrusion by the State.” Schmerber v. California, 384 U.S. 757, 767 (1966). But the principal concern of that Amendment’s prohibition against unreasonable searches and seizures is with intrusions on privacy in the course of criminal investigations. See Whalen v. Roe, 429 U.S. 589, 604 n. 32 (1977). Petitioners do not contend that the Fourth Amendment applies, according to its terms, to corporal punishment in public school.
[ 1.43 ] Unlike Goss v. Lopez, 419 U.S. 565 (1975), this case does not involve the state-created property interest in public education. The purpose of corporal punishment is to correct a child’s behavior without interrupting his education. That corporal punishment may, in a rare case, have the unintended effect of temporarily removing a child from school affords no basis for concluding that the practice itself deprives students of property protected by the Fourteenth Amendment. Nor does this case involve any state-created interest in liberty going beyond the Fourteenth Amendment’s protection of freedom from bodily restraint and corporal punishment. Cf. Meachum v. Fano, 427 U.S. 215, 225-227 (1976).
[ 1.44 ] If the common-law privilege to inflict reasonable corporal punishment in school were inapplicable, it is doubtful whether any procedure short of a trial in a criminal or juvenile court could satisfy the requirements of procedural due process for the imposition of such punishment. See United States v. Lovett, 328 U.S., at 317-318; cf. Breed v. Jones, 421 U.S. 519, 528-529 (1975).
[ 1.45 ] See supra, at 655-657, 661. The statutory prohibition against “degrading” or unnecessarily “severe” corporal punishment in former § 232.27 has been construed as a statement of the common-law principle. See 1937 Op. Fla. Atty. Gen., Biennial Report of the Atty. Gen. 169 (1937-1938); cf. 1957 Op. Fla. Atty. Gen., Biennial Report of the Atty. Gen. 7, 8 (1957-1958). Florida Stat. Ann. § 827.03 (3) (1976) makes malicious punishment of a child a felony. Both the District Court, App. 144, and the Court of Appeals, 525 F.2d, at 915, expressed the view that the common-law tort remedy was available to the petitioners in this case. And petitioners conceded in this Court that a teacher who inflicts excessive punishment on a child may be held both civilly and criminally liable under Florida law. Brief for Petitioners 33 n. 11, 34; Tr. of Oral Arg. 17, 52-53.
In view of the statutory adoption of the common-law rule, and the unanimity of the parties and the courts below, the doubts expressed in MR. JUSTICE WHITE’s dissenting opinion as to the availability of tort remedies in Florida can only be viewed as chimerical. The dissent makes much of the fact that no Florida court has ever “recognized” a damages remedy for unreasonable corporal punishment. Post, at 694 n. 11, 700. But the absence of reported Florida decisions hardly suggests that no remedy is available. Rather, it merely confirms the commonsense judgment that excessive corporal punishment is exceedingly rare in the public schools.
[ 1.46 ] The low incidence of abuse, and the availability of established judicial remedies in the event of abuse, distinguish this case from Goss v. Lopez, 419 U.S. 565 (1975). The Ohio law struck down in Goss provided for suspensions from public school of up to 10 days without “any written procedure applicable to suspensions.” Id., at 567. Although Ohio law provided generally for administrative review, Ohio Rev. Code Ann. § 2506.01 (Supp. 1973), the Court assumed that the short suspensions would not be stayed pending review, with the result that the review proceeding could serve neither a deterrent nor a remedial function. 419 U.S., at 581 n. 10. In these circumstances, the Court held the law authorizing suspensions unconstitutional for failure to require “that there be at least an informal give-and-take between student and disciplinarian, preferably prior to the suspension. . . .” Id., at 584. The subsequent civil and criminal proceedings available in this case may be viewed as affording substantially greater protection to the child than the informal conference mandated by Goss.
[ 1.47 ] “[P]rior hearings might well be dispensed with in many circumstances in which the state’s conduct, if not adequately justified, would constitute a common-law tort. This would leave the injured plaintiff in precisely the same posture as a common-law plaintiff, and this procedural consequence would be quite harmonious with the substantive view that the fourteenth amendment encompasses the same liberties as those protected by the common law.” Monaghan, Of “Liberty” and “Property,” 62 Cornell L. Rev. 405, 431 (1977) (footnote omitted). See Bonner v. Coughlin, 517 F.2d 1311, 1319 (CA7 1975), modified en banc, 545 F.2d 565 (1976), cert. pending, No. 76-6204. We have no occasion in this case, see supra, at 659, and n. 12, to decide whether or under what circumstances corporal punishment of a public school child may give rise to an independent federal cause of action to vindicate substantive rights under the Due Process Clause.
[ 1.48 ] See also Terry v. Ohio, 392 U.S. 1 (1968). The reasonableness of a warrantless public arrest may be subjected to subsequent judicial scrutiny in a civil action against the law enforcement officer or in a suppression hearing to determine whether any evidence seized in the arrest may be used in a criminal trial.
[ 1.49 ] “[P]rocedural due process rules are shaped by the risk of error inherent in the truthfinding process as applied to the generality of cases, not the rare exceptions. . . .” Mathews v. Eldridge, 424 U.S. 319, 344 (1976).
[ 1.50 ] If a prior hearing, with the inevitable attendant publicity within the school, resulted in rejection of the teacher’s recommendation, the consequent impairment of the teacher’s ability to maintain discipline in the classroom would not be insubstantial.
[ 1.51 ] The effect of interposing prior procedural safeguards may well be to make the punishment more severe by increasing the anxiety of the child. For this reason, the school authorities in Dade County found it desirable that the punishment be inflicted as soon as possible after the infraction. App. 48-49.
[ 1.52 ] “It may be true that procedural regularity in disciplinary proceedings promotes a sense of institutional rapport and open communication, a perception of fair treatment, and provides the offender and his fellow students a showcase of democracy at work. But . . . [r]espect for democratic institutions will equally dissipate if they are thought too ineffectual to provide their students an environment of order in which the educational process may go forward. . . .” Wilkinson, Goss v. Lopez: The Supreme Court as School Superintendent, 1975 Sup. Ct. Rev. 25, 71-72.
[ 1.53 ] The seriousness of the disciplinary problems in the Nation’s public schools has been documented in a recent congressional report, Senate Committee on the Judiciary, Subcommittee to Investigate Juvenile [430 U.S. 651, 682] Delinquency, Challenge for the Third Century: Education in a Safe Environment—Final Report on the Nature and Prevention of School Violence and Vandalism, 95th Cong., 1st Sess. (Comm. Print 1977).
[ 1.54 ] The need to maintain order in a trial courtroom raises similar problems. In that context, this Court has recognized the power of the trial judge “to punish summarily and without notice or hearing contemptuous conduct committed in his presence and observed by him.” Taylor v. Hayes, 418 U.S. 488, 497 (1974), citing Ex parte Terry, 128 U.S. 289 (1888). The punishment so imposed may be as severe as six months in prison. See Codispoti v. Pennsylvania, 418 U.S. 506, 513-515 (1974); cf. Muniz v. Hoffman, 422 U.S. 454, 475-476 (1975).
[ 1.55 ] MR. JUSTICE WHITE’s dissenting opinion offers no manageable standards for determining what process is due in any particular case. The [430 U.S. 651, 683] dissent apparently would require, as a general rule, only “an informal give-and-take between student and disciplinarian.” Post, at 693. But the dissent would depart from these “minimal procedures”—requiring even witnesses, counsel, and crossexamination—in cases where the punishment reaches some undefined level of severity. Post, at 700 n. 18. School authorities are left to guess at the degree of punishment that will require more than an “informal give-and-take” and at the additional process that may be constitutionally required. The impracticality of such an approach is self-evident, and illustrates the hazards of ignoring the traditional solution of the common law.
We agree with the dissent that the Goss procedures will often be, “if anything, less than a fair-minded school principal would impose upon himself.” Post, at 700, quoting Goss, 419 U.S., at 583. But before this Court invokes the Constitution to impose a procedural requirement, it should be reasonably certain that the effect will be to afford protection appropriate to the constitutional interests at stake. The dissenting opinion’s reading of the Constitution suggests no such beneficial result and, indeed, invites a lowering of existing constitutional standards.
MR. JUSTICE WHITE, with whom MR. JUSTICE BRENNAN, MR. JUSTICE MARSHALL, and MR. JUSTICE STEVENS join, dissenting.
Today the Court holds that corporal punishment in public schools, no matter how severe, can never be the subject of the protections afforded by the Eighth Amendment. It also holds [430 U.S. 651, 684] that students in the public school systems are not constitutionally entitled to a hearing of any sort before beatings can be inflicted on them. Because I believe that these holdings are inconsistent with the prior decisions of this Court and are contrary to a reasoned analysis of the constitutional provisions involved, I respectfully dissent.
I
A
The Eighth Amendment places a flat prohibition against the infliction of “cruel and unusual punishments.” This reflects a societal judgment that there are some punishments that are so barbaric and inhumane that we will not permit them to be imposed on anyone, no matter how opprobrious the offense. See Robinson v. California, 370 U.S. 660, 676 (1962) (Douglas, J., concurring). If there are some punishments that are so barbaric that they may not be imposed for the commission of crimes, designated by our social system as the most thoroughly reprehensible acts an individual can commit, then, a fortiori, similar punishments may not be imposed on persons for less culpable acts, such as breaches of school discipline. Thus, if it is constitutionally impermissible to cut off someone’s ear for the commission of murder, it must be unconstitutional to cut off a child’s ear for being late to class. 2.1 Although there were no ears cut off in this case, the [430 U.S. 651, 685] record reveals beatings so severe that if they were inflicted on a hardened criminal for the commission of a serious crime, they might not pass constitutional muster.
Nevertheless, the majority holds that the Eighth Amendment “was designed to protect [only] those convicted of crimes,” ante, at 664, relying on a vague and inconclusive recitation of the history of the Amendment. Yet the constitutional prohibition is against cruel and unusual punishments; nowhere is that prohibition limited or modified by the language of the Constitution. Certainly, the fact that the Framers did not choose to insert the word “criminal” into the language of the Eighth Amendment is strong evidence that the Amendment was designed to prohibit all inhumane or barbaric punishments, no matter what the nature of the offense for which the punishment is imposed.
No one can deny that spanking of schoolchildren is “punishment” under any reasonable reading of the word, for the similarities between spanking in public schools and other forms of punishment are too obvious to ignore. Like other forms of punishment, spanking of schoolchildren involves an institutionalized response to the violation of some official rule or regulation proscribing certain conduct and is imposed [430 U.S. 651, 686] for the purpose of rehabilitating the offender, deterring the offender and others like him from committing the violation in the future, and inflicting some measure of social retribution for the harm that has been done.
B
We are fortunate that in our society punishments that are severe enough to raise a doubt as to their constitutional validity are ordinarily not imposed without first affording the accused the full panoply of procedural safeguards provided by the criminal process. 2.2 The effect has been that “every decision of this Court considering whether a punishment is ‘cruel and unusual’ within the meaning of the Eighth and Fourteenth Amendments has dealt with a criminal punishment.” Ante, at 666. The Court would have us believe from this fact that there is a recognized distinction between criminal and noncriminal punishment for purposes of the Eighth Amendment. This is plainly wrong. “[E]ven a clear legislative classification of a statute as ‘non-penal’ would not alter the fundamental nature of a plainly penal statute.” Trop v. Dulles, 356 U.S. 86, 95 (1958) (plurality opinion). The relevant inquiry is not whether the offense for which a punishment is inflicted has been labeled as criminal, but whether the purpose of the deprivation is among those ordinarily associated [430 U.S. 651, 687] with punishment, such as retribution, rehabilitation, or deterrence. 2.3 Id., at 96. Cf. Kennedy v. MendozaMartinez, 372 U.S. 144 (1963).
If this purposive approach were followed in the present case, it would be clear that spanking in the Florida public schools is punishment within the meaning of the Eighth Amendment. The District Court found that “[c]orporal punishment is one of a variety of measures employed in the school system for the correction of pupil behavior and the preservation of order.” App. 146. Behavior correction and [430 U.S. 651, 688] preservation of order are purposes ordinarily associated with punishment.
Without even mentioning the purposive analysis applied in the prior decisions of this Court, the majority adopts a rule that turns on the label given to the offense for which the punishment is inflicted. Thus, the record in this case reveals that one student at Drew Junior High School received 50 licks with a paddle for allegedly making an obscene telephone call. Brief for Petitioners 13. The majority holds that the Eighth Amendment does not prohibit such punishment since it was only inflicted for a breach of school discipline. However, that same conduct is punishable as a misdemeanor under Florida law, Fla. Stat. Ann. § 365.16 (Supp. 1977), and there can be little doubt that if that same “punishment” had been inflicted by an officer of the state courts for violation of § 365.16, it would have had to satisfy the requirements of the Eighth Amendment.
C
In fact, as the Court recognizes, the Eighth Amendment has never been confined to criminal punishments. 2.4 Nevertheless, the majority adheres to its view that any protections afforded by the Eighth Amendment must have something to do with [430 U.S. 651, 689] criminals, and it would therefore confine any exceptions to its general rule that only criminal punishments are covered by the Eighth Amendment to abuses inflicted on prisoners. Thus, if a prisoner is beaten mercilessly for a breach of discipline, he is entitled to the protection of the Eighth Amendment, while a schoolchild who commits the same breach of discipline and is similarly beaten is simply not covered.
The purported explanation of this anomaly is the assertion that schoolchildren have no need for the Eighth Amendment. We are told that schools are open institutions, subject to constant public scrutiny; that schoolchildren have adequate remedies under state law; 2.5 and that prisoners suffer the social stigma of being labeled as criminals. How any of these policy considerations got into the Constitution is difficult to discern, for the Court has never considered any of these factors in determining the scope of the Eighth Amendment. 2.6 [430 U.S. 651, 690]
The essence of the majority’s argument is that schoolchildren do not need Eighth Amendment protection because corporal punishment is less subject to abuse in the public schools than it is in the prison system. 2.7 However, it cannot be reasonably suggested that just because cruel and unusual punishments may occur less frequently under public scrutiny, they will not occur at all. The mere fact that a public flogging or a public execution would be available for all to see would not render the punishment constitutional if it were otherwise impermissible. Similarly, the majority would not suggest that a prisoner who is placed in a minimum-security prison and permitted to go home to his family on the weekends should be any less entitled to Eighth Amendment protections than his counterpart in a maximum-security prison. In short, if a punishment is so barbaric and inhumane that it goes beyond the tolerance of a civilized society, its openness to public scrutiny should have nothing to do with its constitutional validity.
Nor is it an adequate answer that schoolchildren may have other state and constitutional remedies available to them. Even assuming that the remedies available to public school students are adequate under Florida law, 2.8 the availability of state remedies has never been determinative of the coverage or of the protections afforded by the Eighth Amendment. The reason is obvious. The fact that a person may have a [430 U.S. 651, 691] state-law cause of action against a public official who tortures him with a thumbscrew for the commission of an antisocial act has nothing to do with the fact that such official conduct is cruel and unusual punishment prohibited by the Eighth Amendment. Indeed, the majority’s view was implicitly rejected this Term in Estelle v. Gamble, 429 U.S. 97 (1976), when the Court held that failure to provide for the medical needs of prisoners could constitute cruel and unusual punishment even though a medical malpractice remedy in tort was available to prisoners under state law. Id., at 107 n. 15.
D
By holding that the Eighth Amendment protects only criminals, the majority adopts the view that one is entitled to the protections afforded by the Eighth Amendment only if he is punished for acts that are sufficiently opprobrious for society to make them “criminal.” This is a curious holding in view of the fact that the more culpable the offender the more likely it is that the punishment will not be disproportionate to the offense, and consequently, the less likely it is that the punishment will be cruel and unusual. 2.9 Conversely, a public school student who is spanked for a mere breach of discipline may sometimes have a strong argument that the punishment does not fit the offense, depending upon the severity of the beating, and therefore that it is cruel and unusual. Yet the majority would afford the student no protection no matter how inhumane and barbaric the punishment inflicted on him might be.
The issue presented in this phase of the case is limited to whether corporal punishment in public schools can ever be prohibited by the Eighth Amendment. I am therefore not [430 U.S. 651, 692] suggesting that spanking in the public schools is in every instance prohibited by the Eighth Amendment. My own view is that it is not. I only take issue with the extreme view of the majority that corporal punishment in public schools, no matter how barbaric, inhumane, or severe, is never limited by the Eighth Amendment. Where corporal punishment becomes so severe as to be unacceptable in a civilized society, I can see no reason that it should become any more acceptable just because it is inflicted on children in the public schools.
II
The majority concedes that corporal punishment in the public schools implicates an interest protected by the Due Process Clause—the liberty interest of the student to be free from “bodily restraint and punishment” involving “appreciable physical pain” inflicted by persons acting under color of state law. Ante, at 674. The question remaining, as the majority recognizes, is what process is due.
The reason that the Constitution requires a State to provide “due process of law” when it punishes an individual for misconduct is to protect the individual from erroneous or mistaken punishment that the State would not have inflicted had it found the facts in a more reliable way. See, e.g., Mathews v. Eldridge, 424 U.S. 319, 335, 344 (1976). In Goss v. Lopez, 419 U.S. 565 (1975), the Court applied this principle to the school disciplinary process, holding that a student must be given an informal opportunity to be heard before he is finally suspended from public school.
“Disciplinarians, although proceeding in utmost good faith, frequently act on the reports and advice of others, and the controlling facts and the nature of the conduct under challenge are often disputed. The risk of error is not at all trivial, and it should be guarded against if that may be done without prohibitive cost or interference [430 U.S. 651, 693] with the educational process.” Id., at 580. (Emphasis added.)
To guard against this risk of punishing an innocent child, the Due Process Clause requires, not an “elaborate hearing” before a neutral party, but simply “an informal give-and-take between student and disciplinarian” which gives the student “an opportunity to explain his version of the facts.” Id., at 580, 582, 584.
The Court now holds that these “rudimentary precautions against unfair or mistaken findings of misconduct,” id., at 581, are not required if the student is punished with “appreciable physical pain” rather than with a suspension, even though both punishments deprive the student of a constitutionally protected interest. Although the respondent school authorities provide absolutely no process to the student before the punishment is finally inflicted, the majority concludes that the student is nonetheless given due process because he can later sue the teacher and recover damages if the punishment was “excessive.”
This tort action is utterly inadequate to protect against erroneous infliction of punishment for two reasons. 2.10 First, under Florida law, a student punished for an act he did not commit cannot recover damages from a teacher “proceeding [430 U.S. 651, 694] in utmost good faith . . . on the reports and advice of others,” supra, at 692; the student has no remedy at all for punishment imposed on the basis of mistaken facts, at least as long as the punishment was reasonable from the point of view of the disciplinarian, uninformed by any prior hearing. 2.11 The “traditional [430 U.S. 651, 695] common-law remedies” on which the majority relies, ante, at 672, thus do nothing to protect the student from the danger that concerned the Court in Goss—the risk of reasonable, good-faith mistake in the school disciplinary process.
Second, and more important, even if the student could sue for good-faith error in the infliction of punishment, the lawsuit occurs after the punishment has been finally imposed. The infliction of physical pain is final and irreparable; it cannot be undone in a subsequent proceeding. There is every reason to require, as the Court did in Goss, a few minutes of “informal give-and-take between student and disciplinarian” [430 U.S. 651, 696] as a “meaningful hedge” against the erroneous infliction of irreparable injury. 419 U.S., at 583-584. 2.12
The majority’s conclusion that a damages remedy for excessive corporal punishment affords adequate process rests on the novel theory that the State may punish an individual without giving him any opportunity to present his side of the story, as long as he can later recover damages from a state official if he is innocent. The logic of this theory would permit a State that punished speeding with a one-day jail sentence to make a driver serve his sentence first without a trial and then sue to recover damages for wrongful imprisonment. 2.13 Similarly, the State could finally take away a prisoner’s good-time credits for alleged disciplinary infractions and require him to bring a damages suit after he was eventually released. There is no authority for this theory, nor does the majority purport to find any, 2.14 in the procedural due process [430 U.S. 651, 697] decisions of this Court. Those cases have “consistently held that some kind of hearing is required at some time before a person is finally deprived of his property interests . . . , [and that] a person’s liberty is equally protected. . . .” Wolff v. McDonnell, 418 U.S. 539, 557-558 (1974). (Emphasis added.)
The majority attempts to support its novel theory by drawing an analogy to warrantless arrests on probable cause, which the Court has held reasonable under the Fourth Amendment. United States v. Watson, 423 U.S. 411 (1976). This analogy fails for two reasons. First, the particular requirements of the Fourth Amendment, rooted in the “ancient common-law rule[s]” regulating police practices, id., at 418, must be understood in the context of the criminal justice system for which that Amendment was explicitly tailored. Thus in Gerstein v. Pugh, 420 U.S. 103 (1975), the Court, speaking through MR. JUSTICE POWELL, rejected the argument that procedural protections required in Goss and other due process [430 U.S. 651, 698] cases should be afforded to a criminal suspect arrested without a warrant.
“The Fourth Amendment was tailored explicitly for the criminal justice system, and its balance between individual and public interests always has been thought to define the ‘process that is due’ for seizures of person or property in criminal cases, including the detention of suspects pending trial. . . . Moreover, the Fourth Amendment probable cause determination is in fact only the first stage of an elaborate system, unique in jurisprudence, designed to safeguard the rights of those accused of criminal conduct. The relatively simple civil procedures (e.g., prior interview with school principal before suspension) presented in the [procedural due process] cases cited in the concurring opinion are inapposite and irrelevant in the wholly different context of the criminal justice system.” Id., at 125 n. 27. (Emphasis in last sentence added.)
While a case dealing with warrantless arrests is perhaps not altogether “inapposite and irrelevant in the wholly different context” of the school disciplinary process, such a case is far weaker authority than procedural due process cases such as Goss v. Lopez, 419 U.S. 565 (1975), that deal with deprivations of liberty outside the criminal context.
Second, contrary to the majority’s suggestion, ante, at 680 n. 48, the reason that the Court has upheld warrantless arrests on probable cause is not because the police officer’s assessment of the facts “may be subjected to subsequent judicial scrutiny in a civil action against the law enforcement officer or in a suppression hearing. . . .” The reason that the Court has upheld arrests without warrants is that they are the “first stage of an elaborate system” of procedural protections, Gerstein v. Pugh, supra, at 125 n. 27, and that the State is not free to continue the deprivation beyond this first stage without procedures. The Constitution requires the State to provide [430 U.S. 651, 699] “a fair and reliable determination of probable cause” by a judicial officer prior to the imposition of “any significant pretrial restraint of liberty” other than “a brief period of detention to take the administrative steps incident to [a warrantless] arrest.” Id., at 114, 125. (Footnote omitted; emphasis added.) This “practical compromise” is made necessary because “requiring a magistrate’s review of the factual justification prior to any arrest . . . would constitute an intolerable handicap for legitimate law enforcement,” id., at 113; but it is the probable-cause determination prior to any significant period of pretrial incarceration, rather than a damages action or suppression hearing, that affords the suspect due process.
There is, in short, no basis in logic or authority for the majority’s suggestion that an action to recover damages for excessive corporal punishment “afford[s] substantially greater protection to the child than the informal conference mandated by Goss.” 2.15 The majority purports to follow the settled principle that what process is due depends on “‘the risk of an erroneous deprivation of [the protected] interest . . . and the probable value, if any, of additional or substitute procedural safeguards’”; 2.16 it recognizes, as did Goss, the risk of error in the school disciplinary process 2.17 and concedes that “the child has a strong interest in procedural safeguards that minimize the risk of wrongful punishment . . .,” ante, at 676; [430 U.S. 651, 700] but it somehow concludes that this risk is adequately reduced by a damages remedy that never has been recognized by a Florida court, that leaves unprotected the innocent student punished by mistake, and that allows the State to punish first and hear the student’s version of events later. I cannot agree.
The majority emphasizes, as did the dissenters in Goss, that even the “rudimentary precautions” required by that decision would impose some burden on the school disciplinary process. But those costs are no greater if the student is paddled rather than suspended; the risk of error in the punishment is no smaller; and the fear of “a significant intrusion” into the disciplinary process, ante, at 682 (cf. Goss, supra, at 585 (POWELL, J., dissenting)), is just as exaggerated. The disciplinarian need only take a few minutes to give the student “notice of the charges against him and, if he denies them, an explanation of the evidence the authorities have and an opportunity to present his side of the story.” 419 U.S., at 581. In this context the Constitution requires, “if anything, less than a fairminded school principal would impose upon himself ” in order to avoid injustice. 2.18 Id., at 583.
I would reverse the judgment below.
[ 2.1 ] There is little reason to fear that if the Eighth Amendment is held to apply at all to corporal punishment of schoolchildren, all paddlings, however moderate, would be prohibited. Jackson v. Bishop, 404 F.2d 571 (CA8 1968), held that any paddling or flogging of prisoners, convicted of crime and serving prison terms, violated the cruel and unusual punishment ban of the Eighth Amendment. But aside from the fact that Bishop has never been embraced by this Court, the theory of that case was not that bodily punishments are intrinsically barbaric or excessively severe but that paddling of prisoners is “degrading to the punisher and to the punished alike.” Id., at 580. That approach may be acceptable in the criminal justice system, but it has little if any relevance to corporal [430 U.S. 651, 685] punishment in the schools, for it can hardly be said that the use of moderate paddlings in the discipline of children is inconsistent with the country’s evolving standards of decency.
On the other hand, when punishment involves a cruel, severe beating or chopping off an ear, something more than merely the dignity of the individual is involved. Whenever a given criminal punishment is “cruel and unusual” because it is inhumane or barbaric, I can think of no reason why it would be any less inhumane or barbaric when inflicted on a schoolchild, as punishment for classroom misconduct.
The issue in this case is whether spankings inflicted on public school children for breaking school rules is “punishment,” not whether such punishment is “cruel and unusual.” If the Eighth Amendment does not bar moderate spanking in public schools, it is because moderate spanking is not “cruel and unusual,” not because it is not “punishment” as the majority suggests.
[ 2.2 ] By no means is it suggested that just because spanking of schoolchildren is “punishment” within the meaning of the Cruel and Unusual Punishments Clause, the school disciplinary process is in any way “criminal” and therefore subject to the full panoply of criminal procedural guarantees. See Part II, infra. Ordinarily, the conduct for which schoolchildren are punished is not sufficiently opprobrious to be called “criminal” in our society, and even violations of school disciplinary rules that might also constitute a crime, see infra, at 688, are not subject to the criminal process. See Baxter v. Palmigiano, 425 U.S. 308 (1976), where the Court held that persons who violate prison disciplinary rules are not entitled to the full panoply of criminal procedural safeguards, even if the rule violation might also constitute a crime.
[ 2.3 ] The majority cites Trop as one of the cases that “dealt with a criminal punishment” but neglects to follow the analysis mandated by that decision. In Trop the petitioner was convicted of desertion by a military court-martial and sentenced to three years at hard labor, forfeiture of all pay and allowances, and a dishonorable discharge. After he was punished for the offense he committed, petitioner’s application for a passport was turned down. Petitioner was told that he had been deprived of the “rights of citizenship” under § 401 (g) of the Nationality Act of 1940 because he had been dishonorably discharged from the Armed Forces. The plurality took the view that denationalization in this context was cruel and unusual punishment prohibited by the Eighth Amendment.
The majority would have us believe that the determinative factor in Trop was that the petitioner had been convicted of desertion; yet there is no suggestion in Trop that the disposition of the military court-martial had anything to do with the decision in that case. Instead, while recognizing that the Eighth Amendment extends only to punishments that are penal in nature, the plurality adopted a purposive approach for determining when punishment is penal.
“In deciding whether or not a law is penal, this Court has generally based its determination upon the purpose of the statute. If the statute imposes a disability for the purposes of punishment—that is, to reprimand the wrongdoer, to deter others, etc.—it has been considered penal. But a statute has been considered nonpenal if it imposes a disability, not to punish, but to accomplish some other legitimate governmental purpose.” 356 U.S., at 96 (footnotes omitted).
Although the quoted passage is taken from the plurality opinion of Mr. Chief Justice Warren, joined by three other Justices, MR. JUSTICE BRENNAN, in a concurring opinion, adopted a similar approach in concluding that § 401 (g) was beyond the power of Congress to enact.
[ 2.4 ] Ante, at 669. In Estelle v. Gamble, 429 U.S. 97 (1976), a case decided this Term, the Court held that “deliberate indifference to the medical needs of prisoners” by prison officials constitutes cruel and unusual punishment prohibited by the Eighth Amendment. Such deliberate indifference to a prisoner’s medical needs clearly is not punishment inflicted for the commission of a crime; it is merely misconduct by a prison official. Similarly, the Eighth Circuit has held that whipping a prisoner with a strap in order to maintain discipline is prohibited by the Eighth Amendment. Jackson v. Bishop, 404 F.2d 571 (1968) (Blackmun, J.). See also Knecht v. Gillman, 488 F.2d 1136, 1139-1140 (CA8 1973) (injection of vomit-inducing drugs as part of aversion therapy held to be cruel and unusual); Vann v. Scott, 467 F.2d 1235, 1240-1241 (CA7 1972) (Stevens, J.) (Eighth Amendment protects runaway children against cruel and inhumane treatment, regardless of whether such treatment is labeled “rehabilitation” or “punishment”).
[ 2.5 ] By finding that bodily punishment invades a constitutionally protected liberty interest within the meaning of the Due Process Clause, the majority suggests that the Clause might also afford a remedy for excessive spanking independently of the Eighth Amendment. If this were the case, the Court’s present thesis would have little practical significance. If rather than holding that the Due Process Clause affords a remedy by way of the express commands of the Eighth Amendment, the majority would recognize a cause of action under 42 U.S.C. § 1983 for a deprivation of “liberty” flowing from an excessive paddling, the Court’s opinion is merely a lengthy word of advice with respect to the drafting of civil complaints.
Petitioners in this case did raise the substantive due process issue in their petition for certiorari, ante, at 659 n. 12, but consideration of that question was foreclosed by our limited grant of certiorari. If it is probable that schoolchildren would be entitled to protection under some theory of substantive due process, the Court should not now affirm the judgment below, but should amend the grant of certiorari and set this case for reargument.
[ 2.6 ] In support of its policy considerations, the only cases from this Court cited by the majority are Morrissey v. Brewer, 408 U.S. 471 (1972), and Meachum v. Fano, 427 U.S. 215 (1976), both cases involving prisoners’ rights to procedural due process.
[ 2.7 ] There is no evidence in the record that corporal punishment has been abused in the prison systems more often than in the public schools. Indeed, corporal punishment is seldom authorized in state prisons. See Jackson v. Bishop, supra, at 580, where MR. JUSTICE (then Judge) BLACKMUN noted: “[O]nly two states still permit the use of the strap [in prisons]. Thus almost uniformly has it been abolished.” By relying on its own view of the nature of these two public institutions, without any evidence being heard on the question below, the majority today predicates a constitutional principle on mere armchair speculation.
[ 2.8 ] There is some doubt that the state-law remedies available to public school children are adequate. See n. 11, infra.
[ 2.9 ] For a penalty to be consistent with the Eighth Amendment “the punishment must not be grossly out of proportion to the severity of the crime.” Gregg v. Georgia, 428 U.S. 153, 173 (1976) (joint opinion of STEWART, POWELL, and STEVENS, JJ.).
[ 2.10 ] Here, as in Goss v. Lopez, 419 U.S. 565, 580-581, n. 9 (1975), the record suggests that there may be a substantial risk of error in the discipline administered by respondent school authorities. Respondents concede that some of the petitioners who were punished “denied misconduct” and that “in some cases the punishments may have been mistaken. . . .” Brief for Respondents 60-61. The Court of Appeals panel below noted numerous instances of students punished despite claims of innocence, 498 F.2d 248, 256-258 (CA5 1974), and was “particularly disturbed by the testimony that whole classes of students were corporally punished for the misconduct of a few.” Id., at 268 n. 36. To the extent that the majority focuses on the incidence of and remedies for unduly severe punishments, it fails to address petitioners’ claim that procedural safeguards are required to reduce the risk of punishments that are simply mistaken.
[ 2.11 ] The majority’s assurances to the contrary, it is unclear to me whether and to what extent Florida law provides a damages action against school officials for excessive corporal punishment. Giving the majority the benefit of every doubt, I think it is fair to say that the most a student punished on the basis of mistaken allegations of misconduct can hope for in Florida is a recovery for unreasonable or bad-faith error. But I strongly suspect that even this remedy is not available.
Although the majority does not cite a single case decided under Florida law that recognizes a student’s right to sue a school official to recover damages for excessive punishment, I am willing to assume that such a tort action does exist in Florida. I nevertheless have serious doubts about whether it would ever provide a recovery to a student simply because he was punished for an offense he did not commit. All the cases in other jurisdictions cited by the majority, ante, at 663 n. 28, involved allegations of punishment disproportionate to the misconduct with which the student was charged; none of the decisions even suggest that a student could recover by showing that the teacher incorrectly imposed punishment for something the student had not done. The majority appears to agree that the damages remedy is available only in cases of punishment unreasonable in light of the misconduct charged. It states: “In those cases where severe punishment is contemplated, the available civil and criminal sanctions for abuse . . . afford significant protection against unjustified corporal punishment.” Ante, at 678. (Emphasis added.)
Even if the common-law remedy for excessive punishment extends to punishment that is “excessive” only in the sense that it is imposed on the basis of mistaken facts, the school authorities are still protected from personal liability by common-law immunity. (They are protected by statutory immunity for liability for enforcing disciplinary rules “[e]xcept in the case of excessive force or cruel and unusual punishment.” Fla. Stat. Ann. § 232.275 (1976).) At a minimum, this immunity would protect school officials from damages liability for reasonable mistakes made in good faith. “Although there have been differing emphases and formulations of the common-law immunity of public school officials in cases of student expulsion or suspension, state courts have generally recognized that such [430 U.S. 651, 696] officers should be protected from tort liability under state law for all goodfaith, nonmalicious action taken to fulfill their official duties.” Wood v. Strickland, 420 U.S. 308, 318 (1975) (adopting this rule for § 1983 suits involving school discipline) (footnote omitted); see id., at 318 n. 9 (citing state cases). Florida has applied this rule to a police officer’s determination of probable cause to arrest; the officer is not liable in damages for an arrest not based on probable cause if the officer reasonably believed that probable cause existed. Miami v. Albro, 120 So.2d 23, 26 (Fla. Dist. Ct. App. 1960); cf. Middleton v. Fort Walton Beach, 113 So.2d 431 (Fla. Dist. Ct. App. 1959) (police officer would be personally liable for intentional tort of making an arrest pursuant to warrant he knew to be void); Wilson v. O’Neal, 118 So.2d 101 (Fla. Dist. Ct. App. 1960) (law enforcement officer not liable in damages for obtaining an arrest warrant on the basis of an incorrect identification). There is every reason to think that the Florida courts would apply a similar immunity standard in a hypothetical damages suit against a school disciplinarian.
A final limitation on the student’s damages remedy under Florida law is that the student can recover only from the personal assets of the official; the school board’s treasury is absolutely protected by sovereign immunity from damages for the torts of its agents. Buck v. McLean, 115 So.2d 764 (Fla. Dist. Ct. App. 1959). A teacher’s limited resources may deter the jury from awarding, or prevent the student from collecting, the full amount of damages to which he is entitled. Cf. Bonner v. Coughlin, 517 F.2d 1311, 1319 n. 23 (CA7 1975), modified en banc, 545 F.2d 565 (1976), cert. pending, No. 76-6204 (state-law remedy affords due process where no sovereign or official immunity bars tort suit for negligence by prison guard).
[ 2.12 ] Cf. G. M. Leasing Corp. v. United States, 429 U.S. 338, 351-359 (1977). The Court there held that, in levying on a taxpayer’s assets pursuant to a jeopardy assessment, revenue agents must obtain a warrant before searching the taxpayer’s office but not before seizing his property in a manner that involves no invasion of privacy. G. M. Leasing thus reflects the principle that the case for advance procedural safeguards (such as a magistrate’s determination of probable cause) is more compelling when the Government finally inflicts an injury that cannot be repaired in a subsequent judicial proceeding (invasion of privacy) than when it inflicts a temporary injury which can be undone (seizure of property). The infliction of bodily punishment, like the invasion of privacy, presents this most compelling case for advance procedural safeguards.
[ 2.13 ] To the extent that the majority attempts to find “a relevant analogy in the criminal law”—warrantless arrests on probable cause—to its holding here, ante, at 679-680 (and see infra, at 697-699), it has chosen the wrong analogy. If the majority forthrightly applied its present due process analysis to the area of criminal prosecutions, the police officer not only could arrest a suspect without a warrant but also could convict the suspect without a trial and sentence him to a short jail term. The accused would get his due process in a tort suit for false imprisonment.
[ 2.14 ] For the proposition that the need for a prior hearing is “significantly [430 U.S. 651, 697] less compelling” where the State has preserved “common-law remedies,” ante, at 679, 678, the majority cites only one case, Bonner v. Coughlin, supra, dismissing an allegation by a prisoner that prison guards acting under color of state law had deprived him of property without due process of law by negligently failing to close the door of his cell after a search, with the foreseeable consequence that his trial transcript was stolen. The panel held that the right to recover under state law for the negligence of state employees provided the prisoner with due process of law. The decision is distinguishable from the instant case on two grounds. First, recovery was not barred by sovereign or official immunity, and the state remedy ensured that the prisoner would be “made whole for any loss of property.” 517 F.2d, at 1319, and n. 23. Cf. Regional Rail Reorganization Act Cases, 419 U.S. 102, 156 (1974). The point here, of course, is that the student cannot be made whole for the infliction of wrongful punishment. Second, the State cannot hold a pre-deprivation hearing where it does not intend to inflict the deprivation; the best it can do to protect the individual from an unauthorized and inadvertent act is to provide a damages remedy. 517 F.2d, at 1319 n. 25. Here the deprivation is intentional and a prior hearing altogether feasible.
[ 2.15 ] Ante, at 678 n. 46.
[ 2.16 ] Ante, at 675, quoting Mathews v. Eldridge, 424 U.S. 319, 335 (1976).
[ 2.17 ] Ante, at 676, quoting Goss, 419 U.S., at 579-580. Elsewhere in its opinion the majority asserts that the risk of error is “typically insignificant” because “paddlings are usually inflicted in response to conduct directly observed by teachers in their presence.” Ante, at 677-678. But it cites no finding or evidence in the record for this assertion, and there is no such restriction in the statute or regulations authorizing corporal punishment. See ante, at 655 n. 6, 656 n. 7. Indeed, the panel below noted specific instances in which students were punished by an assistant to the principal who was not present when the alleged offenses were committed. 498 F.2d, at 257, 259.
[ 2.18 ] My view here expressed that the minimal procedures of Goss are required for any corporal punishment implicating the student’s liberty interest is, of course, not meant to imply that this minimum would be constitutionally sufficient no matter how severe the punishment inflicted. The Court made this reservation explicit in Goss by suggesting that more elaborate procedures such as witnesses, counsel, and cross-examination might well be required for suspensions longer than the 10-day maximum involved in that case. 419 U.S., at 583-584. A similar caveat is appropriate here.
MR. JUSTICE STEVENS, dissenting.
MR. JUSTICE WHITE’s analysis of the Eighth Amendment issue is, I believe, unanswerable. I am also persuaded that his analysis of the procedural due process issue is correct. Notwithstanding my disagreement with the Court’s holding [430 U.S. 651, 701] on the latter question, my respect for MR. JUSTICE POWELL’s reasoning in Part IV-B of his opinion for the Court prompts these comments.
The constitutional prohibition of state deprivations of life, liberty, or property without due process of law does not, by its express language, require that a hearing be provided before any deprivation may occur. To be sure, the timing of the process may be a critical element in determining its adequacy— that is, in deciding what process is due in a particular context. Generally, adequate notice and a fair opportunity to be heard in advance of any deprivation of a constitutionally protected interest are essential. The Court has recognized, however, that the wording of the command that there shall be no deprivation “without” due process of law is consistent with the conclusion that a postdeprivation remedy is sometimes constitutionally sufficient. 3.1
When only an invasion of a property interest is involved, there is a greater likelihood that a damages award will make a person completely whole than when an invasion of the individual’s interest in freedom from bodily restraint and punishment has occurred. In the property context, therefore, frequently a postdeprivation state remedy may be all the process that the Fourteenth Amendment requires. It may also be true—although I do not express an opinion on the point—that an adequate state remedy for defamation may satisfy the due process requirement when a State has impaired an individual’s interest in his reputation. On that hypothesis, the Court’s analysis today gives rise to the thought that Paul v. Davis, 424 U.S. 693, may have been correctly decided on an incorrect rationale. Perhaps the Court will one day [430 U.S. 651, 702] agree with MR. JUSTICE BRENNAN’s appraisal of the importance of the constitutional interest at stake in id., at 720-723, 734 (dissenting opinion), and nevertheless conclude that an adequate state remedy may prevent every state-inflicted injury to a person’s reputation from violating 42 U.S.C. § 1983. 3.2
[ 3.1 ] Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663; Fuentes v. Shevin, 407 U.S. 67, 82, 90-92; Ewing v. Mytinger & Casselberry, 339 U.S. 594, 598-600; Phillips v. Commissioner, 283 U.S. 589, 595-599; Lawton v. Steele, 152 U.S. 133, 140-142; cf. Gerstein v. Pugh, 420 U.S. 103, 113-114.
[ 3.2 ] Cf. Bonner v. Coughlin, 517 F.2d 1311, 1318-1320 (CA7 1975), modified en banc, 545 F.2d 565 (1976), cert. pending, No. 76-6204; see also Judge Swygert’s thoughtful opinion, id., at 569-578. [430 U.S. 651, 703] | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/03%3A_The_Eighth_Amendment/3.01%3A_New_Page.txt |
Learning Objectives
Goss v. Lopez
419 U.S. 565 (1975)
United States Supreme Court, Docket No. 73-898
Argued: October 16, 1974 Decided: January 22, 1975
Appellee Ohio public high school students, who had been suspended from school for misconduct for up to 10 days without a hearing, brought a class action against appellant school officials seeking a declaration that the Ohio statute permitting such suspensions was unconstitutional and an order enjoining the officials to remove the references to the suspensions from the students’ records. A three-judge District Court declared that appellees were denied due process of law in violation of the Fourteenth Amendment because they were “suspended without hearing prior to suspension or within a reasonable time thereafter,” and that the statute and implementing regulations were unconstitutional, and granted the requested injunction.
Held:
1. Students facing temporary suspension from a public school have property and liberty interests that qualify for protection under the Due Process Clause of the Fourteenth Amendment. Pp. 572-576.
(a) Having chosen to extend the right to an education to people of appellees’ class generally, Ohio may not withdraw that right on grounds of misconduct, absent fundamentally fair procedures to determine whether the misconduct has occurred, and must recognize a student’s legitimate entitlement to a public education as a property interest that is protected by the Due Process Clause, and that may not be taken away for misconduct without observing minimum procedures required by that Clause. Pp. 573-574.
(b) Since misconduct charges if sustained and recorded could seriously damage the students’ reputation as well as interfere with later educational and employment opportunities, the State’s claimed right to determine unilaterally and without process whether that misconduct has occurred immediately collides with the Due Process Clause’s prohibition against arbitrary deprivation of liberty. Pp. 574-575.
(c) A 10-day suspension from school is not de minimis and may not be imposed in complete disregard of the Due Process [419 U.S. 565, 566] Clause. Neither the property interest in educational benefits temporarily denied nor the liberty interest in reputation is so insubstantial that suspensions may constitutionally be imposed by any procedure the school chooses, no matter how arbitrary. Pp. 575-576.
2. Due process requires, in connection with a suspension of 10 days or less, that the student be given oral or written notice of the charges against him and, if he denies them, an explanation of the evidence the authorities have and an opportunity to present his version. Generally, notice and hearing should precede the student’s removal from school, since the hearing may almost immediately follow the misconduct, but if prior notice and hearing are not feasible, as where the student’s presence endangers persons or property or threatens disruption of the academic process, thus justifying immediate removal from school, the necessary notice and hearing should follow as soon as practicable. Pp. 577-584.
372 F. Supp. 1279, affirmed.
WHITE, J., delivered the opinion of the Court, in which DOUGLAS, BRENNAN, STEWART, and MARSHALL, JJ., joined. POWELL, J., filed a dissenting opinion, in which BURGER, C. J., and BLACKMUN and REHNQUIST, JJ., joined, post, p. 584.
Thomas A. Bustin argued the cause for appellants. With him on the briefs were James J. Hughes, Jr., Robert A. Bell, and Patrick M. McGrath.
Peter D. Roos argued the cause for appellees. With him on the brief were Denis Murphy and Kenneth C. Curtin. *
[ * ] John F. Lewis filed a brief for the Buckeye Association of School Administrators et al. as amici curiae urging reversal.
Briefs of amici curiae urging affirmance were filed by David Bonderman, Peter Van N. Lockwood, Paul L. Tractenberg, David Rubin, and W. William Hodes for the National Committee for Citizens in Education et al.; by Alan H. Levine, Melvin L. Wulf, and Joel M. Gora for the American Civil Liberties Union; by Robert H. Kapp, R. Stephen Browning, and Nathaniel R. Jones for the National Association for the Advancement of Colored People et al.; and by Marian Wright Edelman for the Children’s Defense Fund of the Washington Research Project, Inc., et al. [419 U.S. 565, 567]
MR. JUSTICE WHITE delivered the opinion of the Court.
This appeal by various administrators of the Columbus, Ohio, Public School System (CPSS) challenges the judgment of a three-judge federal court, declaring that appellees—various high school students in the CPSS—were denied due process of law contrary to the command of the Fourteenth Amendment in that they were temporarily suspended from their high schools without a hearing either prior to suspension or within a reasonable time thereafter, and enjoining the administrators to remove all references to such suspensions from the students’ records.
I
Ohio law, Rev. Code Ann. § 3313.64 (1972), provides for free education to all children between the ages of six and 21. Section 3313.66 of the Code empowers the principal of an Ohio public school to suspend a pupil for misconduct for up to 10 days or to expel him. In either case, he must notify the student’s parents within 24 hours and state the reasons for his action. A pupil who is expelled, or his parents, may appeal the decision to the Board of Education and in connection therewith shall be permitted to be heard at the board meeting. The Board may reinstate the pupil following the hearing. No similar procedure is provided in § 3313.66 or any other provision of state law for a suspended student. Aside from a regulation tracking the statute, at the time of the imposition of the suspensions in this case the CPSS itself had not issued any written procedure applicable to suspensions. 1.1 Nor, so far as the record reflects, had any of [419 U.S. 565, 568] the individual high schools involved in this case. 1.2 Each, however, had formally or informally described the conduct for which suspension could be imposed.
The nine named appellees, each of whom alleged that he or she had been suspended from public high school in Columbus for up to 10 days without a hearing pursuant to § 3313.66, filed an action under 42 U.S.C. § 1983 against the Columbus Board of Education and various administrators of the CPSS. The complaint sought a [419 U.S. 565, 569] declaration that § 3313.66 was unconstitutional in that it permitted public school administrators to deprive plaintiffs of their rights to an education without a hearing of any kind, in violation of the procedural due process component of the Fourteenth Amendment. It also sought to enjoin the public school officials from issuing future suspensions pursuant to § 3313.66 and to require them to remove references to the past suspensions from the records of the students in question. 1.3
The proof below established that the suspensions arose out of a period of widespread student unrest in the CPSS during February and March 1971. Six of the named plaintiffs, Rudolph Sutton, Tyrone Washington, Susan Cooper, Deborah Fox, Clarence Byars, and Bruce Harris, were students at the Marion-Franklin High School and were each suspended for 10 days 1.4 on account of disruptive or disobedient conduct committed in the presence of the school administrator who ordered the suspension. One of these, Tyrone Washington, was among a group of students demonstrating in the school auditorium while a class was being conducted there. He was ordered by the school principal to leave, refused [419 U.S. 565, 570] to do so, and was suspended. Rudolph Sutton, in the presence of the principal, physically attacked a police officer who was attempting to remove Tyrone Washington from the auditorium. He was immediately suspended. The other four Marion-Franklin students were suspended for similar conduct. None was given a hearing to determine the operative facts underlying the suspension, but each, together with his or her parents, was offered the opportunity to attend a conference, subsequent to the effective date of the suspension, to discuss the student’s future.
Two named plaintiffs, Dwight Lopez and Betty Crome, were students at the Central High School and McGuffey Junior High School, respectively. The former was suspended in connection with a disturbance in the lunchroom which involved some physical damage to school property. 1.5 Lopez testified that at least 75 other students were suspended from his school on the same day. He also testified below that he was not a party to the destructive conduct but was instead an innocent bystander. Because no one from the school testified with regard to this incident, there is no evidence in the record indicating the official basis for concluding otherwise. Lopez never had a hearing.
Betty Crome was present at a demonstration at a high school other than the one she was attending. There she was arrested together with others, taken to the police station, and released without being formally charged. Before she went to school on the following day, she was [419 U.S. 565, 571] notified that she had been suspended for a 10-day period. Because no one from the school testified with respect to this incident, the record does not disclose how the McGuffey Junior High School principal went about making the decision to suspend Crome, nor does it disclose on what information the decision was based. It is clear from the record that no hearing was ever held.
There was no testimony with respect to the suspension of the ninth named plaintiff, Carl Smith. The school files were also silent as to his suspension, although as to some, but not all, of the other named plaintiffs the files contained either direct references to their suspensions or copies of letters sent to their parents advising them of the suspension.
On the basis of this evidence, the three-judge court declared that plaintiffs were denied due process of law because they were “suspended without hearing prior to suspension or within a reasonable time thereafter,” and that Ohio Rev. Code Ann. § 3313.66 (1972) and regulations issued pursuant thereto were unconstitutional in permitting such suspensions. 1.6 It was ordered that all references to plaintiffs’ suspensions be removed from school files.
Although not imposing upon the Ohio school administrators any particular disciplinary procedures and leaving them “free to adopt regulations providing for fair suspension procedures which are consonant with the educational goals of their schools and reflective of the characteristics of their school and locality,” the District Court declared [419 U.S. 565, 572] that there were “minimum requirements of notice and a hearing prior to suspension, except in emergency situations.” In explication, the court stated that relevant case authority would: (1) permit “[i]mmediate removal of a student whose conduct disrupts the academic atmosphere of the school, endangers fellow students, teachers or school officials, or damages property”; (2) require notice of suspension proceedings to be sent to the student’s parents within 24 hours of the decision to conduct them; and (3) require a hearing to be held, with the student present, within 72 hours of his removal. Finally, the court stated that, with respect to the nature of the hearing, the relevant cases required that statements in support of the charge be produced, that the student and others be permitted to make statements in defense or mitigation, and that the school need not permit attendance by counsel.
The defendant school administrators have appealed the three-judge court’s decision. Because the order below granted plaintiffs’ request for an injunction—ordering defendants to expunge their records—this Court has jurisdiction of the appeal pursuant to 28 U.S.C. § 1253. We affirm.
II
At the outset, appellants contend that because there is no constitutional right to an education at public expense, the Due Process Clause does not protect against expulsions from the public school system. This position misconceives the nature of the issue and is refuted by prior decisions. The Fourteenth Amendment forbids the State to deprive any person of life, liberty, or property without due process of law. Protected interests in property are normally “not created by the Constitution. Rather, they are created and their dimensions are defined” by an independent source such as state statutes or rules [419 U.S. 565, 573] entitling the citizen to certain benefits. Board of Regents v. Roth, 408 U.S. 564, 577 (1972).
Accordingly, a state employee who under state law, or rules promulgated by state officials, has a legitimate claim of entitlement to continued employment absent sufficient cause for discharge may demand the procedural protections of due process. Connell v. Higginbotham, 403 U.S. 207 (1971); Wieman v. Updegraff, 344 U.S. 183, 191-192 (1952); Arnett v. Kennedy, 416 U.S. 134, 164 (POWELL, J., concurring), 171 (WHITE, J., concurring and dissenting) (1974). So may welfare recipients who have statutory rights to welfare as long as they maintain the specified qualifications. Goldberg v. Kelly, 397 U.S. 254 (1970). Morrissey v. Brewer, 408 U.S. 471 (1972), applied the limitations of the Due Process Clause to governmental decisions to revoke parole, although a parolee has no constitutional right to that status. In like vein was Wolff v. McDonnell, 418 U.S. 539 (1974), where the procedural protections of the Due Process Clause were triggered by official cancellation of a prisoner’s good-time credits accumulated under state law, although those benefits were not mandated by the Constitution.
Here, on the basis of state law, appellees plainly had legitimate claims of entitlement to a public education. Ohio Rev. Code Ann. §§ 3313.48 and 3313.64 (1972 and Supp. 1973) direct local authorities to provide a free education to all residents between five and 21 years of age, and a compulsory-attendance law requires attendance for a school year of not less than 32 weeks. Ohio Rev. Code Ann. § 3321.04 (1972). It is true that § 3313.66 of the Code permits school principals to suspend students for up to 10 days; but suspensions may not be imposed without any grounds whatsoever. All of the schools had their own rules specifying the [419 U.S. 565, 574] grounds for expulsion or suspension. Having chosen to extend the right to an education to people of appellees’ class generally, Ohio may not withdraw that right on grounds of misconduct, absent fundamentally fair procedures to determine whether the misconduct has occurred. Arnett v. Kennedy, supra, at 164 (POWELL, J., concurring), 171 (WHITE, J., concurring and dissenting), 206 (MARSHALL, J., dissenting).
Although Ohio may not be constitutionally obligated to establish and maintain a public school system, it has nevertheless done so and has required its children to attend. Those young people do not “shed their constitutional rights” at the schoolhouse door. Tinker v. Des Moines School Dist., 393 U.S. 503, 506 (1969). “The Fourteenth Amendment, as now applied to the States, protects the citizen against the State itself and all of its creatures—Boards of Education not excepted.” West Virginia Board of Education v. Barnette, 319 U.S. 624, 637 (1943). The authority possessed by the State to prescribe and enforce standards of conduct in its schools although concededly very broad, must be exercised consistently with constitutional safeguards. Among other things, the State is constrained to recognize a student’s legitimate entitlement to a public education as a property interest which is protected by the Due Process Clause and which may not be taken away for misconduct without adherence to the minimum procedures required by that Clause.
The Due Process Clause also forbids arbitrary deprivations of liberty. “Where a person’s good name, reputation, honor, or integrity is at stake because of what the government is doing to him,” the minimal requirements of the Clause must be satisfied. Wisconsin v. Constantineau, 400 U.S. 433, 437 (1971); Board of Regents v. Roth, supra, at 573. School authorities here suspended appellees from school for periods of up to 10 days [419 U.S. 565, 575] based on charges of misconduct. If sustained and recorded, those charges could seriously damage the students’ standing with their fellow pupils and their teachers as well as interfere with later opportunities for higher education and employment. 1.7 It is apparent that the claimed right of the State to determine unilaterally and without process whether that misconduct has occurred immediately collides with the requirements of the Constitution.
Appellants proceed to argue that even if there is a right to a public education protected by the Due Process Clause generally, the Clause comes into play only when the State subjects a student to a “severe detriment or grievous loss.” The loss of 10 days, it is said, is neither severe nor grievous and the Due Process Clause is therefore of no relevance. Appellants’ argument is again refuted by our prior decisions; for in determining “whether due process requirements apply in the first place, we must look not to the ‘weight’ but to the nature of the interest [419 U.S. 565, 576] at stake.” Board of Regents v. Roth, supra, at 570-571. Appellees were excluded from school only temporarily, it is true, but the length and consequent severity of a deprivation, while another factor to weigh in determining the appropriate form of hearing, “is not decisive of the basic right” to a hearing of some kind. Fuentes v. Shevin, 407 U.S. 67, 86 (1972). The Court’s view has been that as long as a property deprivation is not de minimis, its gravity is irrelevant to the question whether account must be taken of the Due Process Clause. Sniadach v. Family Finance Corp., 395 U.S. 337, 342 (1969) (Harlan, J., concurring); Boddie v. Connecticut, 401 U.S. 371, 378-379 (1971); Board of Regents v. Roth, supra, at 570 n. 8. A 10-day suspension from school is not de minimis in our view and may not be imposed in complete disregard of the Due Process Clause.
A short suspension is, of course, a far milder deprivation than expulsion. But, “education is perhaps the most important function of state and local governments,” Brown v. Board of Education, 347 U.S. 483, 493 (1954), and the total exclusion from the educational process for more than a trivial period, and certainly if the suspension is for 10 days, is a serious event in the life of the suspended child. Neither the property interest in educational benefits temporarily denied nor the liberty interest in reputation, which is also implicated, is so insubstantial that suspensions may constitutionally be imposed by any procedure the school chooses, no matter how arbitrary. 1.8 [419 U.S. 565, 577]
III
“Once it is determined that due process applies, the question remains what process is due.” Morrissey v. Brewer, 408 U.S., at 481. We turn to that question, fully [419 U.S. 565, 578] realizing as our cases regularly do that the interpretation and application of the Due Process Clause are intensely practical matters and that “[t]he very nature of due process negates any concept of inflexible procedures universally applicable to every imaginable situation.” Cafeteria Workers v. McElroy, 367 U.S. 886, 895 (1961). We are also mindful of our own admonition:
“Judicial interposition in the operation of the public school system of the Nation raises problems requiring care and restraint. . . . By and large, public education in our Nation is committed to the control of state and local authorities.” Epperson v. Arkansas, 393 U.S. 97, 104 (1968).
There are certain bench marks to guide us, however. Mullane v. Central Hanover Trust Co., 339 U.S. 306 [419 U.S. 565, 579] (1950), a case often invoked by later opinions, said that “[m]any controversies have raged about the cryptic and abstract words of the Due Process Clause but there can be no doubt that at a minimum they require that deprivation of life, liberty or property by adjudication be preceded by notice and opportunity for hearing appropriate to the nature of the case.” Id., at 313. “The fundamental requisite of due process of law is the opportunity to be heard,” Grannis v. Ordean, 234 U.S. 385, 394 (1914), a right that “has little reality or worth unless one is informed that the matter is pending and can choose for himself whether to . . . contest.” Mullane v. Central Hanover Trust Co., supra, at 314. See also Armstrong v. Manzo, 380 U.S. 545, 550 (1965); Anti-Fascist Committee v. McGrath, 341 U.S. 123, 168-169 (1951) (Frankfurter, J., concurring). At the very minimum, therefore, students facing suspension and the consequent interference with a protected property interest must be given some kind of notice and afforded some kind of hearing. “Parties whose rights are to be affected are entitled to be heard; and in order that they may enjoy that right they must first be notified.” Baldwin v. Hale, 1 Wall. 223, 233 (1864).
It also appears from our cases that the timing and content of the notice and the nature of the hearing will depend on appropriate accommodation of the competing interests involved. Cafeteria Workers v. McElroy, supra, at 895; Morrissey v. Brewer, supra, at 481. The student’s interest is to avoid unfair or mistaken exclusion from the educational process, with all of its unfortunate consequences. The Due Process Clause will not shield him from suspensions properly imposed, but it disserves both his interest and the interest of the State if his suspension is in fact unwarranted. The concern would be mostly academic if the disciplinary process were a totally accurate, unerring process, never mistaken and never [419 U.S. 565, 580] unfair. Unfortunately, that is not the case, and no one suggests that it is. Disciplinarians, although proceeding in utmost good faith, frequently act on the reports and advice of others; and the controlling facts and the nature of the conduct under challenge are often disputed. The risk of error is not at all trivial, and it should be guarded against if that may be done without prohibitive cost or interference with the educational process.
The difficulty is that our schools are vast and complex. Some modicum of discipline and order is essential if the educational function is to be performed. Events calling for discipline are frequent occurrences and sometimes require immediate, effective action. Suspension is considered not only to be a necessary tool to maintain order but a valuable educational device. The prospect of imposing elaborate hearing requirements in every suspension case is viewed with great concern, and many school authorities may well prefer the untrammeled power to act unilaterally, unhampered by rules about notice and hearing. But it would be a strange disciplinary system in an educational institution if no communication was sought by the disciplinarian with the student in an effort to inform him of his dereliction and to let him tell his side of the story in order to make sure that an injustice is not done. “[F]airness can rarely be obtained by secret, onesided determination of facts decisive of rights. . . .” “Secrecy is not congenial to truth-seeking and self-righteousness gives too slender an assurance of rightness. No better instrument has been devised for arriving at truth than to give a person in jeopardy of serious loss notice of the case against him and opportunity to meet it.” Anti-Fascist Committee v. McGrath, supra, at 170, 171-172 (Frankfurter, J., concurring). 1.9 [419 U.S. 565, 581]
We do not believe that school authorities must be totally free from notice and hearing requirements if their schools are to operate with acceptable efficiency. Students facing temporary suspension have interests qualifying for protection of the Due Process Clause, and due process requires, in connection with a suspension of 10 days or less, that the student be given oral or written notice of the charges against him and, if he denies them, an explanation of the evidence the authorities have and an opportunity to present his side of the story. The Clause requires at least these rudimentary precautions against unfair or mistaken findings of misconduct and arbitrary exclusion from school. 1.10 [419 U.S. 565, 582]
There need be no delay between the time “notice” is given and the time of the hearing. In the great majority of cases the disciplinarian may informally discuss the alleged misconduct with the student minutes after it has occurred. We hold only that, in being given an opportunity to explain his version of the facts at this discussion, the student first be told what he is accused of doing and what the basis of the accusation is. Lower courts which have addressed the question of the nature of the procedures required in short suspension cases have reached the same conclusion. Tate v. Board of Education, 453 F.2d 975, 979 (CA8 1972); Vail v. Board of Education, 354 F. Supp. 592, 603 (NH 1973). Since the hearing may occur almost immediately following the misconduct, it follows that as a general rule notice and hearing should precede removal of the student from school. We agree with the District Court, however, that there are recurring situations in which prior notice and hearing cannot be insisted upon. Students whose presence poses a continuing danger to persons or property or an ongoing threat of disrupting the academic process may be immediately removed from school. In such cases, the necessary notice and rudimentary hearing should follow [419 U.S. 565, 583] as soon as practicable, as the District Court indicated.
In holding as we do, we do not believe that we have imposed procedures on school disciplinarians which are inappropriate in a classroom setting. Instead we have imposed requirements which are, if anything, less than a fair-minded school principal would impose upon himself in order to avoid unfair suspensions. Indeed, according to the testimony of the principal of Marion-Franklin High School, that school had an informal procedure, remarkably similar to that which we now require, applicable to suspensions generally but which was not followed in this case. Similarly, according to the most recent memorandum applicable to the entire CPSS, see n. 1, supra, school principals in the CPSS are now required by local rule to provide at least as much as the constitutional minimum which we have described.
We stop short of construing the Due Process Clause to require, countrywide, that hearings in connection with short suspensions must afford the student the opportunity to secure counsel, to confront and cross-examine witnesses supporting the charge, or to call his own witnesses to verify his version of the incident. Brief disciplinary suspensions are almost countless. To impose in each such case even truncated trial-type procedures might well overwhelm administrative facilities in many places and, by diverting resources, cost more than it would save in educational effectiveness. Moreover, further formalizing the suspension process and escalating its formality and adversary nature may not only make it too costly as a regular disciplinary tool but also destroy its effectiveness as part of the teaching process.
On the other hand, requiring effective notice and informal hearing permitting the student to give his version of the events will provide a meaningful hedge against erroneous action. At least the disciplinarian will be alerted to the existence of disputes about facts and arguments [419 U.S. 565, 584] about cause and effect. He may then determine himself to summon the accuser, permit crossexamination, and allow the student to present his own witnesses. In more difficult cases, he may permit counsel. In any event, his discretion will be more informed and we think the risk of error substantially reduced.
Requiring that there be at least an informal give-and-take between student and disciplinarian, preferably prior to the suspension, will add little to the factfinding function where the disciplinarian himself has witnessed the conduct forming the basis for the charge. But things are not always as they seem to be, and the student will at least have the opportunity to characterize his conduct and put it in what he deems the proper context.
We should also make it clear that we have addressed ourselves solely to the short suspension, not exceeding 10 days. Longer suspensions or expulsions for the remainder of the school term, or permanently, may require more formal procedures. Nor do we put aside the possibility that in unusual situations, although involving only a short suspension, something more than the rudimentary procedures will be required.
IV
The District Court found each of the suspensions involved here to have occurred without a hearing, either before or after the suspension, and that each suspension was therefore invalid and the statute unconstitutional insofar as it permits such suspensions without notice or hearing. Accordingly, the judgment is
Affirmed.
Footnotes
[ 1.1 ] At the time of the events involved in this case, the only administrative regulation on this subject was § 1010.04 of the Administrative Guide of the Columbus Public Schools which provided: “Pupils may be suspended or expelled from school in accordance with the provisions of Section 3313.66 of the Revised Code.” Subsequent [419 U.S. 565, 568] to the events involved in this lawsuit, the Department of Pupil Personnel of the CPSS issued three memoranda relating to suspension procedures, dated August 16, 1971, February 21, 1973, and July 10, 1973, respectively. The first two are substantially similar to each other and require no factfinding hearing at any time in connection with a suspension. The third, which was apparently in effect when this case was argued, places upon the principal the obligation to “investigate” “before commencing suspension procedures”; and provides as part of the procedures that the principal shall discuss the case with the pupil, so that the pupil may “be heard with respect to the alleged offense,” unless the pupil is “unavailable” for such a discussion or “unwilling” to participate in it. The suspensions involved in this case occurred, and records thereof were made, prior to the effective date of these memoranda. The District Court’s judgment, including its expunction order, turns on the propriety of the procedures existing at the time the suspensions were ordered and by which they were imposed.
[ 1.2 ] According to the testimony of Phillip Fulton, the principal of one of the high schools involved in this case, there was an informal procedure applicable at the Marion-Franklin High School. It provided that in the routine case of misconduct, occurring in the presence of a teacher, the teacher would describe the misconduct on a form provided for that purpose and would send the student, with the form, to the principal’s office. There, the principal would obtain the student’s version of the story, and, if it conflicted with the teacher’s written version, would send for the teacher to obtain the teacher’s oral version— apparently in the presence of the student. Mr. Fulton testified that, if a discrepancy still existed, the teacher’s version would be believed and the principal would arrive at a disciplinary decision based on it.
[ 1.3 ] The plaintiffs sought to bring the action on behalf of all students of the Columbus Public Schools suspended on or after February 1971, and a class action was declared accordingly. Since the complaint sought to restrain the “enforcement” and “operation” of a state statute “by restraining the action of any officer of such state in the enforcement or execution of such statute,” a three-judge court was requested pursuant to 28 U.S.C. § 2281 and convened. The students also alleged that the conduct for which they could be suspended was not adequately defined by Ohio law. This vagueness and overbreadth argument was rejected by the court below and the students have not appealed from this part of the court’s decision.
[ 1.4 ] Fox was given two separate 10-day suspensions for misconduct occurring on two separate occasions—the second following immediately upon her return to school. In addition to his suspension, Sutton was transferred to another school.
[ 1.5 ] Lopez was actually absent from school, following his suspension, for over 20 days. This seems to have occurred because of a misunderstanding as to the length of the suspension. A letter sent to Lopez after he had been out for over 10 days purports to assume that, being over compulsory school age, he was voluntarily staying away. Upon asserting that this was not the case, Lopez was transferred to another school.
[ 1.6 ] In its judgment, the court stated that the statute is unconstitutional in that it provides “for suspension . . . without first affording the student due process of law.” (Emphasis supplied.) However, the language of the judgment must be read in light of the language in the opinion which expressly contemplates that under some circumstances students may properly be removed from school before a hearing is held, so long as the hearing follows promptly.
[ 1.7 ] Appellees assert in their brief that four of 12 randomly selected Ohio colleges specifically inquire of the high school of every applicant for admission whether the applicant has ever been suspended. Brief for Appellees 34-35 and n. 40. Appellees also contend that many employers request similar information. Ibid.
Congress has recently enacted legislation limiting access to information contained in the files of a school receiving federal funds. Section 513 of the Education Amendments of 1974, Pub. L. 93-380, 88 Stat. 571, 20 U.S.C. § 1232g (1970 ed., Supp. IV), adding § 438 to the General Education Provisions Act. That section would preclude release of “verified reports of serious or recurrent behavior patterns” to employers without written consent of the student’s parents. While subsection (b) (1) (B) permits release of such information to “other schools . . . in which the student intends to enroll,” it does so only upon condition that the parent be advised of the release of the information and be given an opportunity at a hearing to challenge the content of the information to insure against inclusion of inaccurate or misleading information. The statute does not expressly state whether the parent can contest the underlying basis for a suspension, the fact of which is contained in the student’s school record.
[ 1.8 ] Since the landmark decision of the Court of Appeals for the Fifth Circuit in Dixon v. Alabama State Board of Education, 294 F.2d 150, cert. denied, 368 U.S. 930 (1961), the lower federal courts have uniformly held the Due Process Clause applicable to decisions made by tax-supported educational institutions to remove a student from the institution long enough for the removal to be classified as an expulsion. Hagopian v. Knowlton, 470 F.2d 201, 211 (CA2 1972); Wasson v. Trowbridge, 382 F.2d 807, 812 (CA2 1967); [419 U.S. 565, 577] Esteban v. Central Missouri State College, 415 F.2d 1077, 1089 (CA8 1969), cert. denied, 398 U.S. 965 (1970); Vought v. Van Buren Public Schools, 306 F. Supp. 1388 (ED Mich. 1969); Whitfield v. Simpson, 312 F. Supp. 889 (ED Ill. 1970); Fielder v. Board of Education of School District of Winnebago, Neb., 346 F. Supp. 722, 729 (Neb. 1972); DeJesus v. Penberthy, 344 F. Supp. 70, 74 (Conn. 1972); Soglin v. Kauffman, 295 F. Supp. 978, 994 (WD Wis. 1968), aff’d, 418 F.2d 163 (CA7 1969); Stricklin v. Regents of University of Wisconsin, 297 F. Supp. 416, 420 (WD Wis. 1969), appeal dismissed, 420 F.2d 1257 (CA7 1970); Buck v. Carter, 308 F. Supp. 1246 (WD Wis. 1970); General Order on Judicial Standards of Procedure and Substance in Review of Student Discipline in Tax Supported Institutions of Higher Education, 45 F. R. D. 133, 147-148 (WD Mo. 1968) (en banc). The lower courts have been less uniform, however, on the question whether removal from school for some shorter period may ever be so trivial a deprivation as to require no process, and, if so, how short the removal must be to qualify. Courts of Appeals have held or assumed the Due Process Clause applicable to long suspensions, Pervis v. LaMarque Ind. School Dist., 466 F.2d 1054 (CA5 1972); to indefinite suspensions, Sullivan v. Houston Ind. School Dist., 475 F.2d 1071 (CA5), cert. denied, 414 U.S. 1032 (1973); to the addition of a 30-day suspension to a 10-day suspension, Williams v. Dade County School Board, 441 F.2d 299 (CA5 1971); to a 10-day suspension, Black Students of North Fort Myers Jr.-Sr. High School v. Williams, 470 F.2d 957 (CA5 1972); to “mild” suspensions, Farrell v. Joel, 437 F.2d 160 (CA2 1971), and Tate v. Board of Education, 453 F.2d 975 (CA8 1972); and to a three-day suspension, Shanley v. Northeast Ind. School Dist., Bexar County, Texas, 462 F.2d 960, 967 n. 4 (CA5 1972); but inapplicable to a seven-day suspension, Linwood v. Board of Ed. of City of Peoria, 463 F.2d 763 (CA7), cert. denied, 409 U.S. 1027 (1972); to a three-day suspension, Dunn v. Tyler Ind. School Dist., 460 F.2d 137 (CA5 1972); to a suspension for not “more than a few days,” Murray v. West Baton Rouge Parish School Board, 472 F.2d 438 (CA5 1973); and to all suspensions no matter how short, Black Coalition v. Portland School District No. 1, [419 U.S. 565, 578] 484 F.2d 1040 (CA9 1973). The Federal District Courts have held the Due Process Clause applicable to an interim suspension pending expulsion proceedings in Stricklin v. Regents of University of Wisconsin, supra, and Buck v. Carter, supra; to a 10-day suspension, Banks v. Board of Public Instruction of Dade County, 314 F. Supp. 285 (SD Fla. 1970), vacated, 401 U.S. 988 (1971) (for entry of a fresh decree so that a timely appeal might be taken to the Court of Appeals), aff’d, 450 F.2d 1103 (CA5 1971); to suspensions of under five days, Vail v. Board of Education of Portsmouth School Dist., 354 F. Supp. 592 (NH 1973); and to all suspensions, Mills v. Board of Education of the Dist. of Columbia, 348 F. Supp. 866 (DC 1972), and Givens v. Poe, 346 F. Supp. 202 (WDNC 1972); but inapplicable to suspensions of 25 days, Hernandez v. School District Number One, Denver, Colorado, 315 F. Supp. 289 (Colo. 1970); to suspensions of 10 days, Baker v. Downey City Board of Education, 307 F. Supp. 517 (CD Cal. 1969); and to suspensions of eight days, Hatter v. Los Angeles City High School District, 310 F. Supp. 1309 (CD Cal. 1970), rev’d on other grounds, 452 F.2d 673 (CA9 1971). In the cases holding no process necessary in connection with short suspensions, it is not always clear whether the court viewed the Due Process Clause as inapplicable, or simply felt that the process received was “due” even in the absence of some kind of hearing procedure.
[ 1.9 ] The facts involved in this case illustrate the point. Betty Crome was suspended for conduct which did not occur on school grounds, and for which mass arrests were made—hardly guaranteeing careful [419 U.S. 565, 581] individualized factfinding by the police or by the school principal. She claims to have been involved in no misconduct. However, she was suspended for 10 days without ever being told what she was accused of doing or being given an opportunity to explain her presence among those arrested. Similarly, Dwight Lopez was suspended, along with many others, in connection with a disturbance in the lunchroom. Lopez says he was not one of those in the lunchroom who was involved. However, he was never told the basis for the principal’s belief that he was involved, nor was he ever given an opportunity to explain his presence in the lunchroom. The school principals who suspended Crome and Lopez may have been correct on the merits, but it is inconsistent with the Due Process Clause to have made the decision that misconduct had occurred without at some meaningful time giving Crome or Lopez an opportunity to persuade the principals otherwise.
We recognize that both suspensions were imposed during a time of great difficulty for the school administrations involved. At least in Lopez’ case there may have been an immediate need to send home everyone in the lunchroom in order to preserve school order and property; and the administrative burden of providing 75 “hearings” of any kind is considerable. However, neither factor justifies a disciplinary suspension without at any time gathering facts relating to Lopez specifically, confronting him with them and giving him an opportunity to explain.
[ 1.10 ] Appellants point to the fact that some process is provided under Ohio law by way of judicial review. Ohio Rev. Code Ann. § 2506.01 [419 U.S. 565, 582] (Supp. 1973). Appellants do not cite any case in which this general administrative review statute has been used to appeal from a disciplinary decision by a school official. If it be assumed that it could be so used, it is for two reasons insufficient to save inadequate procedures at the school level. First, although new proof may be offered in a § 2501.06 proceeding, Shaker Coventry Corp. v. Shaker Heights Planning Comm’n, 18 Ohio Op. 2d 272, 176 N. E. 2d 332 (1961), the proceeding is not de novo. In re Locke, 33 Ohio App. 2d 177, 294 N. E. 2d 230 (1972). Thus the decision by the school—even if made upon inadequate procedures—is entitled to weight in the court proceeding. Second, without a demonstration to the contrary, we must assume that delay will attend any § 2501.06 proceeding, that the suspension will not be stayed pending hearing, and that the student meanwhile will irreparably lose his educational benefits.
MR. JUSTICE POWELL, with whom THE CHIEF JUSTICE, MR. JUSTICE BLACKMUN, and MR. JUSTICE REHNQUIST join, dissenting
The Court today invalidates an Ohio statute that permits student suspensions from school without a hearing [419 U.S. 565, 585] “for not more than ten days.” 2.1 The decision unnecessarily opens avenues for judicial intervention in the operation of our public schools that may affect adversely the quality of education. The Court holds for the first time that the federal courts, rather than educational officials and state legislatures, have the authority to determine the rules applicable to routine classroom discipline of children and teenagers in the public schools. It justifies this unprecedented intrusion into the process of elementary and secondary education by identifying a new constitutional right: the right of a student not to be suspended for as much as a single day without notice and a due process hearing either before or promptly following the suspension. 2.2
The Court’s decision rests on the premise that, under Ohio law, education is a property interest protected by the Fourteenth Amendment’s Due Process Clause and therefore that any suspension requires notice and a hearing. 2.3 In my view, a student’s interest in education is [419 U.S. 565, 586] not infringed by a suspension within the limited period prescribed by Ohio law. Moreover, to the extent that there may be some arguable infringement, it is too speculative, transitory, and insubstantial to justify imposition of a constitutional rule.
I
Although we held in San Antonio Independent School Dist. v. Rodriguez, 411 U.S. 1, 35 (1973), that education is not a right protected by the Constitution, Ohio has elected by statute to provide free education for all youths age six to 21, Ohio Rev. Code Ann. §§ 3313.48, 3313.64 (1972 and Supp. 1973), with children under 18 years of age being compelled to attend school. § 3321.01 et seq. State law, therefore, extends the right of free public school education to Ohio students in accordance with the education laws of that State. The right or entitlement to education so created is protected in a proper case by the Due Process Clause. See, e.g., Board of Regents v. Roth, 408 U.S. 564 (1972); Arnett v. Kennedy, 416 U.S. 134, 164 (1974) (POWELL, J., concurring). In my view, this is not such a case.
In identifying property interests subject to due process protections, the Court’s past opinions make clear that these interests “are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law.” Board of Regents v. Roth, supra, at 577 (emphasis supplied). The Ohio statute that creates the right to a “free” education also explicitly authorizes a principal to suspend a student for as much as 10 days. Ohio Rev. Code Ann. §§ 3313.48, 3313.64, 3313.66 (1972 and Supp. 1973). Thus the very legislation which “defines” the “dimension” of the student’s entitlement, while providing a right to education generally, does not establish this right free of discipline imposed in accord with Ohio law. Rather, the right is [419 U.S. 565, 587] encompassed in the entire package of statutory provisions governing education in Ohio—of which the power to suspend is one.
The Court thus disregards the basic structure of Ohio law in posturing this case as if Ohio had conferred an unqualified right to education, thereby compelling the school authorities to conform to due process procedures in imposing the most routine discipline. 2.4
But however one may define the entitlement to education provided by Ohio law, I would conclude that a deprivation of not more than 10 days’ suspension from school, imposed as a routine disciplinary measure, does not assume constitutional dimensions. Contrary to the Court’s assertion, our cases support rather than “refute” appellants’ [419 U.S. 565, 588] argument that “the Due Process Clause . . . comes into play only when the State subjects a student to a ‘severe detriment or grievous loss.’” Ante, at 575. Recently, the Court reiterated precisely this standard for analyzing due process claims:
“Whether any procedural protections are due depends on the extent to which an individual will be ‘condemned to suffer grievous loss.’ Joint Anti-Fascist Refugee Committee v. McGrath, 341 U.S. 123, 168 (1951) (Frankfurter, J., concurring), quoted in Goldberg v. Kelly, 397 U.S. 254, 263 (1970).” Morrissey v. Brewer, 408 U.S. 471, 481 (1972) (emphasis supplied).
In Morrissey we applied that standard to require due process procedures for parole revocation on the ground that revocation “inflicts a ‘grievous loss’ on the parolee and often on others.” Id., at 482. See also Board of Regents v. Roth, 408 U.S., at 573 (“seriously damage” reputation and standing); Bell v. Burson, 402 U.S. 535, 539 (1971) (“important interests of the licensees”); Boddie v. Connecticut, 401 U.S. 371, 379 (1971) (“significant property interest”). 2.5
The Ohio suspension statute allows no serious or significant [419 U.S. 565, 589] infringement of education. It authorizes only a maximum suspension of eight school days, less than 5% of the normal 180-day school year. Absences of such limited duration will rarely affect a pupil’s opportunity to learn or his scholastic performance. Indeed, the record in this case reflects no educational injury to appellees. Each completed the semester in which the suspension occurred and performed at least as well as he or she had in previous years. 2.6 Despite the Court’s unsupported speculation that a suspended student could be “seriously damage[d]” (ante, at 575), there is no factual showing of any such damage to appellees.
The Court also relies on a perceived deprivation of “liberty” resulting from any suspension, arguing— again without factual support in the record pertaining to these appellees—that a suspension harms a student’s reputation. In view of the Court’s decision in Board of Regents v. Roth, supra, I would have thought that this argument was plainly untenable. Underscoring the need for “serious damage” to reputation, the Roth Court held that a nontenured teacher who is not rehired by a public university could not claim to suffer sufficient reputational injury to require constitutional protections. 2.7 Surely a brief suspension is of less serious consequence to the reputation of a teenage student.
II
In prior decisions, this Court has explicitly recognized that school authorities must have broad discretionary authority [419 U.S. 565, 590] in the daily operation of public schools. This includes wide latitude with respect to maintaining discipline and good order. Addressing this point specifically, the Court stated in Tinker v. Des Moines School Dist., 393 U.S. 503, 507 (1969):
“[T]he Court has repeatedly emphasized the need for affirming the comprehensive authority of the States and of school officials, consistent with fundamental constitutional safeguards, to prescribe and control conduct in the schools.” 2.8
Such an approach properly recognizes the unique nature of public education and the correspondingly limited role of the judiciary in its supervision. In Epperson v. Arkansas, 393 U.S. 97, 104 (1968), the Court stated:
“By and large, public education in our Nation is committed to the control of state and local authorities. Courts do not and cannot intervene in the resolution of conflicts which arise in the daily operation of school systems and which do not directly and sharply implicate basic constitutional values.”
The Court today turns its back on these precedents. It can hardly seriously be claimed that a school principal’s decision to suspend a pupil for a single day would “directly and sharply implicate basic constitutional values.” Ibid.
Moreover, the Court ignores the experience of mankind, as well as the long history of our law, recognizing [419 U.S. 565, 591] that there are differences which must be accommodated in determining the rights and duties of children as compared with those of adults. Examples of this distinction abound in our law: in contracts, in torts, in criminal law and procedure, in criminal sanctions and rehabilitation, and in the right to vote and to hold office. Until today, and except in the special context of the First Amendment issue in Tinker, the educational rights of children and teenagers in the elementary and secondary schools have not been analogized to the rights of adults or to those accorded college students. Even with respect to the First Amendment, the rights of children have not been regarded as “co-extensive with those of adults.” Tinker, supra, at 515 (STEWART, J., concurring).
A
I turn now to some of the considerations which support the Court’s former view regarding the comprehensive authority of the States and school officials “to prescribe and control conduct in the schools.” Id., at 507. Unlike the divergent and even sharp conflict of interests usually present where due process rights are asserted, the interests here implicated—of the State through its schools and of the pupils—are essentially congruent.
The State’s interest, broadly put, is in the proper functioning of its public school system for the benefit of all pupils and the public generally. Few rulings would interfere more extensively in the daily functioning of schools than subjecting routine discipline to the formalities and judicial oversight of due process. Suspensions are one of the traditional means—ranging from keeping a student after class to permanent expulsion—used to maintain discipline in the schools. It is common knowledge that maintaining order and reasonable decorum [419 U.S. 565, 592] in school buildings and classrooms is a major educational problem, and one which has increased significantly in magnitude in recent years. 2.9 Often the teacher, in protecting the rights of other children to an education (if not his or their safety), is compelled to rely on the power to suspend.
The facts set forth in the margin 2.10 leave little room for doubt as to the magnitude of the disciplinary problem in the public schools, or as to the extent of reliance upon the right to suspend. They also demonstrate that if hearings were required for a substantial percentage of short-term suspensions, school authorities would have time to do little else.
B
The State’s generalized interest in maintaining an orderly school system is not incompatible with the individual [419 U.S. 565, 593] interest of the student. Education in any meaningful sense includes the inculcation of an understanding in each pupil of the necessity of rules and obedience thereto. This understanding is no less important than learning to read and write. One who does not comprehend the meaning and necessity of discipline is handicapped not merely in his education but throughout his subsequent life. In an age when the home and church play a diminishing role in shaping the character and value judgments of the young, a heavier responsibility falls upon the schools. When an immature student merits censure for his conduct, he is rendered a disservice if appropriate sanctions are not applied or if procedures for their application are so formalized as to invite a challenge to the teacher’s authority 2.11—an invitation which rebellious or even merely spirited teenagers are likely to accept.
The lesson of discipline is not merely a matter of the student’s self-interest in the shaping of his own character and personality; it provides an early understanding of the relevance to the social compact of respect for the rights of others. The classroom is the laboratory in which this lesson of life is best learned. Mr. Justice Black summed it up:
“School discipline, like parental discipline, is an integral and important part of training our children to be good citizens—to be better citizens.” Tinker, 393 U.S., at 524 (dissenting opinion).
In assessing in constitutional terms the need to protect pupils from unfair minor discipline by school authorities, the Court ignores the commonality of interest of the State and pupils in the public school system. Rather, it thinks in traditional judicial terms of an adversary [419 U.S. 565, 594] situation. To be sure, there will be the occasional pupil innocent of any rule infringement who is mistakenly suspended or whose infraction is too minor to justify suspension. But, while there is no evidence indicating the frequency of unjust suspensions, common sense suggests that they will not be numerous in relation to the total number, and that mistakes or injustices will usually be righted by informal means.
C
One of the more disturbing aspects of today’s decision is its indiscriminate reliance upon the judiciary, and the adversary process, as the means of resolving many of the most routine problems arising in the classroom. In mandating due process procedures the Court misapprehends the reality of the normal teacher-pupil relationship. There is an ongoing relationship, one in which the teacher must occupy many roles—educator, adviser, friend, and, at times, parent-substitute. 2.12 It is rarely adversary in nature except with respect to the chronically disruptive or insubordinate pupil whom the teacher must be free to discipline without frustrating formalities. 2.13 [419 U.S. 565, 595]
The Ohio statute, providing as it does for due notice both to parents and the Board, is compatible with the teacher-pupil relationship and the informal resolution of mistaken disciplinary action. We have relied for generations upon the experience, good faith and dedication of those who staff our public schools, 2.14 and the nonadversary means of airing grievances that always have been available to pupils and their parents. One would have thought before today’s opinion that this informal method of resolving differences was more compatible with the interests of all concerned than resort to any constitutionalized procedure, however blandly it may be defined by the Court.
D
In my view, the constitutionalizing of routine classroom decisions not only represents a significant and unwise extension of the Due Process Clause, but it also was quite unnecessary in view of the safeguards prescribed by the Ohio statute. This is demonstrable from a comparison [419 U.S. 565, 596] of what the Court mandates as required by due process with the protective procedures it finds constitutionally insufficient.
The Ohio statute, limiting suspensions to not more than eight school days, requires written notice including the “reasons therefor” to the student’s parents and to the Board of Education within 24 hours of any suspension. The Court only requires oral or written notice to the pupil, with no notice being required to the parents or the Board of Education. The mere fact of the statutory requirement is a deterrent against arbitrary action by the principal. The Board, usually elected by the people and sensitive to constituent relations, may be expected to identify a principal whose record of suspensions merits inquiry. In any event, parents placed on written notice may exercise their rights as constituents by going directly to the Board or a member thereof if dissatisfied with the principal’s decision.
Nor does the Court’s due process “hearing” appear to provide significantly more protection than that already available. The Court holds only that the principal must listen to the student’s “version of the events,” either before suspension or thereafter—depending upon the circumstances. Ante, at 583. Such a truncated “hearing” is likely to be considerably less meaningful than the opportunities for correcting mistakes already available to students and parents. Indeed, in this case all of the students and parents were offered an opportunity to attend a conference with school officials.
In its rush to mandate a constitutional rule, the Court appears to give no weight to the practical manner in which suspension problems normally would be worked out under Ohio law. 2.15 One must doubt, then, whether [419 U.S. 565, 597] the constitutionalization of the student-teacher relationship, with all of its attendant doctrinal and practical difficulties, will assure in any meaningful sense greater protection than that already afforded under Ohio law.
III
No one can foresee the ultimate frontiers of the new “thicket” the Court now enters. Today’s ruling appears to sweep within the protected interest in education a multitude of discretionary decisions in the educational process. Teachers and other school authorities are required to make many decisions that may have serious consequences for the pupil. They must decide, for example, how to grade the student’s work, whether a student passes or fails a course, 2.16 whether he is to be promoted, whether he is required to take certain subjects, whether he may be excluded from interscholastic athletics 2.17 or other extracurricular activities, whether he may be removed from one school and sent to another, whether he may be bused long distances when available schools are nearby, and whether he should be placed in a “general,” “vocational,” or “college-preparatory” track.
In these and many similar situations claims of impairment of one’s educational entitlement identical in principle to those before the Court today can be asserted with equal or greater justification. Likewise, in many of these situations, the pupil can advance the same types of speculative and subjective injury given critical weight in this case. The District Court, relying upon generalized opinion evidence, concluded that a suspended student may suffer psychological injury in one or more of [419 U.S. 565, 598] the ways set forth in the margin below. 2.18 The Court appears to adopt this rationale. See ante, at 575.
It hardly need be said that if a student, as a result of a day’s suspension, suffers “a blow” to his “self esteem,” “feels powerless,” views “teachers with resentment,” or feels “stigmatized by his teachers,” identical psychological harms will flow from many other routine and necessary school decisions. The student who is given a failing grade, who is not promoted, who is excluded from certain extracurricular activities, who is assigned to a school reserved for children of less than average ability, or who is placed in the “vocational” rather than the “college preparatory” track, is unlikely to suffer any less psychological injury than if he were suspended for a day for a relatively minor infraction. 2.19 [419 U.S. 565, 599]
If, as seems apparent, the Court will now require due process procedures whenever such routine school decisions are challenged, the impact upon public education will be serious indeed. The discretion and judgment of federal courts across the land often will be substituted for that of the 50 state legislatures, the 14,000 school boards, 2.20 and the 2,000,000 2.21 teachers who heretofore have been responsible for the administration of the American public school system. If the Court perceives a rational and analytically sound distinction between the discretionary decision by school authorities to suspend a pupil for a brief period, and the types of discretionary school decisions described above, it would be prudent to articulate it in today’s opinion. Otherwise, the federal courts should prepare themselves for a vast new role in society.
IV
Not so long ago, state deprivations of the most significant forms of state largesse were not thought to require due process protection on the ground that the deprivation resulted only in the loss of a state-provided “benefit.” E.g., Bailey v. Richardson, 86 U.S. App. D.C. 248, 182 F.2d 46 (1950), aff ’d by an equally divided Court, 341 U.S. 918 (1951). In recent years the Court, wisely in my view, has rejected the “wooden distinction between ‘rights’ and ‘privileges,’” Board of Regents v. Roth, 408 U.S., at 571, and looked instead to the significance of the state-created or state-enforced right and to [419 U.S. 565, 600] the substantiality of the alleged deprivation. Today’s opinion appears to abandon this reasonable approach by holding in effect that government infringement of any interest to which a person is entitled, no matter what the interest or how inconsequential the infringement, requires constitutional protection. As it is difficult to think of any less consequential infringement than suspension of a junior high school student for a single day, it is equally difficult to perceive any principled limit to the new reach of procedural due process. 2.22
[ 2.1 ] The Ohio statute, Ohio Rev. Code Ann. § 3313.66 (1972), actually is a limitation on the time-honored practice of school authorities themselves determining the appropriate duration of suspensions. The statute allows the superintendent or principal of a public school to suspend a pupil “for not more than ten days . . .” (italics supplied); and requires notification to the parent or guardian in writing within 24 hours of any suspension.
[ 2.2 ] Section 3313.66 also provides authority for the expulsion of pupils, but requires a hearing thereon by the school board upon request of a parent or guardian. The rights of pupils expelled are not involved in this case, which concerns only the limited discretion of school authorities to suspend for not more than 10 days. Expulsion, usually resulting at least in loss of a school year or semester, is an incomparably more serious matter than the brief suspension, traditionally used as the principal sanction for enforcing routine discipline. The Ohio statute recognizes this distinction.
[ 2.3 ] The Court speaks of “exclusion from the educational process for more than a trivial period . . .,” ante, at 576, but its opinion makes clear that even one day’s suspension invokes the constitutional procedure mandated today.
[ 2.4 ] The Court apparently reads into Ohio law by implication a qualification that suspensions may be imposed only for “cause,” thereby analogizing this case to the civil service laws considered in Arnett v. Kennedy, 416 U.S. 134 (1974). To be sure, one may assume that pupils are not suspended at the whim or caprice of the school official, and the statute does provide for notice of the suspension with the “reasons therefor.” But the same statute draws a sharp distinction between suspension and the far more drastic sanction of expulsion. A hearing is required only for the latter. To follow the Court’s analysis, one must conclude that the legislature nevertheless intended—without saying so—that suspension also is of such consequence that it may be imposed only for cause which can be justified at a hearing. The unsoundness of reading this sort of requirement into the statute is apparent from a comparison with Arnett. In that case, Congress expressly provided that nonprobationary federal employees should be discharged only for “cause.” This requirement reflected congressional recognition of the seriousness of discharging such employees. There simply is no analogy between termination of nonprobationary employment of a civil service employee and the suspension of a public school pupil for not more than 10 days. Even if the Court is correct in implying some concept of justifiable cause in the Ohio procedure, it could hardly be stretched to the constitutional proportions found present in Arnett.
[ 2.5 ] Indeed, the Court itself quotes from a portion of Mr. Justice Frankfurter’s concurrence in Anti-Fascist Refugee Committee v. McGrath, 341 U.S. 123, 171 (1951), which explicitly refers to “a person in jeopardy of serious loss.” See ante, at 580 (emphasis supplied).
Nor is the “de minimis” standard referred to by the Court relevant in this case. That standard was first stated by Mr. Justice Harlan in a concurring opinion in Sniadach v. Family Finance Corp., 395 U.S. 337, 342 (1969), and then quoted in a footnote to the Court’s opinion in Fuentes v. Shevin, 407 U.S. 67, 90 n. 21 (1972). Both Sniadach and Fuentes, however, involved resolution of property disputes between two private parties claiming an interest in the same property. Neither case pertained to an interest conferred by the State.
[ 2.6 ] 2 App. 163-171 (testimony of Norval Goss, Director of Pupil Personnel). See opinion of the three-judge court, 372 F. Supp. 1279, 1291 (SD Ohio 1973).
[ 2.7 ] See also Wisconsin v. Constantineau, 400 U.S. 433, 437 (1971), quoting the “grievous loss” standard first articulated in Anti-Fascist Committee v. McGrath, supra.
[ 2.8 ] In dissent on the First Amendment issue, Mr. Justice Harlan recognized the Court’s basic agreement on the limited role of the judiciary in overseeing school disciplinary decisions:
“I am reluctant to believe that there is any disagreement between the majority and myself on the proposition that school officials should be accorded the widest authority in maintaining discipline and good order in their institutions.” 393 U.S., at 526.
[ 2.9 ] See generally S. Bailey, Disruption in Urban Secondary Schools (1970), which summarizes some of the recent surveys on school disruption. A Syracuse University study, for example, found that 85% of the schools responding reported some type of significant disruption in the years 1967-1970.
[ 2.10 ] An amicus brief filed by the Children’s Defense Fund states that at least 10% of the junior and senior high school students in the States sampled were suspended one or more times in the 1972-1973 school year. The data on which this conclusion rests were obtained from an extensive survey prepared by the Office for Civil Rights of the Department of Health, Education, and Welfare. The Children’s Defense Fund reviewed the suspension data for five States—Arkansas, Maryland, New Jersey, Ohio, and South Carolina.
Likewise, an amicus brief submitted by several school associations in Ohio indicates that the number of suspensions is significant: in 1972-1973, 4,054 students out of a school enrollment of 81,007 were suspended in Cincinnati; 7,352 of 57,000 students were suspended in Akron; and 14,598 of 142,053 students were suspended in Cleveland. See also the Office of Civil Rights Survey, supra, finding that approximately 20,000 students in New York City, 12,000 in Cleveland, 9,000 in Houston, and 9,000 in Memphis were suspended at least once during the 1972-1973 school year. Even these figures are probably somewhat conservative since some schools did not reply to the survey.
[ 2.11 ] See generally J. Dobson, Dare to Discipline (1970).
[ 2.12 ] The role of the teacher in our society historically has been an honored and respected one, rooted in the experience of decades that has left for most of us warm memories of our teachers, especially those of the formative years of primary and secondary education.
[ 2.13 ] In this regard, the relationship between a student and teacher is manifestly different from that between a welfare administrator and a recipient (see Goldberg v. Kelly, 397 U.S. 254 (1970)), a motor vehicle department and a driver (see Bell v. Burson, 402 U.S. 535 (1971)), a debtor and a creditor (see Sniadach v. Family Finance Corp., supra; Fuentes v. Shevin, supra; Mitchell v. W. T. Grant Co., 416 U.S. 600 (1974)), a parole officer and a parolee (see Morrissey v. Brewer, 408 U.S. 471 (1972)), or even an employer and an employee (see Arnett v. Kennedy, 416 U.S. 134 (1974)). In many of these noneducation settings there is—for purposes of this analysis [419 U.S. 565, 595]—a “faceless” administrator dealing with an equally “faceless” recipient of some form of government benefit or license; in others, such as the garnishment and repossession cases, there is a conflict-of-interest relationship. Our public school system, however, is premised on the belief that teachers and pupils should not be “faceless” to each other. Nor does the educational relationship present a typical “conflict of interest.” Rather, the relationship traditionally is marked by a coincidence of interests.
Yet the Court, relying on cases such as Sniadach and Fuentes, apparently views the classroom of teenagers as comparable to the competitive and adversary environment of the adult, commercial world.
[ 2.14 ] A traditional factor in any due process analysis is “the protection implicit in the office of the functionary whose conduct is challenged. . . .” Anti-Fascist Committee v. McGrath, 341 U.S., at 163 (Frankfurter, J., concurring). In the public school setting there is a high degree of such protection since a teacher has responsibility for, and a commitment to, his pupils that is absent in other due process contexts.
[ 2.15 ] The Court itself recognizes that the requirements it imposes are, “if anything, less than a fair-minded school principal would impose upon himself in order to avoid unfair suspensions.” Ante, at 583.
[ 2.16 ] See Connelly v. University of Vermont, 244 F. Supp. 156 (Vt. 1956).
[ 2.17 ] See Kelley v. Metropolitan County Board of Education of Nashville, 293 F. Supp. 485 (MD Tenn. 1968).
[ 2.18 ] The psychological injuries so perceived were as follows:
“1. The suspension is a blow to the student’s self-esteem. 2. The student feels powerless and helpless. 3. The student views school authorities and teachers with resentment, suspicion and fear. 4. The student learns withdrawal as a mode of problem solving. 5. The student has little perception of the reasons for the suspension. He does not know what offending acts he committed. 6. The student is stigmatized by his teachers and school administrators as a deviant. They expect the student to be a troublemaker in the future.” 372 F. Supp., at 1292.
[ 2.19 ] There is, no doubt, a school of modern psychological or psychiatric persuasion that maintains that any discipline of the young is detrimental. Whatever one may think of the wisdom of this unproved theory, it hardly affords dependable support for a constitutional decision. Moreover, even the theory’s proponents would concede that the magnitude of injury depends primarily upon the individual child or teenager. A classroom reprimand by the teacher may be more traumatic to the shy, timid introvert than expulsion would be to the aggressive, rebellious extrovert. In my view we tend to lose our sense of perspective and proportion in a case of this kind. For average, normal children—the vast majority—suspension for a few days is simply not a detriment; it is a commonplace [419 U.S. 565, 599] occurrence, with some 10% of all students being suspended; it leaves no scars; affects no reputations; indeed, it often may be viewed by the young as a badge of some distinction and a welcome holiday.
[ 2.20 ] This estimate was supplied by the National School Board Association, Washington, D.C.
[ 2.21 ] See U.S. Office of Education, Elementary and Secondary Public School Statistics, 1972-1973.
[ 2.22 ] Some half dozen years ago, the Court extended First Amendment rights under limited circumstances to public school pupils. Mr. Justice Black, dissenting, viewed the decision as ushering in “an entirely new era in which the power to control pupils by the elected ‘officials of state supported public schools’ . . . is in ultimate effect transferred to the Supreme Court.” Tinker v. Des Moines School Dist., 393 U.S. 503, 515 (1969). There were some who thought Mr. Justice Black was unduly concerned. But his prophecy is now being fulfilled. In the few years since Tinker there have been literally hundreds of cases by schoolchildren alleging violation of their constitutional rights. This flood of litigation, between pupils and school authorities, was triggered by a narrowly written First Amendment opinion which I could well have joined on its facts. One can only speculate as to the extent to which public education will be disrupted by giving every schoolchild the power to contest in court any decision made by his teacher which arguably infringes the state-conferred right to education. [419 U.S. 565, 601] | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/04%3A_The_Fourteenth_Amendment/4.01%3A_New_Page.txt |
Learning Objectives
Honig v. Doe
484 U.S. 305 (1988)
United States Supreme Court, Docket No. 86-728
Argued: November 9, 1987 Decided: January 20, 1988
In order to assure that States receiving federal financial assistance will provide a “free appropriate public education” for all disabled children, including those with serious emotional disturbances, the Education of the Handicapped Act (EHA or Act) establishes a comprehensive system of procedural safeguards designed to provide meaningful parental participation in all aspects of a child’s educational placement, including an opportunity for an impartial due process hearing with respect to any complaints such parents have concerning their child’s placement, and the right to seek administrative review of any decisions they think inappropriate. If that review proves unsatisfactory, either the parents or the local educational agency may file a civil action in any state or federal court for “appropriate” relief. 20 U.S.C. § 1415(e)(2). The Act’s “stay-put” provision directs that a disabled child “shall remain in [his or her] then current educational placement” pending completion of any review proceedings, unless the parents and state or local educational agencies otherwise agree. § 1415(e)(3). Respondents Doe and Smith, who were emotionally disturbed students, were suspended indefinitely for violent and disruptive conduct related to their disabilities, pending the completion of expulsion proceedings by the San Francisco Unified School District (SFUSD). After unsuccessfully protesting the action against him, Doe filed a suit in Federal District Court, in which Smith intervened, alleging that the suspension and proposed expulsion violated the EHA, and seeking injunctive relief against SFUSD officials and petitioner, the State Superintendent of Public Instruction. The court entered summary judgment for respondents on their EHA claims and issued a permanent injunction. The Court of Appeals affirmed with slight modifications.
Held:
1. The case is moot as to respondent Doe, who is now 24 years old, since the Act limits eligibility to disabled children between the ages of 3 and 21. However, the case is justiciable with respect to respondent Smith, who continues to be eligible for EHA educational services since he is currently only 20 and has not yet completed high school. This Court has jurisdiction since there is a reasonable likelihood that Smith [484 U.S. 305, 306] will again suffer the deprivation of EHAmandated rights that gave rise to this suit. Given the evidence that he is unable to conform his conduct to socially acceptable norms, and the absence of any suggestion that he has overcome his behavioral problems, it is reasonable to expect that he will again engage in aggressive and disruptive classroom misconduct. Moreover, it is unreasonable to suppose that any future educational placement will so perfectly suit his emotional and academic needs that further disruptions on his part are improbable. If Smith does repeat the objectionable conduct, it is likely that he will again be subjected to the same type of unilateral school action in any California school district in which he is enrolled, in light of the lack of a statewide policy governing local school responses to disability-related misconduct, and petitioner’s insistence that all local school districts retain residual authority to exclude disabled children for dangerous conduct. In light of the ponderousness of review procedures under the Act, and the fact that an aggrieved student will often be finished with school or otherwise ineligible for EHA protections by the time review can be had in this Court, the conduct Smith complained of is “capable of repetition, yet evading review.” Thus his EHA claims are not moot. Pp. 317-323.
2. The “stay-put” provision prohibits state or local school authorities from unilaterally excluding disabled children from the classroom for dangerous or disruptive conduct growing out of their disabilities during the pendency of review proceedings. Section 1415(e)(3) is unequivocal in its mandate that “the child shall remain in the then current educational placement” (emphasis added), and demonstrates a congressional intent to strip schools of the unilateral authority they had traditionally employed to exclude disabled students, particularly emotionally disturbed students, from school. This Court will not rewrite the statute to infer a “dangerousness” exception on the basis of obviousness or congressional inadvertence, since, in drafting the statute, Congress devoted close attention to Mills v. Board of Education of District of Columbia, 348 F. Supp. 866, and Pennsylvania Assn. for Retarded Children v. Pennsylvania, 334 F. Supp. 1257, and 343 F. Supp. 279, thereby establishing that the omission of an emergency exception for dangerous students was intentional. However, Congress did not leave school administrators powerless to deal with such students, since implementing regulations allow the use of normal, nonplacement-changing procedures, including temporary suspensions for up to 10 schooldays for students posing an immediate threat to others’ safety, while the Act allows for interim placements where parents and school officials are able to agree, [484 U.S. 305, 307] and authorizes officials to file a § 1415(e) (2) suit for “appropriate” injunctive relief where such an agreement cannot be reached. In such a suit, § 1415(e)(3) effectively creates a presumption in favor of the child’s current educational placement which school officials can rebut only by showing that maintaining the current placement is substantially likely to result in injury to the student or to others. Here, the District Court properly balanced respondents’ interests under the Act against the state and local school officials’ safety interest, and both lower courts properly construed and applied § 1415(e)(3), except insofar as the Court of Appeals held that a suspension exceeding 10 schooldays does not constitute a prohibited change in placement. The Court of Appeals’ judgment is modified to that extent. Pp. 323-328.
3. Insofar as the Court of Appeals’ judgment affirmed the District Court’s order directing the State to provide services directly to a disabled child where the local agency has failed to do so, that judgment is affirmed by an equally divided Court. Pp. 328-329.
793 F.2d 1470, affirmed.
BRENNAN, J., delivered the opinion of the Court as to holdings number 1 and 2 above, in which REHNQUIST, C. J., and WHITE, MARSHALL, BLACKMUN, and STEVENS, JJ., joined. REHNQUIST, C. J., filed a concurring opinion, post, p. 329. SCALIA, J., filed a dissenting opinion, in which O’CONNOR, J., joined, post, p. 332.
Asher Rubin, Deputy Attorney General of California, argued the cause for petitioner. With him on the briefs were John K. Van de Kamp, Attorney General, Charlton G. Holland, Assistant Attorney General, and John Davidson, Supervising Deputy Attorney General.
Glen D. Nager argued the cause pro hac vice for the United States as amicus curiae urging reversal. With him on the brief were Solicitor General Fried, Assistant Attorney General Reynolds, Deputy Solicitor General Ayer, Deputy Assistant Attorney General Carvin, Walter W. Barnett, Dennis J. Dimsey, and Wendell L. Willkie.
Sheila Brogna argued the cause for respondents. With her on the brief were William J. Taylor and Toby Fishbein Rubin. *
[ * ] Briefs of amici curiae urging reversal were filed for the Davis Joint Unified School District et al. by Charles R. Mack; for the National School [484 U.S. 305, 308] Boards Association by Gwendolyn H. Gregory and August W. Steinhilber; for the National School Safety Center et al. by James A. Rapp, Donna Clontz, and Jane Slenkovich; and for the San Francisco Unified School District by Louise H. Renne and Thomas M. Berliner.
Briefs of amici curiae urging affirmance were filed for the American Association on Mental Deficiency et al. by Norman S. Rosenberg and Janet Stotland; for the National Association of Protection and Advocacy Systems et al. by Marilyn Holle; and for the Center for Law and Education, Inc., et al.
Briefs of amici curiae were filed for Senator Chafee et al. by Arlene Brynne Mayerson; and for the Legal Aid Society of the City of New York, Juvenile Rights Division, by Henry S. Weintraub. [484 U.S. 305, 308]
JUSTICE BRENNAN delivered the opinion of the Court.
As a condition of federal financial assistance, the Education of the Handicapped Act requires States to ensure a “free appropriate public education” for all disabled children within their jurisdictions. In aid of this goal, the Act establishes a comprehensive system of procedural safeguards designed to ensure parental participation in decisions concerning the education of their disabled children and to provide administrative and judicial review of any decisions with which those parents disagree. Among these safeguards is the so-called “stay-put” provision, which directs that a disabled child “shall remain in [his or her] then current educational placement” pending completion of any review proceedings, unless the parents and state or local educational agencies otherwise agree. 20 U.S.C. § 1415(e)(3). Today we must decide whether, in the face of this statutory proscription, state or local school authorities may nevertheless unilaterally exclude disabled children from the classroom for dangerous or disruptive conduct growing out of their disabilities. In addition, we are called upon to decide whether a district court may, in the exercise of its equitable powers, order a State to provide educational services directly to a disabled child when the local agency fails to do so. [484 U.S. 305, 309]
I
In the Education of the Handicapped Act (EHA or the Act), 84 Stat. 175, as amended, 20 U.S.C. § 1400 et seq., Congress sought “to assure that all handicapped children have available to them . . . a free appropriate public education which emphasizes special education and related services designed to meet their unique needs, [and] to assure that the rights of handicapped children and their parents or guardians are protected.” § 1400(c). When the law was passed in 1975, Congress had before it ample evidence that such legislative assurances were sorely needed: 21 years after this Court declared education to be “perhaps the most important function of state and local governments,” Brown v. Board of Education, 347 U.S. 483, 493 (1954), congressional studies revealed that better than half of the Nation’s 8 million disabled children were not receiving appropriate educational services. § 1400(b)(3). Indeed, one out of every eight of these children was excluded from the public school system altogether, § 1400(b)(4); many others were simply “warehoused” in special classes or were neglectfully shepherded through the system until they were old enough to drop out. See H. R. Rep. No. 94-332, p. 2 (1975). Among the most poorly served of disabled students were emotionally disturbed children: Congressional statistics revealed that for the school year immediately preceding passage of the Act, the educational needs of 82 percent of all children with emotional disabilities went unmet. See S. Rep. No. 94-168, p. 8 (1975) (hereinafter S. Rep.).
Although these educational failings resulted in part from funding constraints, Congress recognized that the problem reflected more than a lack of financial resources at the state and local levels. Two federal-court decisions, which the Senate Report characterized as “landmark,” see id., at 6, demonstrated that many disabled children were excluded pursuant to state statutes or local rules and policies, typically without [484 U.S. 305, 310] any consultation with, or even notice to, their parents. See Mills v. Board of Education of District of Columbia, 348 F. Supp. 866 (DC 1972); Pennsylvania Assn. for Retarded Children v. Pennsylvania, 334 F. Supp. 1257 (ED Pa. 1971), and 343 F. Supp. 279 (1972) (PARC). Indeed, by the time of the EHA’s enactment, parents had brought legal challenges to similar exclusionary practices in 27 other States. See S. Rep., at 6.
In responding to these problems, Congress did not content itself with passage of a simple funding statute. Rather, the EHA confers upon disabled students an enforceable substantive right to public education in participating States, see Board of Education of Hendrick Hudson Central School Dist. v. Rowley, 458 U.S. 176 (1982), 1.1 and conditions federal financial assistance upon a State’s compliance with the substantive and procedural goals of the Act. Accordingly, States seeking to qualify for federal funds must develop policies assuring all disabled children the “right to a free appropriate public education,” and must file with the Secretary of [484 U.S. 305, 311] Education formal plans mapping out in detail the programs, procedures, and timetables under which they will effectuate these policies. 20 U.S.C. §§ 1412(1), 1413(a). Such plans must assure that, “to the maximum extent appropriate,” States will “mainstream” disabled children, i.e., that they will educate them with children who are not disabled, and that they will segregate or otherwise remove such children from the regular classroom setting “only when the nature or severity of the handicap is such that education in regular classes . . . cannot be achieved satisfactorily.” § 1412(5).
The primary vehicle for implementing these congressional goals is the “individualized educational program” (IEP), which the EHA mandates for each disabled child. Prepared at meetings between a representative of the local school district, the child’s teacher, the parents or guardians, and, whenever appropriate, the disabled child, the IEP sets out the child’s present educational performance, establishes annual and short-term objectives for improvements in that performance, and describes the specially designed instruction and services that will enable the child to meet those objectives. § 1401(19). The IEP must be reviewed and, where necessary, revised at least once a year in order to ensure that local agencies tailor the statutorily required “free appropriate public education” to each child’s unique needs. § 1414(a)(5).
Envisioning the IEP as the centerpiece of the statute’s education delivery system for disabled children, and aware that schools had all too often denied such children appropriate educations without in any way consulting their parents, Congress repeatedly emphasized throughout the Act the importance and indeed the necessity of parental participation in both the development of the IEP and any subsequent assessments of its effectiveness. See §§ 1400(c), 1401(19), 1412(7), 1415(b)(1)(A), (C), (D), (E), and 1415(b)(2). Accordingly, the Act establishes various procedural safeguards that guarantee parents both an opportunity for meaningful input into all decisions affecting their child’s education and the right [484 U.S. 305, 312] to seek review of any decisions they think inappropriate. These safeguards include the right to examine all relevant records pertaining to the identification, evaluation, and educational placement of their child; prior written notice whenever the responsible educational agency proposes (or refuses) to change the child’s placement or program; an opportunity to present complaints concerning any aspect of the local agency’s provision of a free appropriate public education; and an opportunity for “an impartial due process hearing” with respect to any such complaints. §§ 1415(b)(1), (2).
At the conclusion of any such hearing, both the parents and the local educational agency may seek further administrative review and, where that proves unsatisfactory, may file a civil action in any state or federal court. §§ 1415(c), (e)(2). In addition to reviewing the administrative record, courts are empowered to take additional evidence at the request of either party and to “grant such relief as [they] determine[] is appropriate.” § 1415(e)(2). The “stay-put” provision at issue in this case governs the placement of a child while these often lengthy review procedures run their course. It directs that:
“During the pendency of any proceedings conducted pursuant to [§ 1415], unless the State or local educational agency and the parents or guardian otherwise agree, the child shall remain in the then current educational placement of such child. . . .” § 1415(e)(3).
The present dispute grows out of the efforts of certain officials of the San Francisco Unified School District (SFUSD) to expel two emotionally disturbed children from school indefinitely for violent and disruptive conduct related to their disabilities. In November 1980, respondent John Doe assaulted another student at the Louise Lombard School, a developmental center for disabled children. Doe’s April 1980 IEP identified him as a socially and physically awkward 17-year-old who experienced considerable difficulty controlling his impulses and anger. Among the goals set out in his IEP was “[i]mprovement in [his] ability to relate to [his] [484 U.S. 305, 313] peers [and to] cope with frustrating situations without resorting to aggressive acts.” App. 17. Frustrating situations, however, were an unfortunately prominent feature of Doe’s school career: physical abnormalities, speech difficulties, and poor grooming habits had made him the target of teasing and ridicule as early as the first grade, id., at 23; his 1980 IEP reflected his continuing difficulties with peers, noting that his social skills had deteriorated and that he could tolerate only minor frustration before exploding. Id., at 15-16.
On November 6, 1980, Doe responded to the taunts of a fellow student in precisely the explosive manner anticipated by his IEP: he choked the student with sufficient force to leave abrasions on the child’s neck, and kicked out a school window while being escorted to the principal’s office afterwards. Id., at 208. Doe admitted his misconduct and the school subsequently suspended him for five days. Thereafter, his principal referred the matter to the SFUSD Student Placement Committee (SPC or Committee) with the recommendation that Doe be expelled. On the day the suspension was to end, the SPC notified Doe’s mother that it was proposing to exclude her child permanently from SFUSD and was therefore extending his suspension until such time as the expulsion proceedings were completed. 1.2 The Committee further advised her that she was entitled to attend the November 25 hearing at which it planned to discuss the proposed expulsion.
After unsuccessfully protesting these actions by letter, Doe brought this suit against a host of local school officials [484 U.S. 305, 314] and the State Superintendent of Public Instruction. Alleging that the suspension and proposed expulsion violated the EHA, he sought a temporary restraining order canceling the SPC hearing and requiring school officials to convene an IEP meeting. The District Judge granted the requested injunctive relief and further ordered defendants to provide home tutoring for Doe on an interim basis; shortly thereafter, she issued a preliminary injunction directing defendants to return Doe to his then current educational placement at Louise Lombard School pending completion of the IEP review process. Doe reentered school on December 15, 51/2 weeks, and 24 schooldays, after his initial suspension.
Respondent Jack Smith was identified as an emotionally disturbed child by the time he entered the second grade in 1976. School records prepared that year indicated that he was unable “to control verbal or physical outburst[s]” and exhibited a “[s]evere disturbance in relationships with peers and adults.” Id., at 123. Further evaluations subsequently revealed that he had been physically and emotionally abused as an infant and young child and that, despite above average intelligence, he experienced academic and social difficulties as a result of extreme hyperactivity and low self-esteem. Id., at 136, 139, 155, 176. Of particular concern was Smith’s propensity for verbal hostility; one evaluator noted that the child reacted to stress by “attempt[ing] to cover his feelings of low self worth through aggressive behavior[,] . . . primarily verbal provocations.” Id., at 136.
Based on these evaluations, SFUSD placed Smith in a learning center for emotionally disturbed children. His grandparents, however, believed that his needs would be better served in the public school setting and, in September 1979, the school district acceded to their requests and enrolled him at A. P. Giannini Middle School. His February 1980 IEP recommended placement in a Learning Disability Group, stressing the need for close supervision and a highly structured environment. Id., at 111. Like earlier evaluations, [484 U.S. 305, 315] the February 1980 IEP noted that Smith was easily distracted, impulsive, and anxious; it therefore proposed a half-day schedule and suggested that the placement be undertaken on a trial basis. Id., at 112, 115.
At the beginning of the next school year, Smith was assigned to a full-day program; almost immediately thereafter he began misbehaving. School officials met twice with his grandparents in October 1980 to discuss returning him to a half-day program; although the grandparents agreed to the reduction, they apparently were never apprised of their right to challenge the decision through EHA procedures. The school officials also warned them that if the child continued his disruptive behavior—which included stealing, extorting money from fellow students, and making sexual comments to female classmates—they would seek to expel him. On November 14, they made good on this threat, suspending Smith for five days after he made further lewd comments. His principal referred the matter to the SPC, which recommended exclusion from SFUSD. As it did in John Doe’s case, the Committee scheduled a hearing and extended the suspension indefinitely pending a final disposition in the matter. On November 28, Smith’s counsel protested these actions on grounds essentially identical to those raised by Doe, and the SPC agreed to cancel the hearing and to return Smith to a half-day program at A. P. Giannini or to provide home tutoring. Smith’s grandparents chose the latter option and the school began home instruction on December 10; on January 6, 1981, an IEP team convened to discuss alternative placements.
After learning of Doe’s action, Smith sought and obtained leave to intervene in the suit. The District Court subsequently entered summary judgment in favor of respondents on their EHA claims and issued a permanent injunction. In a series of decisions, the District Judge found that the proposed expulsions and indefinite suspensions of respondents for conduct attributable to their disabilities deprived [484 U.S. 305, 316] them of their congressionally mandated right to a free appropriate public education, as well as their right to have that education provided in accordance with the procedures set out in the EHA. The District Judge therefore permanently enjoined the school district from taking any disciplinary action other than a 2- or 5-day suspension against any disabled child for disabilityrelated misconduct, or from effecting any other change in the educational placement of any such child without parental consent pending completion of any EHA proceedings. In addition, the judge barred the State from authorizing unilateral placement changes and directed it to establish an EHA compliance-monitoring system or, alternatively, to enact guidelines governing local school responses to disability-related misconduct. Finally, the judge ordered the State to provide services directly to disabled children when, in any individual case, the State determined that the local educational agency was unable or unwilling to do so.
On appeal, the Court of Appeals for the Ninth Circuit affirmed the orders with slight modifications. Doe v. Maher, 793 F.2d 1470 (1986). Agreeing with the District Court that an indefinite suspension in aid of expulsion constitutes a prohibited “change in placement” under § 1415(e)(3), the Court of Appeals held that the stay-put provision admitted of no “dangerousness” exception and that the statute therefore rendered invalid those provisions of the California Education Code permitting the indefinite suspension or expulsion of disabled children for misconduct arising out of their disabilities. The court concluded, however, that fixed suspensions of up to 30 schooldays did not fall within the reach of § 1415(e)(3), and therefore upheld recent amendments to the state Education Code authorizing such suspensions. 1.3 Lastly, the court [484 U.S. 305, 317] affirmed that portion of the injunction requiring the State to provide services directly to a disabled child when the local educational agency fails to do so.
Petitioner Bill Honig, California Superintendent of Public Instruction, 1.4 sought review in this Court, claiming that the Court of Appeals’ construction of the stay-put provision conflicted with that of several other Courts of Appeals which had recognized a dangerousness exception, compare Doe v. Maher, supra (case below), with Jackson v. Franklin County School Board, 765 F.2d 535, 538 (CA5 1985); Victoria L. v. District School Bd. of Lee County, Fla., 741 F.2d 369, 374 (CA11 1984); S-1 v. Turlington, 635 F.2d 342, 348, n. 9 (CA5), cert. denied, 454 U.S. 1030 (1981), and that the direct services ruling placed an intolerable burden on the State. We granted certiorari to resolve these questions, 479 U.S. 1084 (1987), and now affirm.
II
At the outset, we address the suggestion, raised for the first time during oral argument, that this case is moot. 1.5 Under Article III of the Constitution this Court may only adjudicate actual, ongoing controversies. Nebraska Press Assn. v. Stuart, 427 U.S. 539, 546 (1976); Preiser v. Newkirk, 422 U.S. 395, 401 (1975). That the dispute between the parties was very much alive when suit was filed, or at the time the Court of Appeals rendered its judgment, cannot substitute for the actual case or controversy that an exercise of this Court’s jurisdiction requires. Steffel v. Thompson, [484 U.S. 305, 318] 415 U.S. 452, 459, n. 10 (1974); Roe v. Wade, 410 U.S. 113, 125 (1973). In the present case, we have jurisdiction if there is a reasonable likelihood that respondents will again suffer the deprivation of EHA-mandated rights that gave rise to this suit. We believe that, at least with respect to respondent Smith, such a possibility does in fact exist and that the case therefore remains justiciable.
Respondent John Doe is now 24 years old and, accordingly, is no longer entitled to the protections and benefits of the EHA, which limits eligibility to disabled children between the ages of 3 and 21. See 20 U.S.C. § 1412(2)(B). It is clear, therefore, that whatever rights to state educational services he may yet have as a ward of the State, see Tr. of Oral Arg. 23, 26, the Act would not govern the State’s provision of those services, and thus the case is moot as to him. Respondent Jack Smith, however, is currently 20 and has not yet completed high school. Although at present he is not faced with any proposed expulsion or suspension proceedings, and indeed no longer even resides within the SFUSD, he remains a resident of California and is entitled to a “free appropriate public education” within that State. His claims under the EHA, therefore, are not moot if the conduct he originally complained of is “‘capable of repetition, yet evading review.’” Murphy v. Hunt, 455 U.S. 478, 482 (1982). Given Smith’s continued eligibility for educational services under the EHA, 1.6 the nature of his disability, and petitioner’s [484 U.S. 305, 319] insistence that all local school districts retain residual authority to exclude disabled children for dangerous conduct, we have little difficulty concluding that there is a “reasonable [484 U.S. 305, 320] expectation,” ibid., that Smith would once again be subjected to a unilateral “change in placement” for conduct growing out of his disabilities were it not for the statewide injunctive relief issued below.
Our cases reveal that, for purposes of assessing the likelihood that state authorities will reinflict a given injury, we generally have been unwilling to assume that the party seeking relief will repeat the type of misconduct that would once again place him or her at risk of that injury. See Los Angeles v. Lyons, 461 U.S. 95, 105-106 (1983) (no threat that party seeking injunction barring police use of chokeholds would be stopped again for traffic violation or other offense, or would resist arrest if stopped); Murphy v. Hunt, supra, at 484 (no reason to believe that party challenging denial of pretrial bail “will once again be in a position to demand bail”); O’Shea v. Littleton, 414 U.S. 488, 497 (1974) (unlikely that parties challenging discriminatory bond-setting, sentencing, and jury-fee practices would again violate valid criminal laws). No such reluctance, however, is warranted here. It is respondent Smith’s very inability to conform his conduct to socially acceptable norms that renders him “handicapped” within the meaning of the EHA. See 20 U.S.C. § 1401(1); 34 CFR § 300.5(b) (8) (1987). As noted above, the record is replete with evidence that Smith is unable to govern his aggressive, impulsive behavior—indeed, his notice of suspension acknowledged that “Jack’s actions seem beyond his control.” App. 152. In the absence of any suggestion that respondent has overcome his earlier difficulties, it is certainly reasonable to expect, based on his prior history of behavioral problems, that he will again engage in classroom misconduct. Nor is it reasonable to suppose that Smith’s future educational placement will so perfectly suit his emotional and academic needs that further disruptions on his part are improbable. Although JUSTICE SCALIA suggests in his dissent, post, at 338, that school officials are unlikely to place Smith in a setting where they cannot control his misbehavior, any efforts [484 U.S. 305, 321] to ensure such total control must be tempered by the school system’s statutory obligations to provide respondent with a free appropriate public education in “the least restrictive environment,” 34 CFR § 300.552(d) (1987); to educate him, “to the maximum extent appropriate,” with children who are not disabled, 20 U.S.C. § 1412(5); and to consult with his parents or guardians, and presumably with respondent himself, before choosing a placement. §§ 1401(19), 1415 (b). Indeed, it is only by ignoring these mandates, as well as Congress’ unquestioned desire to wrest from school officials their former unilateral authority to determine the placement of emotionally disturbed children, see infra, at 323-324, that the dissent can so readily assume that respondent’s future placement will satisfactorily prevent any further dangerous conduct on his part. Overarching these statutory obligations, moreover, is the inescapable fact that the preparation of an IEP, like any other effort at predicting human behavior, is an inexact science at best. Given the unique circumstances and context of this case, therefore, we think it reasonable to expect that respondent will again engage in the type of misconduct that precipitated this suit.
We think it equally probable that, should he do so, respondent will again be subjected to the same unilateral school action for which he initially sought relief. In this regard, it matters not that Smith no longer resides within the SFUSD. While the actions of SFUSD officials first gave rise to this litigation, the District Judge expressly found that the lack of a state policy governing local school responses to disability-related misconduct had led to, and would continue to result in, EHA violations, and she therefore enjoined the state defendant from authorizing, among other things, unilateral placement changes. App. 247-248. She of course also issued injunctions directed at the local defendants, but they did not seek review of those orders in this Court. Only petitioner, the State Superintendent of Public Instruction, has invoked our jurisdiction, and he now urges us to hold that [484 U.S. 305, 322] local school districts retain unilateral authority under the EHA to suspend or otherwise remove disabled children for dangerous conduct. Given these representations, we have every reason to believe that were it not for the injunction barring petitioner from authorizing such unilateral action, respondent would be faced with a real and substantial threat of such action in any California school district in which he enrolled. Cf. Los Angeles v. Lyons, supra, at 106 (respondent lacked standing to seek injunctive relief because he could not plausibly allege that police officers choked all persons whom they stopped, or that the city “authorized police officers to act in such manner” (emphasis added)). Certainly, if the SFUSD’s past practice of unilateral exclusions was at odds with state policy and the practice of local school districts generally, petitioner would not now stand before us seeking to defend the right of all local school districts to engage in such aberrant behavior. 1.7
We have previously noted that administrative and judicial review under the EHA is often “ponderous,” Burlington School Committee v. Massachusetts Dept. of Education, 471 U.S. 359, 370 (1985), and this case, which has taken seven years to reach us, amply confirms that observation. For obvious reasons, the misconduct of an emotionally disturbed or otherwise disabled child who has not yet reached adolescence typically will not pose such a serious threat to the well-being of other students that school officials can only ensure classroom safety by excluding the child. Yet, the adolescent student improperly disciplined for misconduct that does pose such a threat will often be finished with school or otherwise [484 U.S. 305, 323] ineligible for EHA protections by the time review can be had in this Court. Because we believe that respondent Smith has demonstrated both “a sufficient likelihood that he will again be wronged in a similar way,” Los Angeles v. Lyons, 461 U.S., at 111, and that any resulting claim he may have for relief will surely evade our review, we turn to the merits of his case.
The language of § 1415(e)(3) is unequivocal. It states plainly that during the pendency of any proceedings initiated under the Act, unless the state or local educational agency and the parents or guardian of a disabled child otherwise agree, “the child shall remain in the then current educational placement.” § 1415(e)(3) (emphasis added). Faced with this clear directive, petitioner asks us to read a “dangerousness” exception into the stay-put provision on the basis of either of two essentially inconsistent assumptions: first, that Congress thought the residual authority of school officials to exclude dangerous students from the classroom too obvious for comment; or second, that Congress inadvertently failed to provide such authority and this Court must therefore remedy the oversight. Because we cannot accept either premise, we decline petitioner’s invitation to rewrite the statute.
Petitioner’s arguments proceed, he suggests, from a simple, commonsense proposition: Congress could not have intended the stay-put provision to be read literally, for such a construction leads to the clearly unintended, and untenable, result that school districts must return violent or dangerous students to school while the often lengthy EHA proceedings run their course. We think it clear, however, that Congress very much meant to strip schools of the unilateral authority they had traditionally employed to exclude disabled students, particularly emotionally disturbed students, from school. In so doing, Congress did not leave school administrators powerless to deal with dangerous students; it did, however, deny school officials their former right to “self-help,” and directed [484 U.S. 305, 324] that in the future the removal of disabled students could be accomplished only with the permission of the parents or, as a last resort, the courts.
As noted above, Congress passed the EHA after finding that school systems across the country had excluded one out of every eight disabled children from classes. In drafting the law, Congress was largely guided by the recent decisions in Mills v. Board of Education of District of Columbia, 348 F. Supp. 866 (1972), and PARC, 343 F. Supp. 279 (1972), both of which involved the exclusion of hard-to-handle disabled students. Mills in particular demonstrated the extent to which schools used disciplinary measures to bar children from the classroom. There, school officials had labeled four of the seven minor plaintiffs “behavioral problems,” and had excluded them from classes without providing any alternative education to them or any notice to their parents. 348 F. Supp., at 869-870. After finding that this practice was not limited to the named plaintiffs but affected in one way or another an estimated class of 12,000 to 18,000 disabled students, id., at 868-869, 875, the District Court enjoined future exclusions, suspensions, or expulsions “on grounds of discipline.” Id., at 880
Congress attacked such exclusionary practices in a variety of ways. It required participating States to educate all disabled children, regardless of the severity of their disabilities, 20 U.S.C. § 1412(2) (C), and included within the definition of “handicapped” those children with serious emotional disturbances. § 1401(1). It further provided for meaningful parental participation in all aspects of a child’s educational placement, and barred schools, through the stay-put provision, from changing that placement over the parent’s objection until all review proceedings were completed. Recognizing that those proceedings might prove long and tedious, the Act’s drafters did not intend § 1415(e)(3) to operate inflexibly, see 121 Cong. Rec. 37412 (1975) (remarks of Sen. Stafford), and they therefore allowed for interim placements where parents [484 U.S. 305, 325] and school officials are able to agree on one. Conspicuously absent from § 1415(e)(3), however, is any emergency exception for dangerous students. This absence is all the more telling in light of the injunctive decree issued in PARC, which permitted school officials unilaterally to remove students in “‘extraordinary circumstances.’” 343 F. Supp., at 301. Given the lack of any similar exception in Mills, and the close attention Congress devoted to these “landmark” decisions, see S. Rep., at 6, we can only conclude that the omission was intentional; we are therefore not at liberty to engraft onto the statute an exception Congress chose not to create.
Our conclusion that § 1415(e)(3) means what it says does not leave educators hamstrung. The Department of Education has observed that, “[w]hile the [child’s] placement may not be changed [during any complaint proceeding], this does not preclude the agency from using its normal procedures for dealing with children who are endangering themselves or others.” Comment following 34 CFR § 300.513 (1987). Such procedures may include the use of study carrels, time-outs, detention, or the restriction of privileges. More drastically, where a student poses an immediate threat to the safety of others, officials may temporarily suspend him or her for up to 10 schooldays. 1.8 This authority, which respondent [484 U.S. 305, 326] in no way disputes, not only ensures that school administrators can protect the safety of others by promptly removing the most dangerous of students, it also provides a “cooling down” period during which officials can initiate IEP review and seek to persuade the child’s parents to agree to an interim placement. And in those cases in which the parents of a truly dangerous child adamantly refuse to permit any change in placement, the 10-day respite gives school officials an opportunity to invoke the aid of the courts under § 1415(e)(2), which empowers courts to grant any appropriate relief.
Petitioner contends, however, that the availability of judicial relief is more illusory than real, because a party seeking review under § 1415(e)(2) must exhaust time-consuming administrative remedies, and because under the Court of Appeals’ construction of § 1415(e)(3), courts are as bound by the stay-put provision’s “automatic injunction,” 793 F.2d, at 1486, as are schools. 1.9 It is true that judicial review is normally [484 U.S. 305, 327] not available under § 1415(e)(2) until all administrative proceedings are completed, but as we have previously noted, parents may bypass the administrative process where exhaustion would be futile or inadequate. See Smith v. Robinson, 468 U.S. 992, 1014, n. 17 (1984) (citing cases); see also 121 Cong. Rec. 37416 (1975) (remarks of Sen. Williams) (“[E] xhaustion . . . should not be required . . . in cases where such exhaustion would be futile either as a legal or practical matter”). While many of the EHA’s procedural safeguards protect the rights of parents and children, schools can and do seek redress through the administrative review process, and we have no reason to believe that Congress meant to require schools alone to exhaust in all cases, no matter how exigent the circumstances. The burden in such cases, of course, rests with the school to demonstrate the futility or inadequacy of administrative review, but nothing in § 1415(e) (2) suggests that schools are completely barred from attempting to make such a showing. Nor do we think that § 1415(e)(3) operates to limit the equitable powers of district courts such that they cannot, in appropriate cases, temporarily enjoin a dangerous disabled child from attending school. As the EHA’s legislative history makes clear, one of the evils Congress sought to remedy was the unilateral exclusion of disabled children by schools, not courts, and one of the purposes of 1415(e) (3), therefore, was “to prevent school officials from removing a child from the regular public school classroom over the parents’ objection pending completion of the review proceedings.” Burlington School Committee v. Massachusetts Dept. of Education, 471 U.S., at 373 (emphasis added). The stayput provision in no way purports to limit or pre-empt the authority conferred on courts by § 1415(e) (2), see Doe v. Brookline School Committee, 722 F.2d 910, 917 (CA1 1983); indeed, it says nothing whatever about judicial power. [484 U.S. 305, 328]
In short, then, we believe that school officials are entitled to seek injunctive relief under § 1415(e) (2) in appropriate cases. In any such action, § 1415(e)(3) effectively creates a presumption in favor of the child’s current educational placement which school officials can overcome only by showing that maintaining the child in his or her current placement is substantially likely to result in injury either to himself or herself, or to others. In the present case, we are satisfied that the District Court, in enjoining the state and local defendants from indefinitely suspending respondent or otherwise unilaterally altering his then current placement, properly balanced respondent’s interest in receiving a free appropriate public education in accordance with the procedures and requirements of the EHA against the interests of the state and local school officials in maintaining a safe learning environment for all their students. 1.10
IV
We believe the courts below properly construed and applied § 1415(e)(3), except insofar as the Court of Appeals held that a suspension in excess of 10 schooldays does not constitute [484 U.S. 305, 329] a “change in placement.” 1.11 We therefore affirm the Court of Appeals’ judgment on this issue as modified herein. Because we are equally divided on the question whether a court may order a State to provide services directly to a disabled child where the local agency has failed to do so, we affirm the Court of Appeals’ judgment on this issue as well.
Affirmed.
Footnotes
[ 1.1 ] Congress’ earlier efforts to ensure that disabled students received adequate public education had failed in part because the measures it adopted were largely hortatory. In the 1966 amendments to the Elementary and Secondary Education Act of 1965, Congress established a grant program “for the purpose of assisting the States in the initiation, expansion, and improvement of programs and projects . . . for the education of handicapped children.” Pub. L. 89-750, § 161, 80 Stat. 1204. It repealed that program four years later and replaced it with the original version of the Education of the Handicapped Act, Pub. L. 91-230, 84 Stat. 175, Part B of which contained a similar grant program. Neither statute, however, provided specific guidance as to how States were to use the funds, nor did they condition the availability of the grants on compliance with any procedural or substantive safeguards. In amending the EHA to its present form, Congress rejected its earlier policy of “merely establish[ing] an unenforceable goal requiring all children to be in school.” 121 Cong. Rec. 37417 (1975) (remarks of Sen. Schweiker). Today, all 50 States and the District of Columbia receive funding assistance under the EHA. U.S. Dept. of Education, Ninth Annual Report to Congress on Implementation of Education of the Handicapped Act (1987).
[ 1.2 ] California law at the time empowered school principals to suspend students for no more than five consecutive schooldays, Cal. Educ. Code Ann. § 48903(a) (West 1978), but permitted school districts seeking to expel a suspended student to “extend the suspension until such time as [expulsion proceedings were completed]; provided, that [it] has determined that the presence of the pupil at the school or in an alternative school placement would cause a danger to persons or property or a threat of disrupting the instructional process.” § 48903(h). The State subsequently amended the law to permit school districts to impose longer initial periods of suspension. See n. 3, infra.
[ 1.3 ] In 1983, the State amended its Education Code to permit school districts to impose initial suspensions of 20, and in certain circumstances, 30 schooldays. Cal. Educ. Code Ann. §§ 48912(a), 48903 (West Supp. 1988). The legislature did not alter the indefinite suspension authority which the [484 U.S. 305, 317] SPC exercised in this case, but simply incorporated the earlier provision into a new section. See § 48911(g).
[ 1.4 ] At the time respondent Doe initiated this suit, Wilson Riles was the California Superintendent of Public Instruction. Petitioner Honig succeeded him in office.
[ 1.5 ] We note that both petitioner and respondents believe that this case presents a live controversy. See Tr. of Oral Arg. 6, 27-31. Only the United States, appearing as amicus curiae, urges that the case is presently nonjusticiable. Id., at 21.
[ 1.6 ] Notwithstanding respondent’s undisputed right to a free appropriate public education in California, JUSTICE SCALIA argues in dissent that there is no “demonstrated probability” that Smith will actually avail himself of that right because his counsel was unable to state affirmatively during oral argument that her client would seek to reenter the state school system. See post, at 337. We believe the dissent overstates the stringency of the “capable of repetition” test. Although JUSTICE SCALIA equates “reasonable expectation” with “demonstrated probability,” the very case he cites for this proposition described these standards in the disjunctive, see Murphy v. Hunt, 455 U.S., at 482 (“[T]here must be a ‘reasonable expectation’ or a ‘demonstrated probability’ that the same controversy will [484 U.S. 305, 319] recur” (emphasis added)), and in numerous cases decided both before and since Hunt we have found controversies capable of repetition based on expectations that, while reasonable, were hardly demonstrably probable. See, e.g., Burlington Northern R. Co. v. Maintenance of Way Employes, 481 U.S. 429, 436, n. 4 (1987) (parties “reasonably likely” to find themselves in future disputes over collectivebargaining agreement); California Coastal Comm’n v. Granite Rock Co., 480 U.S. 572, 578 (1987) (O’CONNOR, J.) (“likely” that respondent would again submit mining plans that would trigger contested state permit requirement); Press-Enterprise Co. v. Superior Court of Cal., Riverside County, 478 U.S. 1, 6 (1986) (“It can reasonably be assumed” that newspaper publisher will be subjected to similar closure order in the future); Globe Newspaper Co. v. Superior Court of Norfolk County, 457 U.S. 596, 603 (1982) (same); United States Parole Comm’n v. Geraghty, 445 U.S. 388, 398 (1980) (case not moot where litigant “faces some likelihood of becoming involved in same controversy in the future”) (dicta). Our concern in these cases, as in all others involving potentially moot claims, was whether the controversy was capable of repetition and not, as the dissent seems to insist, whether the claimant had demonstrated that a recurrence of the dispute was more probable than not. Regardless, then, of whether respondent has established with mathematical precision the likelihood that he will enroll in public school during the next two years, we think there is at the very least a reasonable expectation that he will exercise his rights under the EHA. In this regard, we believe respondent’s actions over the course of the last seven years speak louder than his counsel’s momentary equivocation during oral argument. Since 1980, he has sought to vindicate his right to an appropriate public education that is not only free of charge, but also free from the threat that school officials will unilaterally change his placement or exclude him from class altogether. As a disabled young man, he has as at least as great a need of a high school education and diploma as any of his peers, and his counsel advises us that he is awaiting the outcome of this case to decide whether to pursue his degree. Tr. Oral Arg. 23-24. Under these circumstances, we think it not only counterintuitive but also unreasonable to assume that respondent will forgo the exercise of a right that he has for so long sought to defend. Certainly we have as much reason to expect that respondent will reenter the California school system as we had to assume that Jane Roe would again both have an unwanted pregnancy and wish to exercise her right to an abortion. See Roe v. Wade, 410 U.S. 113, 125 (1973).
[ 1.7 ] Petitioner concedes that the school district “made a number of procedural mistakes in its eagerness to protect other students from Doe and Smith.” Reply Brief for Petitioner 6. According to petitioner, however, unilaterally excluding respondents from school was not among them; indeed, petitioner insists that the SFUSD acted properly in removing respondents and urges that the stay-put provision “should not be interpreted to require a school district to maintain such dangerous children with other children.” Id., at 6-7.
[ 1.8 ] The Department of Education has adopted the position first espoused in 1980 by its Office of Civil Rights that a suspension of up to 10 schooldays does not amount to a “change in placement” prohibited by § 1415(e)(3). U.S. Dept. of Education, Office of Special Education Programs, Policy Letter (Feb. 26, 1987), Ed. for Handicapped L. Rep. 211:437 (1987). The EHA nowhere defines the phrase “change in placement,” nor does the statute’s structure or legislative history provide any guidance as to how the term applies to fixed suspensions. Given this ambiguity, we defer to the construction adopted by the agency charged with monitoring and enforcing the statute. See INS v. Cardoza-Fonseca, 480 U.S. 421, 448 (1987). Moreover, the agency’s position comports fully with the purposes of the statute: Congress sought to prevent schools from permanently and unilaterally excluding disabled children by means of indefinite suspensions and [484 U.S. 305, 326] expulsions; the power to impose fixed suspensions of short duration does not carry the potential for total exclusion that Congress found so objectionable. Indeed, despite its broad injunction, the District Court in Mills v. Board of Education of District of Columbia, 348 F. Supp. 866 (DC 1972), recognized that school officials could suspend disabled children on a short-term, temporary basis. See id, at 880. Cf. Goss v. Lopez, 419 U.S. 565, 574-576 (1975) (suspension of 10 schooldays or more works a sufficient deprivation of property and liberty interests to trigger the protections of the Due Process Clause). Because we believe the agency correctly determined that a suspension in excess of 10 days does constitute a prohibited “change in placement,” we conclude that the Court of Appeals erred to the extent it approved suspensions of 20 and 30 days’ duration.
[ 1.9 ] Petitioner also notes that in California, schools may not suspend any given student for more than a total of 20, and in certain special circumstances 30, schooldays in a single year, see Cal. Educ. Code Ann. § 48903 (West Supp. 1988); he argues, therefore, that a school district may not have the option of imposing a 10-day suspension when dealing with an obstreperous child whose previous suspensions for the year total 18 or 19 days. The fact remains, however, that state law does not define the scope of § 1415(e) (3). There may be cases in which a suspension that is otherwise valid under the stay-put provision would violate local law. The effect [484 U.S. 305, 327] of such a violation, however, is a question of state law upon which we express no view.
[ 1.10 ] We therefore reject the United States’ contention that the District Judge abused her discretion in enjoining the local school officials from indefinitely suspending respondent pending completion of the expulsion proceedings. Contrary to the Government’s suggestion, the District Judge did not view herself bound to enjoin any and all violations of the stay-put provision, but rather, consistent with the analysis we set out above, weighed the relative harms to the parties and found that the balance tipped decidedly in favor of respondent. App. 222-223. We of course do not sit to review the factual determinations underlying that conclusion. We do note, however, that in balancing the parties’ respective interests, the District Judge gave proper consideration to respondent’s rights under the EHA. While the Government complains that the District Court indulged an improper presumption of irreparable harm to respondent, we do not believe that school officials can escape the presumptive effect of the stay-put provision simply by violating it and forcing parents to petition for relief. In any suit brought by parents seeking injunctive relief for a violation of § 1415(e) (3), the burden rests with the school district to demonstrate that the educational status quo must be altered.
[ 1.11 ] See n. 8, supra.
CHIEF JUSTICE REHNQUIST, concurring
I write separately on the mootness issue in this case to explain why I have joined Part II of the Court’s opinion, and why I think reconsideration of our mootness jurisprudence may be in order when dealing with cases decided by this Court.
The present rule in federal cases is that an actual controversy must exist at all stages of appellate review, not merely at the time the complaint is filed. This doctrine was clearly articulated in United States v. Munsingwear, Inc., 340 U.S. 36 (1950), in which Justice Douglas noted that “[t]he established practice of the Court in dealing with a civil case from a court in the federal system which has become moot while on its way here or pending our decision on the merits is to reverse or vacate the judgment below and remand with a direction to dismiss.” Id., at 39. The rule has been followed fairly consistently over the last 30 years. See, e.g., Preiser v. Newkirk, 422 U.S. 395 (1975); SEC v. Medical Committee for Human Rights, 404 U.S. 403 (1972).
All agree that this case was “very much alive,” ante, at 317, when the action was filed in the District Court, and very probably when the Court of Appeals decided the case. It is supervening events since the decision of the Court of Appeals which have caused the dispute between the majority and the dissent over whether this case is moot. Therefore, all that the Court actually holds is that these supervening events do [484 U.S. 305, 330] not deprive this Court of the authority to hear the case. I agree with that holding, and would go still further in the direction of relaxing the test of mootness where the events giving rise to the claim of mootness have occurred after our decision to grant certiorari or to note probable jurisdiction.
The Court implies in its opinion, and the dissent expressly states, that the mootness doctrine is based upon Art. III of the Constitution. There is no doubt that our recent cases have taken that position. See Nebraska Press Assn. v. Stuart, 427 U.S. 539, 546 (1976); Preiser v. Newkirk, supra, at 401; Sibron v. New York, 392 U.S. 40, 57 (1968); Liner v. Jafco, Inc., 375 U.S. 301, 306, n. 3 (1964). But it seems very doubtful that the earliest case I have found discussing mootness, Mills v. Green, 159 U.S. 651 (1895), was premised on constitutional constraints; Justice Gray’s opinion in that case nowhere mentions Art. III.
If it were indeed Art. III which—by reason of its requirement of a case or controversy for the exercise of federal judicial power—underlies the mootness doctrine, the “capable of repetition, yet evading review” exception relied upon by the Court in this case would be incomprehensible. Article III extends the judicial power of the United States only to cases and controversies; it does not except from this requirement other lawsuits which are “capable of repetition, yet evading review.” If our mootness doctrine were forced upon us by the case or controversy requirement of Art. III itself, we would have no more power to decide lawsuits which are “moot” but which also raise questions which are capable of repetition but evading review than we would to decide cases which are “moot” but raise no such questions.
The exception to mootness for cases which are “capable of repetition, yet evading review,” was first stated by this Court in Southern Pacific Terminal Co. v. ICC, 219 U.S. 498 (1911). There the Court enunciated the exception in the light of obvious pragmatic considerations, with no mention of Art. III as the principle underlying the mootness doctrine: [484 U.S. 305, 331]
“The questions involved in the orders of the Interstate Commerce Commission are usually continuing (as are manifestly those in the case at bar) and their consideration ought not to be, as they might be, defeated, by short term orders, capable of repetition, yet evading review, and at one time the Government and at another time the carriers have their rights determined by the Commission without a chance of redress.” Id., at 515.
The exception was explained again in Moore v. Ogilvie, 394 U.S. 814, 816 (1969):
The exception was explained again in Moore v. Ogilvie, 394 U.S. 814, 816 (1969): “The problem is therefore ‘capable of repetition, yet evading review.’ The need for its resolution thus reflects a continuing controversy in the federal-state area where our ‘one man, one vote’ decisions have thrust” (citation omitted).
It is also worth noting that Moore v. Ogilvie involved a question which had been mooted by an election, just as did Mills v. Green some 74 years earlier. But at the time of Mills, the case originally enunciating the mootness doctrine, there was no thought of any exception for cases which were “capable of repetition, yet evading review.”
The logical conclusion to be drawn from these cases, and from the historical development of the principle of mootness, is that while an unwillingness to decide moot cases may be connected to the case or controversy requirement of Art. III, it is an attenuated connection that may be overridden where there are strong reasons to override it. The “capable of repetition, yet evading review” exception is an example. So too is our refusal to dismiss as moot those cases in which the defendant voluntarily ceases, at some advanced stage of the appellate proceedings, whatever activity prompted the plaintiff to seek an injunction. See, e.g., City of Mesquite v. Aladdin’s Castle, Inc., 455 U.S. 283, 289, n. 10 (1982); United States v. W. T. Grant Co., 345 U.S. 629, 632 (1953). I believe that we should adopt an additional exception to our [484 U.S. 305, 332] present mootness doctrine for those cases where the events which render the case moot have supervened since our grant of certiorari or noting of probable jurisdiction in the case. Dissents from denial of certiorari in this Court illustrate the proposition that the roughly 150 or 160 cases which we decide each year on the merits are less than the number of cases warranting review by us if we are to remain, as Chief Justice Taft said many years ago, “the last word on every important issue under the Constitution and the statutes of the United States.” But these unique resources—the time spent preparing to decide the case by reading briefs, hearing oral argument, and conferring—are squandered in every case in which it becomes apparent after the decisional process is underway that we may not reach the question presented. To me the unique and valuable ability of this Court to decide a case—we are, at present, the only Art. III court which can decide a federal question in such a way as to bind all other courts—is a sufficient reason either to abandon the doctrine of mootness altogether in cases which this Court has decided to review, or at least to relax the doctrine of mootness in such a manner as the dissent accuses the majority of doing here. I would leave the mootness doctrine as established by our cases in full force and effect when applied to the earlier stages of a lawsuit, but I believe that once this Court has undertaken a consideration of a case, an exception to that principle is just as much warranted as where a case is “capable of repetition, yet evading review.”
JUSTICE SCALIA, with whom JUSTICE O’CONNOR joins, dissenting.
Without expressing any views on the merits of this case, I respectfully dissent because in my opinion we have no authority to decide it. I think the controversy is moot.
I
The Court correctly acknowledges that we have no power under Art. III of the Constitution to adjudicate a case that no [484 U.S. 305, 333] longer presents an actual, ongoing dispute between the named parties. Ante, at 317, citing Nebraska Press Assn. v. Stuart, 427 U.S. 539, 546 (1976); Preiser v. Newkirk, 422 U.S. 395, 401 (1975). Here, there is obviously no present controversy between the parties, since both respondents are no longer in school and therefore no longer subject to a unilateral “change in placement.” The Court concedes mootness with respect to respondent John Doe, who is now too old to receive the benefits of the Education of the Handicapped Act (EHA). Ante, at 318. It concludes, however, that the case is not moot as to respondent Jack Smith, who has two more years of eligibility but is no longer in the public schools, because the controversy is “capable of repetition, yet evading review.” Ante, at 318-323.
Jurisdiction on the basis that a dispute is “capable of repetition, yet evading review” is limited to the “exceptional situatio[n],” Los Angeles v. Lyons, 461 U.S. 95, 109 (1983), where the following two circumstances simultaneously occur: “‘(1) the challenged action [is] in its duration too short to be fully litigated prior to its cessation or expiration, and (2) there [is] a reasonable expectation that the same complaining party would be subjected to the same action again.’” Murphy v. Hunt, 455 U.S. 478, 482 (1982) (per curiam), quoting Weinstein v. Bradford, 423 U.S. 147, 149 (1975) (per curiam). The second of these requirements is not met in this case.
For there to be a “reasonable expectation” that Smith will be subjected to the same action again, that event must be a “demonstrated probability.” Murphy v. Hunt, supra, at 482, 483; Weinstein v. Bradford, supra, at 149. I am surprised by the Court’s contention, fraught with potential for future mischief, that “reasonable expectation” is satisfied by something less than “demonstrated probability.” Ante, at 318-319, n. 6. No one expects that to happen which he does not think probable; and his expectation cannot be shown to be reasonable unless the probability is demonstrated. Thus, as the Court notes, our cases recite the two descriptions side by [484 U.S. 305, 334] side (“a ‘reasonable expectation’ or a ‘demonstrated probability,’” Hunt, supra, at 482). The Court asserts, however, that these standards are “described . . . in the disjunctive,” ante, at 318-319, n. 6—evidently believing that the conjunction “or” has no accepted usage except a disjunctive one, i.e., “expressing an alternative, contrast, or opposition,” Webster’s Third New International Dictionary 651 (1981). In fact, however, the conjunction is often used “to indicate . . . (3) the synonymous, equivalent, or substitutive character of two words or phrases ; (4) correction or greater exactness of phrasing or meaning .” Id., at 1585. It is obvious that in saying “a reasonable expectation or a demonstrated probability” we have used the conjunction in one of the latter, or nondisjunctive, senses. Otherwise (and according to the Court’s exegesis), we would have been saying that a controversy is sufficiently likely to recur if either a certain degree of probability exists or a higher degree of probability exists. That is rather like a statute giving the vote to persons who are “18 or 21.” A bare six years ago, the author of today’s opinion and one other Member of the majority plainly understood “reasonable expectation” and “demonstrated probability” to be synonymous. Cf. Edgar v. MITE Corp., 457 U.S. 624, 662, and n. 11 (1982) (MARSHALL, J., dissenting, joined by BRENNAN, J.) (using the two terms here at issue interchangeably, and concluding that the case is moot because “there is no demonstrated probability that the State will have occasion to prevent MITE from making a takeover offer for some other corporation”) (emphasis added).
The prior holdings cited by the Court in a footnote, see ante, at 319, n. 6, offer no support for the novel proposition that less than a probability of recurrence is sufficient to avoid mootness. In Burlington Northern R. Co. v. Maintenance of Way Employes, 481 U.S. 429, 436, n. 4 (1987), we found [484 U.S. 305, 335] that the same railroad and union were “reasonably likely” to find themselves in a recurring dispute over the same issue. Similarly, in California Coastal Comm’n v. Granite Rock Co., 480 U.S. 572, 578 (1987), we found it “likely” that the plaintiff mining company would submit new plans which the State would seek to subject to its coastal permit requirements. See Webster’s Third New International Dictionary 1310 (1981) (defining “likely” as “of such a nature or so circumstanced as to make something probable[;] . . . seeming to justify belief or expectation[;] . . . in all probability”). In the cases involving exclusion orders issued to prevent the press from attending criminal trials, we found that “[i]t can reasonably be assumed” that a news organization covering the area in which the defendant court sat will again be subjected to that court’s closure rules. PressEnterprise Co. v. Superior Court of Cal., Riverside County, 478 U.S. 1, 6 (1986); Globe Newspaper Co. v. Superior Court of Norfolk County, 457 U.S. 596, 603 (1982). In these and other cases, one may quarrel, perhaps, with the accuracy of the Court’s probability assessment; but there is no doubt that assessment was regarded as necessary to establish jurisdiction.
In Roe v. Wade, 410 U.S. 113, 125 (1973), we found that the “human gestation period is so short that the pregnancy will come to term before the usual appellate process is complete,” so that “pregnancy litigation seldom will survive much beyond the trial stage, and appellate review will be effectively denied.” Roe, at least one other abortion case, see Doe v. Bolton, 410 U.S. 179, 187 (1973), and some of our election law decisions, see Rosario v. Rockefeller, 410 U.S. 752, 756, n. 5 (1973); Dunn v. Blumstein, 405 U.S. 330, 333, n. 2 (1972), differ from the body of our mootness jurisprudence not in accepting less than a probability that the issue will recur, in a manner evading review, between the same parties; but in dispensing with the same-party requirement entirely, focusing instead upon the great likelihood that the issue will recur between the defendant and the other members [484 U.S. 305, 336] of the public at large without ever reaching us. Arguably those cases have been limited to their facts, or to the narrow areas of abortion and election rights, by our more recent insistence that, at least in the absence of a class action, the “capable of repetition” doctrine applies only where “there [is] a ‘reasonable expectation’” that the “same complaining party” would be subjected to the same action again. Hunt, 455 U.S., at 482 (emphasis added), quoting Weinstein, 423 U.S., at 149; see Burlington Northern R. Co., supra, at 436, n. 4; Illinois Elections Bd. v. Socialist Workers Party, 440 U.S. 173, 187 (1979). If those earlier cases have not been so limited, however, the conditions for their application do not in any event exist here. There is no extraordinary improbability of the present issue’s reaching us as a traditionally live controversy. It would have done so in this very case if Smith had not chosen to leave public school. In sum, on any analysis, the proposition the Court asserts in the present case— that probability need not be shown in order to establish the “same-party-recurrence” exception to mootness—is a significant departure from settled law.
II
If our established mode of analysis were followed, the conclusion that a live controversy exists in the present case would require a demonstrated probability that all of the following events will occur: (1) Smith will return to public school; (2) he will be placed in an educational setting that is unable to tolerate his dangerous behavior; (3) he will again engage in dangerous behavior; and (4) local school officials will again attempt unilaterally to change his placement and the state defendants will fail to prevent such action. The Court spends considerable time establishing that the last two of these events are likely to recur, but relegates to a footnote its discussion of the first event, upon which all others depend, and only briefly alludes to the second. Neither the facts in [484 U.S. 305, 337] the record, nor even the extrarecord assurances of counsel, establish a demonstrated probability of either of them.
With respect to whether Smith will return to school, at oral argument Smith’s counsel forthrightly conceded that she “cannot represent whether in fact either of these students will ask for further education from the Petitioners.” Tr. of Oral Arg. 23. Rather, she observed, respondents would “look to [our decision in this case] to find out what will happen after that.” Id., at 23-24. When pressed, the most counsel would say was that, in her view, the 20-year-old Smith could seek to return to public school because he has not graduated, he is handicapped, and he has a right to an education. Id., at 27. I do not perceive the principle that would enable us to leap from the proposition that Smith could reenter public school to the conclusion that it is a demonstrated probability he will do so.
The Court nevertheless concludes that “there is at the very least a reasonable expectation” that Smith will return to school. Ante, at 319, n. 6. I cannot possibly dispute that on the basis of the Court’s terminology. Once it is accepted that a “reasonable expectation” can exist without a demonstrable probability that the event in question will occur, the phrase has been deprived of all meaning, and the Court can give it whatever application it wishes without fear of effective contradiction. It is worth pointing out, however, how slim are the reeds upon which this conclusion of “reasonable expectation” (whatever that means) rests. The Court bases its determination on three observations from the record and oral argument. First, it notes that Smith has been pressing this lawsuit since 1980. It suffices to observe that the equivalent argument can be made in every case that remains active and pending; we have hitherto avoided equating the existence of a case or controversy with the existence of a lawsuit. Second, the Court observes that Smith has “as great a need of a high school education and diploma as any of his peers.” Ibid. While this is undoubtedly good advice, it hardly establishes [484 U.S. 305, 338] that the 20-year-old Smith is likely to return to high school, much less to public high school. Finally, the Court notes that counsel “advises us that [Smith] is awaiting the outcome of this case to decide whether to pursue his degree.” Ibid. Not only do I not think this establishes a current case or controversy, I think it a most conclusive indication that no current case or controversy exists. We do not sit to broaden decisionmaking options, but to adjudicate the lawfulness of acts that have happened or, at most, are about to occur.
The conclusion that the case is moot is reinforced, moreover, when one considers that, even if Smith does return to public school, the controversy will still not recur unless he is again placed in an educational setting that is unable to tolerate his behavior. It seems to me not only not demonstrably probable, but indeed quite unlikely, given what is now known about Smith’s behavioral problems, that local school authorities would again place him in an educational setting that could not control his dangerous conduct, causing a suspension that would replicate the legal issues in this suit. The majority dismisses this further contingency by noting that the school authorities have an obligation under the EHA to provide an “appropriate” education in “the least restrictive environment.” Ante, at 321. This means, however, the least restrictive environment appropriate for the particular child. The Court observes that “the preparation of an [individualized educational placement]” is “an inexact science at best,” ibid., thereby implying that the school authorities are likely to get it wrong. Even accepting this assumption, which seems to me contrary to the premises of the Act, I see no reason further to assume that they will get it wrong by making the same mistake they did last time— assigning Smith to too unrestrictive an environment, from which he will thereafter be suspended— rather than by assigning him to too restrictive an environment. The latter, which seems to me more likely than the former (though both combined are much less likely than a correct placement), might produce a lawsuit, [484 U.S. 305, 339] but not a lawsuit involving the issues that we have before us here.
III
THE CHIEF JUSTICE joins the majority opinion on the ground, not that this case is not moot, but that where the events giving rise to the mootness have occurred after we have granted certiorari we may disregard them, since mootness is only a prudential doctrine and not part of the “case or controversy” requirement of Art. III. I do not see how that can be. There is no more reason to intuit that mootness is merely a prudential doctrine than to intuit that initial standing is. Both doctrines have equivalently deep roots in the common-law understanding, and hence the constitutional understanding, of what makes a matter appropriate for judicial disposition. See Flast v. Cohen, 392 U.S. 83, 95 (1968) (describing mootness and standing as various illustrations of the requirement of “justifiability” in Art. III).
THE CHIEF JUSTICE relies upon the fact that an 1895 case discussing mootness, Mills v. Green, 159 U.S. 651, makes no mention of the Constitution. But there is little doubt that the Court believed the doctrine called into question the Court’s power and not merely its prudence, for (in an opinion by the same Justice who wrote Mills) it had said two years earlier:
“[T]he court is not empowered to decide moot questions or abstract propositions, or to declare . . . principles or rules of law which cannot affect the result as to the thing in issue in the case before it. No stipulation of parties or counsel . . . can enlarge the power, or affect the duty, of the court in this regard.” California v. San Pablo & Tulare R. Co., 149 U.S. 308, 314 (1893) (Gray, J.) (emphasis added).
If it seems peculiar to the modern lawyer that our 19th-century mootness cases make no explicit mention of Art. III, that is a peculiarity shared with our 19th-century, and even [484 U.S. 305, 340] our early 20th-century, standing cases. As late as 1919, in dismissing a suit for lack of standing we said simply:
“Considerations of propriety, as well as long-established practice, demand that we refrain from passing upon the constitutionality of an act of Congress unless obliged to do so in the proper performance of our judicial function, when the question is raised by a party whose interests entitle him to raise it.” Blair v. United States, 250 U.S. 273, 279.
See also, e.g., Standard Stock Food Co. v. Wright, 225 U.S. 540, 550 (1912); Southern R. Co. v. King, 217 U.S. 524, 534 (1910); Turpin v. Lemon, 187 U.S. 51, 60-61 (1902); Tyler v. Judges of Court of Registration, 179 U.S. 405, 409 (1900). The same is also true of our early cases dismissing actions lacking truly adverse parties, that is, collusive actions. See, e.g., Cleveland v. Chamberlain, 1 Black 419, 425-426 (1862); Lord v. Veazie, 8 How. 251, 254-256 (1850). The explanation for this ellipsis is that the courts simply chose to refer directly to the traditional, fundamental limitations upon the powers of common-law courts, rather than referring to Art. III which in turn adopts those limitations through terms (“The judicial Power”; “Cases”; “Controversies”) that have virtually no meaning except by reference to that tradition. The ultimate circularity, coming back in the end to tradition, is evident in the statement by Justice Field:
“By cases and controversies are intended the claims of litigants brought before the courts for determination by such regular proceedings as are established by law or custom for the protection or enforcement of rights, or the prevention, redress, or punishment of wrongs. Whenever the claim of a party under the constitution, laws, or treaties of the United States takes such a form that the judicial power is capable of acting upon it, then it has become a case.” In re Pacific Railway Comm’n, 32 F. 241, 255 (CC ND Cal. 1887). [484 U.S. 305, 341]
See also 2 M. Farrand, Records of the Federal Convention of 1787, p. 430 (rev. ed. 1966):
“Docr. Johnson moved to insert the words ‘this Constitution and the’ before the word ‘laws.’
“Mr. Madison doubted whether it was not going too far to extend the jurisdiction of the Court generally to cases arising Under the Constitution, & whether it ought not to be limited to cases of a Judiciary Nature. The right of expounding the Constitution in cases not of this nature ought not to be given to that Department.
“The motion of Docr. Johnson was agreed to nem: con: it being generally supposed that the jurisdiction given was constructively limited to cases of a Judiciary nature.”
In sum, I cannot believe that it is only our prudence, and nothing inherent in the understood nature of “The judicial Power,” U.S. Const., Art. III, § 1, that restrains us from pronouncing judgment in a case that the parties have settled, or a case involving a nonsurviving claim where the plaintiff has died, or a case where the law has been changed so that the basis of the dispute no longer exists, or a case where conduct sought to be enjoined has ceased and will not recur. Where the conduct has ceased for the time being but there is a demonstrated probability that it will recur, a real-life controversy between parties with a personal stake in the outcome continues to exist, and Art. III is no more violated than it is violated by entertaining a declaratory judgment action. But that is the limit of our power. I agree with THE CHIEF JUSTICE to this extent: the “yet evading review” portion of our “capable of repetition, yet evading review” test is prudential; whether or not that criterion is met, a justiciable controversy exists. But the probability of recurrence between the same parties is essential to our jurisdiction as a court, and it is that deficiency which the case before us presents.
It is assuredly frustrating to find that a jurisdictional impediment prevents us from reaching the important merits [484 U.S. 305, 342] issues that were the reason for our agreeing to hear this case. But we cannot ignore such impediments for purposes of our appellate review without simultaneously affecting the principles that govern district courts in their assertion or retention of original jurisdiction. We thus do substantial harm to a governmental structure designed to restrict the courts to matters that actually affect the litigants before them. [484 U.S. 305, 343] | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/04%3A_The_Fourteenth_Amendment/4.02%3A_New_Page.txt |
Learning Objectives
Stewart v. Board of Ed. of Ritenour
630 S.W.2d 130 (1982)
Missouri Court of Appeals, Eastern District, Division Four, Docket No. 42331
Argued: January 5, 1982 Motions for Rehearing or to Transfer Denied: February 19, 1982
Dorothy STEWART, Respondent, v. BOARD OF EDUCATION OF RITENOUR CONSOLIDATED SCHOOL DISTRICT, R-3, et al., Appellants
Attorney(s) appearing for the Case
[630 S.W.2d 131] Donald L. James, St. Louis, for respondent.
George J. Bude, Clayton, for appellants.
Motions for Rehearing or to Transfer to Supreme Court Denied February 19, 1982.
SIMON, Judge.
This teacher termination case comes before our court for the third time in five years. 1.1 On this appeal, the issues before our court relate to the proper measure of damages. The trial court awarded respondent Dorothy Stewart \$108,948.01 in damages. 1.2 Appellant Board of Education of [630 S.W.2d 132] Ritenour Consolidated School District (Board) contends that the trial court erred (1) in finding that Stewart could not have mitigated her damages; (2) in restoring thirty days of sick leave pay to Stewart because this issue had been previously litigated; (3) in awarding Stewart compensation for the loss of her teacher’s hospitalization insurance policy because Stewart did not, in fact, sustain any damages resulting from the loss; (4) in awarding Stewart \$500 to pay the fee and expenses of an expert witness because the amount was unreasonable; and (5) in awarding excessive attorney’s fees. We affirm in part and reverse in part.
In 1974, Dorothy Stewart, by virtue of having taught in the Ritenour School District since 1959, was a permanent teacher under the Teacher Tenure Act, § 168.104(4) RSMo.1969. 1.3 In June of 1974 the Board terminated Stewart’s teaching contract. Stewart contested her termination. As justification for Stewart’s discharge, the Board claimed that during the previous five years she had been excessively absent from work. The trial court upheld the Board’s actions. Our court reversed and remanded, finding that the Board’s findings of fact and conclusions of law were insufficient. On remand, the trial court found that the Board had wrongfully discharged Stewart and ordered the Board to reinstate her at the salary level she would have attained had the Board not wrongfully discharged her. The trial court also awarded Stewart damages in the form of back pay plus 6% interest.
In the second Stewart case before our court, we affirmed the trial court’s reinstatement order, holding that the Board had wrongfully discharged Stewart. We remanded the cause for a determination of the amount by which Stewart could have mitigated her damages. On remand, Stewart stated that she had made no efforts to secure any type of teaching position during the five years that she was unemployed. The trial court refused to reduce the Board’s damages, awarding Stewart \$108,948.01.
Our preliminary inquiry concerns whether there was sufficient evidence to support the trial court’s findings of fact. Appellate review of a court tried case is limited. We must sustain the trial court’s judgment, “unless there is no substantial evidence to support it, unless it is against the weight of the evidence, unless it erroneously declares the law, or unless it erroneously applies the law.” Murphy v. Carron, 536 S.W.2d 30, 31 (Mo. banc 1976). The court found that Stewart had been a tenured teacher in the Ritenour School District, but that she could not have obtained a tenured or non-tenured position in another district. As to the non-tenured position, the court found:
“3. If plaintiff had sought a non-tenured position in any other School District, she could only have done so by signing a one year contract in such District, and would have been compelled upon her reinstatement to either breach the contract with such District or to refuse reinstatement at Ritenour. . . .”
After reviewing the entire record, we are convinced that there is no substantial evidence to support the trial court’s third finding of fact. There was simply no evidence before the trial court that Stewart’s taking a non-tenured teaching position would have placed her in the dilemma of deciding whether to refuse reinstatement or to breach her contract. The evidence merely showed that another school district would expect Stewart to complete a one year contract. There is no evidence to support the dilemma which the trial court found.
This determination does not dispose of the case. While we cannot act as a trial [630 S.W.2d 133] court, we recognize that our primary concern is the correctness of the trial court’s decision, not its reasoning. Our brethren in the western district, in a similar situation stated:
“When this Court considers the evidence before it, under the searchlight of controlling law, and the reasonable conclusion and inferences to be drawn therefrom, and, in so doing, concludes that in a bench-tried case the proper result was reached, the judgment or decree should be affirmed. And this is true even though the trial court may have assigned incorrect or erroneous legal or factual reasons for its judgment.” (emphasis added) Kenilworth Insurance Co. v. Cole, 587 S.W.2d 93, 96 (Mo.App.1979).
Our court has reached a similar conclusion. Koedding v. N. B. West Contracting Co., 596 S.W.2d 744, 747 (Mo.App.1980), (“judgment of the trial court will be affirmed if based upon erroneous reasoning.”) We believe that the record supports the decision reached by the trial court concerning the issue of mitigation of damages.
The Board contends that Stewart failed to use reasonable diligence to secure similar employment. In Wolf v. Missouri State Training School for Boys, 517 S.W.2d 138, 142-43 (Mo. banc 1974), our Supreme Court stated: “the employer . . . [may] reduce damages recoverable by a wrongfully discharged employee by whatever the employee has earned or by reasonable diligence could have earned during the period of wrongful discharge.” (citations omitted) Wolf, supra, at 143. Wolf involved a wrongfully discharged state corrections officer. Our court, following Wolf, supra, held that the doctrine of mitigation applies to wrongfully discharged teachers protected under the Teacher Tenure Act, §§ 168.102-168.130. Stewart v. Board of Education of Ritenour Consolidated School District, 574 S.W.2d 471, 474-75 (Mo.App.1978).
A great deal of confusion surrounds the doctrine of mitigation. While it is often stated that the employee has the “duty” to mitigate damages, this characterization is misleading. As Professor Corbin notes, “The law does not penalize . . . [plaintiff ’s] inaction; it merely does nothing to compensate... [plaintiff] for the loss that he helped to cause by not avoiding it.” 5 Corbin on Contracts § 1039 (1954). See also Reinstatement (Second) of Contracts § 336, Comment d. Thus, the doctrine of avoidable consequences is the basis for most rules of general damages. Missouri law is in clear agreement with that of the overwhelming majority or jurisdictions to the effect that the Board has the burden of proving that Stewart could have mitigated her damages. See Lynch v. Webb City School District, 373 S.W.2d 193, 199 (Mo. App.1963); Curlee v. Donaldson, 233 S.W.2d 746, 757 (Mo.App.1950); Miller v. Woolman Todd Boot & Shoe Co., 26 Mo.App. 57 (1887); 11 Williston on Contracts § 1360 (1980). However, the crucial question concerns the precise elements of this burden and its application to the specific facts adduced at trial. We have been unable to discover any Missouri cases concerning mitigation of damages in employment contracts that elucidate the extent and nature of the Board’s burden of proof. In reaching our decision we have relied on our courts’ holdings in analogous situations, and have taken note of similar cases decided in other jurisdictions.
In Curlee v. Donaldson, supra, our court addressed the burden of proof issue. In Curlee, defendant’s lumberjack wrongfully entered onto plaintiff ’s property and cut down a substantial number of trees, many of which they left lying on plaintiff ’s property. In plaintiff ’s suit for damages defendant claimed that plaintiff had the duty to mitigate and that the recovery should have been reduced by the amount of money that plaintiff could have received from a sale of the remaining cut timber. Defendant offered no evidence on mitigation and our court rejected the argument, holding that:
“The burden is on the party claiming the allowance to introduce evidence which shows the opportunity the injured party had to dispose of the property and the [630 S.W.2d 134] reasonable amount which he could have received...” Curlee, supra, at 757 (emphasis added).
The Curlee 1.4 holding makes it clear that the defendant has the burden of proving that plaintiff ’s recovery should be reduced for failing to mitigate. Under Curlee, the Board must show not only that Stewart failed to mitigate, but that Stewart had an opportunity to mitigate. Furthermore, McCormick states, “It is not enough for the employer to prove that the plaintiff made no effort to get other employment, but he must go further and prove that such employment could have been secured.” McCormick, Damages 628 (1975 reprint)
In Ryan v. Superintendent of Schools of Quincy, 374 Mass. 670, 373 N.E.2d 1178, 1181 (1978), the Massachusetts Supreme Court outlined the defendant’s burden:
“A former employer meets its burden of proof of ‘mitigation of damages’ if the employer proves that (a) one or more discoverable opportunities for comparable employment were available in a location as, or more convenient than, the place of former employment, (b) the improperly discharged employee unreasonably made no attempt to apply for any such job, and (c) it was reasonably likely that the former employee would obtain one of those comparable jobs.”
We believe the test enunciated in Ryan dovetails with our court’s holding in Curlee. Apparently, the Board also believes that this test represents the applicable standard because the Board urges our court to adopt the identical rule as set forth in Black v. School Committee of Malden, 369 Mass. 657, 341 N.E.2d 896 (1976).
In Ryan, defendant school committee wrongfully discharged plaintiff Ryan, a fifty nine year old art teacher. After winning reinstatement, Ryan sought damages in the form of back pay. As in the case at bar, Ryan did not apply for any teaching positions during the five years of her unemployment. The court stated that “[t]his fact alone . . . is not sufficient to establish that the employee could have mitigated damages.” Ryan, supra 373 N.E.2d at 1182.
The court proceeded to examine the facts of the case to determine whether “it was reasonably likely that Ryan could have obtained a comparable job.” Id. The court noted that the facts indicated that during the period in question the number of art teachers greatly exceeded demand. The court also noted that Ryan would not have been able to get favorable references from her former employer. Finally, the court concluded that Ryan’s age would probably have been viewed unfavorably by any prospective employers. On these facts the court held that “the defendants did not sustain their burden of proving that it was ‘reasonably likely that the former employee would obtain one of . . . [the] comparable jobs.’” Ryan, supra, 373 N.E.2d at 1183.
Likewise, we do not believe that the Board met their burden of proof. The evidence introduced at trial reveals that there were teaching jobs available in the St. Louis area during Stewart’s period of unemployment for which she was qualified. The Board presented three witnesses who were in charge of hiring teaching personnel in different metropolitan school districts. They testified that in every year from 1974 to 1979, each of their districts hired from zero to 27 teachers in Stewart’s subject area. Generally, the number of applicants exceeded the number of vacancies. For example, Dr. Burchard Neel, Associate Superintendent for Personnel for the St. Louis Public Schools, testified that in 1976 when the St. Louis Public Schools hired 27 teachers there were several hundred applicants. The witnesses further testified that from 1974 to 1979 none of their districts had hired a teacher in Stewart’s age bracket, with Stewart’s qualifications, who had been discharged from another district. None of [630 S.W.2d 135] the evidence indicated that there was a reasonable likelihood that Stewart could have received a teaching position. In fact, the evidence indicated that Stewart’s chances of finding a teaching job were slim at best. Stewart was a fifty-five year old tenured teacher with fifteen years experience and a Masters degree plus thirty hours, who had been discharged for excessive absences. It is reasonable to conclude that Stewart’s age, though not determinative in any hiring decision, would probably not have been viewed favorably by prospective employers. The three administrators from the other metropolitan school districts testified that if their district hired a teacher with Stewart’s qualifications the teacher would be “credited” with five to ten years experience in the district for purposes of determining the teacher’s salary. Salary schedules introduced into evidence showed that the salary of a teacher with Stewart’s qualifications would be \$4,125 to \$6,400 greater than that of a new teacher.
We recognize that the Board did not have to prove conclusively that Stewart would have obtained a comparable job, but it did have to show that it was reasonably likely that she would have obtained such a job. Although Stewart was not required to prove that she would have been unable to find a teaching position, she did present evidence for this point. Dr. Ellen Harshman, Director of Career Planning and Placement at St. Louis University, testified that a person in Stewart’s position would have “very poor” possibilities. Viewing the record in its entirety, we conclude that the Board did not meet its burden of proof. Our holding should not be construed to constitute our approval of a discharged employee’s reaping a “reward” as a consequence of her failure to make a reasonable effort to mitigate her damages. Our holding is simply a result of the Board’s failure to carry its burden of proof, i.e., of showing there was a reasonable likelihood that Stewart could have obtained one of the available positions. Therefore, we affirm the trial court’s decision that Stewart’s recovery should not be reduced for her failure to mitigate.
The Board’s second point is that the trial court erred in restoring Stewart thirty days of sick leave for the 1973-74 school year. The Board argues that this issue was previously litigated. In 1976, Stewart brought suit against the Board to obtain reimbursement for sick leave pay that she alleged was due to her from the 1973-74 school year. In that case, the trial court found against Stewart on this issue. Here, the trial court held that Stewart was entitled to sick leave. Stewart was relitigating the precise issue which had been disposed of in an earlier proceeding against the Board. Well established principles of res judicata preclude the same parties from litigating issues that have been previously adjudicated by a court of competent jurisdiction. Prentzler v. Schneider, 411 S.W.2d 135, 138 (Mo. banc 1967). Therefore, we reverse that part of the judgment relating to sick leave.
The Board next contends that the trial court erred in granting Stewart damages for the loss of hospitalization insurance coverage during the time of her wrongful discharge, because there was no evidence that Stewart had been damaged. At trial, George Chapman, the Assistant Superintendent of Schools in the Ritenour School District, testified that the premiums for the insurance were paid directly to the insurance company. The record is devoid of any evidence that Stewart incurred any hospitalization costs during this time, and there is no evidence to indicate that Stewart purchased a substitute hospitalization plan during this time.
A similar situation to the case at bar existed in Mass v. Board of Education of San Francisco Unified School District, 61 Cal. 2d 612, 39 Cal. Rptr. 739, 394 P.2d 579 (banc 1964). There a teacher was found to have been wrongfully discharged and claimed as part of the damages the loss of medical insurance during the time of wrongful discharge. The California Supreme Court stated: “[P]laintiff proved no incurred medical expenditures or ‘losses’ from ‘other insurance plans.’ Plaintiff is [630 S.W.2d 136] therefore not entitled to any recovery on these latter matters.” Id. 39 Cal. Rptr. at 747, 394 P.2d at 587.
We believe this reasoning to be sound. To allow Stewart to recover on this question would allow her to recover more than she lost. Therefore, we reverse the judgment of the trial court with respect to the award of damages for the loss of hospitalization coverage.
The Board’s final two claims will be considered together. The Board claims that the trial court erred in awarding Stewart attorney’s fees totaling \$15,275.88. The Board also claims that the trial court erred in awarding Stewart \$500 for the fees and expenses of Dr. Leroy Grossman, an expert witness. We agree and, accordingly, reduce Stewart’s damages by \$15,775.88.
In Wolf v. Missouri State Training School for Boys, supra, our Supreme Court, quoting from Perrella v. Board of Education, 51 N.J. 323, 240 A.2d 417, 428 (1968), held that a wrongfully discharged Corrections Officer “should be given credit for attorney’s fees and expenses in the determination of the sum to be deducted in mitigation of back pay. . . .” In the second Stewart case, our court applied the Wolf holding to wrongfully discharged teachers and remanded the cause “for a determination of the amount by which [the] back-pay award is to be mitigated under the rules of avoidable consequences to have credited against such amount the counsel fee plus expenses which the employee has paid or obligated himself to pay. . . .” Stewart, supra, 574 S.W.2d at 475. In the instant case, the trial court did not credit Stewart’s fees and expenses against an amount to be deducted. Rather the court added the fees and expenses to Stewart’s damage award. Under the holdings in Wolf and the second Stewart case this was error. The award of fees and expenses in this case was improper. Therefore, we reverse the trial court’s award of \$15,775.88 for fees and expenses.
For the foregoing reasons, the judgment of the trial court is affirmed in part and reversed in part. Judgment entered accordingly.
SATZ, P. J., and SMITH, J., concur.
Notes
[ 1.1 ] The earlier cases are reported at 538 S.W.2d 765 (Mo.App.1976) and 574 S.W.2d 471 (Mo. App.1980).
[ 1.2 ] The trial court specified: “that defendants pay to the Missouri Retirement System [630 S.W.2d 132] \$8,372.89 representing the principal and interest on unpaid retirement and pay to plaintiff the hospitalization and the interest thereon of \$1,267.24, the plaintiff’s salary of \$84,032.00, and attorney’s fees and expenses for the presentation of this action of \$15,275.88, for a total judgment of \$108,948.01 together with the costs of this action.”
[ 1.3 ] All statutory references shall be to RSMo. 1969, unless otherwise noted.
[ 1.4 ] Our brethren in the western district recently cited Curlee with approval, stating:
“The burden of proof of mitigation of damages is on the defendant who must show the opportunity the injured party had to mitigate and the reasonable prospective consequences.” Braun v. Lorenz, 585 S.W.2d 102, 108 (Mo.App. 1979) (emphasis added). | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/05%3A_Missouri_Laws/5.01%3A_New_Page.txt |
Learning Objectives
Smith v. Normandy School Dist.
734 S.W.2d 943 (1987)
Missouri Court of Appeals, Eastern District, Division Three, Docket No. 51597
Argued: August 4, 1987
Janis SMITH, Appellant, v. NORMANDY SCHOOL DISTRICT, Respondent.
Attorney(s) appearing for the Case
[734 S.W.2d 944] Daniel J. Gralike, Paskal, Cohen & Benson, Clayton, for appellant. Darold E. Crotzer, Jr., Steinberg & Crotzer, Clayton, for respondent.
KAROHL, Judge.
Janis Smith appeals a judgment of the circuit court affirming the decision of the Board of Education of the Normandy School District (Board) to terminate her indefinite contract as a permanent teacher as that status is defined in Section 168.104(4) RSMo 1978. She was a teacher in the district for sixteen years. The Teacher Tenure Act provides substantive and procedural safeguards with respect to tenured teachers. The purpose of the Act is to establish strictly defined grounds and procedures for removing a permanent teacher which may not be evaded or other procedures substituted therefor. Iven v. Hazelwood School District, 710 S.W.2d 462, 464 (Mo.App.1986).
On June 26, 1985 the Board entered findings of fact, conclusions of law and ordered the indefinite contract of Janis Smith be terminated for cause. Within fifteen days of receipt of the order Smith filed a timely Notice of Appeal with the Board. Section 168.120.1 RSMo 1978. The Board promptly certified the record of its proceedings and filed the same in the circuit court for its review according to the provisions of Chapter 536 RSMo according to Section 168.120.2 RSMo 1978. The scope of review before the circuit court is defined in Section 536.140.1 RSMo 1978. We review the decision of the Board under Rule 73.01 as interpreted in Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976).
Appellant teacher claims: (1) the Board failed to comply with the provisions of Section 168.116(2) RSMo 1978 which requires the Board to begin the termination proceeding by a “warning in writing, stating specifically the causes which, if not removed, may result in charges”; (2) the Board waived prior warnings by subsequently offering a continuing contract for the next school year; and, (3) the termination was arbitrary, capricious and unreasonable.
We discussed the chronological sequence of the requirements of Section 168.116 RSMo 1978 for termination of a tenured teacher in Iven v. Hazelwood School District, 710 S.W.2d 462, 464 (Mo. App.1986). We review the claims of error in the same sequence.
Appellant teacher claims that the Board erred in its conclusion of law that letters from the Superintendent of schools addressed to Smith on April 22, 1983 and September 17, 1984 satisfied the statutory requirements for a “warning in writing.” The April 22, 1983 letter contains the following:
This letter is being sent to you pursuant to Section 168.116-2 RSMo. 1978. The purpose of the letter is to inform you that I consider you to be incompetent, inefficient and insubordinate in the line of duty and to be in willful and persistent violation of or failure to obey the published regulations of the Normandy School District. I consider the following to be the areas in which your work is unsatisfactory.
[The letter notes five specific areas which include failure to file certain forms; refusal to permit class to participate [734 S.W.2d 945] in physical education classes as a means of discipline; failure to treat associates with proper respect; failure to turn in lesson plans and grade books as required; and, late in reporting for work.]
You are further notified that I would like you to schedule a conference with Mr. Greer, your principal, at your earliest convenience and begin efforts to resolve these difficulties. Please inform Mr. Greer of a date at which time you will be available for such a conference.
In addition to the items enumerated above, I believe grounds may exist for your termination for reasons other than incompetency, inefficiency, insubordination and failure to obey School Board regulations. This letter is intended to give the formal warning notice required by the laws of the State of Missouri in cases of incompetency, inefficiency, insubordination or failure to follow School Board regulations, and should not be construed by you to be a waiver of any other basis upon which your contract may be terminated by the Board.
We need not decide whether this letter is an insufficient basis to satisfy the statutory requirement of a “warning in writing” as a first step leading to termination by the Board. There was no evidence that subsequent to this letter the superintendent or Mr. Greer ever met and conferred with appellant teacher in an effort to resolve the matters mentioned in the letter. Incompetency and inefficiency were never charged or found as grounds for termination. The general charge of “failure to obey the published regulations of the Normandy School District” was not the basis of a subsequent meeting or charge. The Board, therefore, could not treat the letter of April 22, 1983 as a statutory warning as required by Section 168.116.2. Nothing in this letter was incorporated in the letter of September 17, 1984. We need not rule on appellant’s claim of insufficiency because of remoteness since the letter did not comply with statutory requirements.
The letter of September 17, 1984 was written by the same Superintendent of Schools. It contains the following statements:
This letter is being sent to you pursuant to Section 168.116-2 RSMo. 1978. The purpose of the letter is to inform you that I consider you to be insubordinate in the line of duty. You have demonstrated insubordinate behavior and demeanor in the 1984-85 school year. Examples of such insubordination are as follows:
1. On or about September 13, 1984 the following incident of direct insubordination to your principal, Jerome Greer, occurred at about 8:30 a.m., following the bell signals for students:
a. Mr. Greer directed your students to go to your classroom from the playground since he was aware you were involved in a grade level staff meeting.
b. Your children proceeded toward your classroom pursuant to Mr. Greer’s instructions.
c. Shortly thereafter, Mr. Greer observed your children returning to the playground and went to the hallway near your classroom.
d. You were in the hallway near your classroom at approximately 8:35 a.m. and the following conversation took place:
Greer: Mrs. Smith, is there a problem?
Smith: There is no problem.
Greer: But Mrs. Smith, I sent your students in.
Smith: But I’m sending them back out.
Greer: Mrs. Smith, we will need to talk about this.
During this entire conversation with Mr. Greer, you continued to send the students back out to the playground. All of the activities and conversations described in this paragraph took place in the presence of and within the hearing of your sixth grade students.
2. On or about March 17, 1983 you were sent a letter by your principal, Jerome Greer, advising you that no recordings of any other none [sic] N.O. [734 S.W.2d 946] R.S.E. activities are to take place during the period of the day that has been set aside for N.O.R.S.E. (Copy of letter attached hereto).
In a conference between yourself and Mr. Greer which took place on May 9, 1983, you confirmed these instructions and stated that you would discontinue the use of any recording during N.O.R.S.E. In spite of Mr. Greer’s express instructions and directions the following conduct has occurred:
a. On the days of September 6, 7, 10, 1984 and other days in September 1984, you played records and recordings to your class during the N.O.R.S.E. period.
b. Your playing of the records and recordings was loud and was disturbing and disrupting to the classes of other teachers and students.
The above conduct is serious and detrimental to the efficient and productive operation of the Normandy School District.
I am directing you to follow all directions and instructions both verbal and written from school administrators including but not limited to your principal and assistant principal in the conduct of school business.
If satisfactory improvement is not made in your performance, a recommendation will be submitted to the Board of Education to terminate your employment with the Normandy School District.
You are further notified that I would like to schedule a conference with you, Mr. Basil Hunt, Director of Elementary Education and Mr. Greer, your principal, and begin efforts to resolve these difficulties. That conference will take place at Garfield School on Wednesday, September 26, 1984 at 8:35 a.m.
This letter is intended to give the formal warning notice required by the laws of the State of Missouri in cases of insubordination and should not be construed by you to be a waiver of any other basis upon which your contract may be terminated by the Board.
In this letter the Superintendent attempted to issue a warning relating only to a question of insubordination. He appointed Basil Hunt and Mr. Greer as his representatives. He also scheduled a conference to “begin efforts to resolve these difficulties.” This letter appears to comply with the statutory requirements for a warning.
On the appointed day, September 26, 1984, appellant teacher and her attorney met with Mr. Hunt and Mr. Greer. In the form of an exhibit the Board received and considered a report of Greer summarizing the meeting. That exhibit includes the following:
Mr. Hunt opened the conference by stating that “The purpose of the meeting is to resolve the problem. Mrs. Smith, we are not asking you to apologize to Mr. Greer we are not asking you to like Mr. Greer, we are saying to you that you must follow all written and oral instructions given to you by your principal and assistant principal.” (our emphasis)
Reference was made to the September 17, 1984 letter addressed to Mrs. Smith and she responded to the first example mentioned in the letter of September 17, 1984. There was no evidence before the Board, by exhibit or testimony, that the September 26, 1984 meeting involved any other discussion or any proposal or plan to resolve the matter mentioned in the warning letter of September 17, 1984. Under the circumstances, including the presence of counsel, the meeting satisfied the requirements of Section 168.116.2.
The letter of September 17, 1984 refers to “demonstrated insubordinate behavior and demeanor.” Insubordination is a statutory cause for termination. Section 168.-114.1(3) RSMo 1978. The first example noted does not specifically state an act of insubordination. At most it describes a direction of the principal to the teacher’s class and a subsequent contrary instruction by the teacher. The second example indicates a direction by the principal addressed to the teacher which on three occasions the [734 S.W.2d 947] teacher violated in regard to a silent reading period. This example of failure to follow instructions is the only specific reference of insubordination contained in the letter. The statute requires specific causes.
On May 10, 1985, eight months after the meeting, the Board filed a “notice of charges” against appellant teacher. Section 168.116.3 RSMo 1978. The Board charged insubordination generally and set forth in separate subparagraphs eleven specifications. For purposes of this opinion it is sufficient to summarize the eleven specifications. The Board charged appellant teacher with the following:
1. Playing a recording during a silent reading period on February 5, 1985 contrary to prior written and verbal instructions and the September 17, 1984 warning letter.
2. She caused or permitted a sign to be displayed in her classroom which said in part down with Mr. Greer.
3. On January 30, 1985 she caused or allowed students to chant down with Greer, up with Smith.
4. During a teacher staff meeting of February 19, 1985 she challenged Mr. Greer in a rude and abusive manner.
5. On December 14, 1984 on the playground she made disparaging comments about Mr. Greer’s race.
6. On November 19, 1984 she confronted Mr. Greer in his office about a feminine hygiene matter.
7. On December 12, 1984 she challenged Mr. Greer on his admonition that she make an effort to supervise her children.
8. On twelve different specified occasions she violated specific directives by leaving her classroom unattended.
9. On February 27, 1985 she administered corporal punishment to a student in opposition to a written directive forbidding such conduct.
10. Between February 27, 1985 and April 25, 1985 she kept a paddle in her classroom in direct violation of instructions from the principal.
11. On frequent occasions she addressed Mr. Greer in a rude and unseemly manner in the presence of other members of the school faculty.
The Board found as a fact that appellant teacher was guilty of specifications 1, 2, 4, 5, 6, 8, 9 and 10. The Board apparently made no findings on numbers 7 and 11. It found insufficient evidence to support number 3. The circuit court adopted the findings of fact and conclusions of law of the Board in affirming the order of the Board.
The statutory procedure set forth in Section 168.116 RSMo 1978 is sequential. There must be a warning describing specific causes, designation of a representative to meet and confer in an effort to resolve the matters and a meeting between the teacher and the representative. In order that the required warning and meeting have their recognized purpose charges must relate to the scope of warning and subsequent meeting. Otherwise, the intent of the legislature to provide substantive and procedural safeguards would not be honored.
The warning letter in the present case and the subsequent meeting related only to insubordination for failure to follow written and oral instructions given by appellant teacher’s principal and assistant principal. The Superintendent and Mr. Hunt as his representatives chose to limit the specified cause of insubordination to matters of following all written and oral instructions of the principal and the assistant principal.
During the hearing before the Board, counsel for appellant teacher made numerous objections to consideration of any charges not within the scope of the warning letter and the meeting. Even without objection the statute and the purpose of the statute limit the Board to only those charges which are supported by a prior warning and a meeting held for the purpose of cure. In our review of the charges before the Board and its findings, we note that a number of the specifications are unrelated to any written or oral instruction of the principal or assistant principal. Of the specifications found supported, number 2 (sign), 4 (rude comments at staff meeting), 5 (derogatory comment about principal), and 6 (feminine hygiene comment to [734 S.W.2d 948] principal) are unrelated to disobedience of written or oral instructions. Only charges 1 (playing music during reading period), 8 (absences from classroom), 9 (administration of corporal punishment), and 10 (keeping a paddle in classroom) comply with the general cause of insubordination as limited by the subject matter of the meeting following the warning letter.
We find that the Board erred in concluding as a matter of law that the specifications found were all supported by the warning letter. The Board relied on Rafael v. Meramec Valley R-III Board of Education, 569 S.W.2d 309, 315 (Mo.App. 1978). It was there held that the warning letter relating to insubordination was adequate although subsequent acts of insubordination were not identical to the acts set forth in the warning letter. The court in Rafael did not consider whether the subsequent meeting limited the scope of charges. However, Rafael stands for the proposition that within the context of the warning letter subsequent acts of insubordination were properly charged, considered and found supported by the evidence. The only charges which survive under the statute because of the cause given in the warning letter and discussed in the meeting in the present case are the four specifications of disobedience of written or oral instructions. [1, 8, 9 and 10]. There was competent and substantial evidence to support the findings on these four charges. Eddington v. St. Francois County R-III Board of Education, 564 S.W.2d 283, 294 (Mo.App.1978). The Board is not required to find each and every charge to support an order of termination. Proof on one charge which constitutes insubordination may be sufficient to support termination. Rose v. State Board of Registration for Healing Arts, 397 S.W.2d 570, 577 (Mo.1965).
Appellant teacher first claims that respondent Board failed to comply with the requirements of warning according to Section 168.116(2) RSMo 1978. For those reasons previously discussed we agree that the Board erred in relying on the letter of April 22, 1983. We reject appellant teacher’s argument that the letter of September 17, 1984 was inadequate. It stated specifically that Mrs. Smith was insubordinate in the line of duty and gave as an example a direct violation of instructions from her principal not to play music during silent reading period. This was followed by a meeting at which a request was made that she follow written and oral instructions of the principal and assistant principal. The four charges relating to violation of direct instructions fall within the scope of the warning. In the warning letter the Superintendent expressly directed appellant teacher to follow all directions and instructions, verbal and written, from school administrators. We find the letter adequate to inform appellant of her deficient area. Merideth v. Board of Education of Rockwood R-6 School District, 513 S.W.2d 740, 750 (Mo.App.1984). As described it complied with the requirements of Section 168.116.2 RSMo 1978. Rafael v. Meramec Valley R-III Board of Education, 569 S.W.2d 309, 313 (Mo.App.1978). This discussion is directed only toward those four specifications of insubordination which relate to violating written and oral instructions of superiors. Point denied.
Appellant teacher also contends that after the September 1984 warning letter and before the hearing and termination the Board waived the subject matter of the warning letter. In support of this position she contends that on April 12, 1985 the President of the Board of Education sent a letter to all teachers in the district, including appellant teacher, to inform them that “[i]n accordance with state statute, you are under continuing contract for the 1985-86 school year predicated on your 1984-85 salary. Formal contracts will be issued when the salary schedule is finally determined.” Appellant teacher signed and returned a copy of the letter indicating that she intended to remain at the Normandy School District. Appellant teacher without citing any authority in support of the theory of waiver argues that the letter is a waiver, as a matter of law.
This claim was never presented to the school district and the Board made no findings of fact or law relating to this claim. It was first presented to the circuit court. There are no provisions in the Teacher Tenure Act expressly providing for waiver. The renewal letter was sent to [734 S.W.2d 949] all teachers in the district. There is no indication that the question of waiver was considered. We find the issue is not properly before this court and will not set aside an administrative action unless an agency has been given a prior opportunity, on timely request by the complainant, to consider the point. Mills v. Federal Soldiers Home, 549 S.W.2d 862, 868 (Mo. banc 1977). The issue has not been preserved. See, Brown v. Weir, 675 S.W.2d 135, 139 (Mo.App.1984).
For a final claim of error appellant teacher contends that there was no competent and substantial evidence to support the decision of the Board. We find on the four specifications relating to the failure to follow written and oral instructions there was sufficient evidence. “We may only determine whether the Board reasonably could have made its finding and reached the decision it did. . . . Also we are to consider the evidence in a light most favorable to the Board’s decision, together with all reasonable inferences which support it.” Rafael v. Meramec Valley R-III Board of Education, 569 S.W.2d 309, 314-15 (Mo. App. 1978). We have reviewed the record and find the four specifications of insubordination supported by substantial and competent evidence.
We have considered and reject respondent Board’s motion for damages for frivolous appeal under Rule 84.19. The judgment of the circuit court affirming the decision of the Board is affirmed. However, some of the findings and conclusions reached by the Board were based upon charges not properly before the Board under Section 168.116. Some of the claims of error relating to these matters are valid as matters of law. Under these circumstances we find the appeal was not frivolous within the meaning of Rule 84.19.
We affirm.
PUDLOWSKI, P.J., and CRANDALL, J., concur. | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/05%3A_Missouri_Laws/5.02%3A_New_Page.txt |
Learning Objectives
Cedar Rapids Community School Dist. v. Garret F.
526 U.S. 66 (1999)
United States Supreme Court, Docket No. 96-1793
Argued: November 4, 1998 Decided: March 3, 1999
To help “assure that all children with disabilities have available to them . . . a free appropriate public education which emphasizes special education and related services designed to meet their unique needs,” 20 U.S.C. § 1400(c), the Individuals with Disabilities Education Act (IDEA) authorizes federal financial assistance to States that agree to provide such children with special education and “related services,” as defined in § 1401(a)(17). Respondent Garret F., a student in petitioner school district (District), is wheelchair-bound and ventilator dependent; he therefore requires, in part, a responsible individual nearby to attend to certain physical needs during the school day. The District declined to accept financial responsibility for the services Garret needs, believing that it was not legally obligated to provide continuous one-on-one nursing care. At an Iowa Department of Education hearing, an Administrative Law Judge concluded that the IDEA required the District to bear financial responsibility for all of the disputed services, finding that most of them are already provided for some other students; that the District did not contend that only a licensed physician could provide the services; and that applicable federal regulations require the District to furnish “school health services,” which are provided by a “qualified school nurse or other qualified person,” but not “medical services,” which are limited to services provided by a physician. The Federal District Court agreed and the Court of Appeals affirmed, concluding that Irving Independent School Dist. v. Tatro, 468 U.S. 883, provided a two-step analysis of § 1401(a)(17)’s “related services” definition that was satisfied here. First, the requested services were “supportive services” because Garret cannot attend school unless they are provided; and second, the services were not excluded as “medical services” under Tatro’s bright-line test: Services provided by a physician (other than for diagnostic and evaluation purposes) are subject to the medical services exclusion, but services that can be provided by a nurse or qualified layperson are not.
Held:
The IDEA requires the District to provide Garret with the nursing services he requires during school hours. The IDEA’s “related services” definition, Tatro, and the overall statutory scheme support the Court of Appeals’ decision. The “related services” definition broadly encompasses those supportive services that “may be required to assist a child with a disability to benefit from special education,” § 1401(a)(17), and the District does not challenge the Court of Appeals’ conclusion that the services at issue are “supportive services.” Furthermore, § 1401(a)(17)’s general “related services” definition is illuminated by a parenthetical phrase listing examples of services that are included within the statute’s coverage, including “medical services” if they are “for diagnostic and evaluation purposes.” Although the IDEA itself does not define “medical services” more specifically, this Court in Tatro concluded that the Secretary of Education had reasonably determined that “medical services” referred to services that must be performed by a physician, and not to school health services. 468 U.S., at 892-894. The cost-based, multi-factor test proposed by the District is supported by neither the statute’s text nor the regulations upheld in Tatro. Moreover, the District offers no explanation why characteristics such as cost make one service any more “medical” than another. Absent an elaboration of the statutory terms plainly more convincing than that reviewed in Tatro, there is no reason to depart from settled law. Although the District may have legitimate concerns about the financial burden of providing the services Garret needs, accepting its cost-based standard as the sole test for determining § 1401(a)(17)’s scope would require the Court to engage in judicial lawmaking without any guidance from Congress. It would also create tension with the IDEA’s purposes, since Congress intended to open the doors of public education to all qualified children and required participating States to educate disabled children with nondisabled children whenever possible, Board of Ed. of Hendrick Hudson Central School Dist., Westchester Cty. v. Rowley, 458 U.S. 176, 192, 202. Pp. 73-79.
106 F. 3d 822, affirmed.
STEVENS, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and O’CONNOR, SCALIA, SOUTER, GINSBURG, and BREYER, JJ., joined. THOMAS, J., filed a dissenting opinion, in which KENNEDY, J., joined, post, p. 79.
Sue Luettjohann Seitz argued the cause for petitioners.
With her on the briefs was Edward M. Mansfield.
Douglas R. Oelschlaeger argued the cause for respondents. With him on the brief was Diane Kutzko.
Beth S. Brinkmann argued the cause for the United States as amicus curiae urging affirmance. With her on the [526 U.S. 66, 68] brief were Solicitor General Waxman, Acting Assistant Attorney General Lee, Deputy Solicitor General Underwood, David K. Flynn, and Seth M. Galanter. *
[ * ] Gwendolyn H. Gregory and Julie Underwood filed a brief for the National School Boards Association as amicus curiae urging reversal.
Briefs of amici curiae urging affirmance were filed for the American Academy of Pediatrics et al. by Paul M. Smith and Nory Miller; and for the National Association of Protection and Advocacy Systems et al. by Leslie Seid Margolis.
JUSTICE STEVENS delivered the opinion of the Court.
The Individuals with Disabilities Education Act (IDEA), 84 Stat. 175, as amended, was enacted, in part, “to assure that all children with disabilities have available to them . . . a free appropriate public education which emphasizes special education and related services designed to meet their unique needs.” 20 U.S.C. § 1400(c). Consistent with this purpose, the IDEA authorizes federal financial assistance to States that agree to provide disabled children with special education and “related services.” See §§ 1401(a)(18), 1412(1). The question presented in this case is whether the definition of “related services” in § 1401(a)(17) 1.1 requires a public school [526 U.S. 66, 69] district in a participating State to provide a ventilator-dependent student with certain nursing services during school hours.
I
Respondent Garret F. is a friendly, creative, and intelligent young man. When Garret was four years old, his spinal column was severed in a motorcycle accident. Though paralyzed from the neck down, his mental capacities were unaffected. He is able to speak, to control his motorized wheelchair through use of a puff and suck straw, and to operate a computer with a device that responds to head movements. Garret is currently a student in the Cedar Rapids Community School District (District), he attends regular classes in a typical school program, and his academic performance has been a success. Garret is, however, ventilator dependent, 1.2 and therefore requires a responsible individual nearby to attend to certain physical needs while he is in school. 1.3 [526 U.S. 66, 70]
During Garret’s early years at school his family provided for his physical care during the schoolday. When he was in kindergarten, his 18-year-old aunt attended him; in the next four years, his family used settlement proceeds they received after the accident, their insurance, and other resources to employ a licensed practical nurse. In 1993, Garret’s mother requested the District to accept financial responsibility for the health care services that Garret requires during the schoolday. The District denied the request, believing that it was not legally obligated to provide continuous one-on-one nursing services.
Relying on both the IDEA and Iowa law, Garret’s mother requested a hearing before the Iowa Department of Education. An Administrative Law Judge (ALJ) received extensive evidence concerning Garret’s special needs, the District’s treatment of other disabled students, and the assistance provided to other ventilator-dependent children in other parts of the country. In his 47-page report, the ALJ found that the District has about 17,500 students, of whom approximately 2,200 need some form of special education or special services. Although Garret is the only ventilatordependent student in the District, most of the health care services that he needs are already provided for some other students. 1.4 “The primary difference between Garret’s situation and that of other students is his dependency on his ventilator for life support.” App. to Pet. for Cert. 28a. The ALJ noted that the parties disagreed over the training or [526 U.S. 66, 71] licensure required for the care and supervision of such students, and that those providing such care in other parts of the country ranged from nonlicensed personnel to registered nurses. However, the District did not contend that only a licensed physician could provide the services in question.
The ALJ explained that federal law requires that children with a variety of health impairments be provided with “special education and related services” when their disabilities adversely affect their academic performance, and that such children should be educated to the maximum extent appropriate with children who are not disabled. In addition, the ALJ explained that applicable federal regulations distinguish between “school health services,” which are provided by a “qualified school nurse or other qualified person,” and “medical services,” which are provided by a licensed physician. See 34 CFR §§ 300.16(a), (b)(4), (b)(ll) (1998). The District must provide the former, but need not provide the latter (except, of course, those “medical services” that are for diagnostic or evaluation purposes, 20 U.S.C. § 1401(a)(17)). According to the ALJ, the distinction in the regulations does not just depend on “the title of the person providing the service”; instead, the “medical services” exclusion is limited to services that are “in the special training, knowledge, and judgment of a physician to carry out.” App. to Pet. for Cert. 51a. The ALJ thus concluded that the IDEA required the District to bear financial responsibility for all of the services in dispute, including continuous nursing services. 1.5 [526 U.S. 66, 72]
The District challenged the ALJ’s decision in Federal District Court, but that court approved the ALJ’s IDEA ruling and granted summary judgment against the District. Id., at 9a, 15a. The Court of Appeals affirmed. 106 F.3d 822 (CA8 1997). It noted that, as a recipient of federal funds under the IDEA, Iowa has a statutory duty to provide all disabled children a “free appropriate public education,” which includes “related services.” See id., at 824. The Court of Appeals read our opinion in Irving Independent School Dist. v. Tatro, 468 U.S. 883 (1984), to provide a two-step analysis of the “related services” definition in § 1401(a)(17)—asking first, whether the requested services are included within the phrase “supportive services”; and second, whether the services are excluded as “medical services.” 106 F. 3d, at 824-825. The Court of Appeals succinctly answered both questions in Garret’s favor. The court found the first step plainly satisfied, since Garret cannot attend school unless the requested services are available during the school day. Id., at 825. As to the second step, the court reasoned that Tatro “established a bright-line test: the services of a physician (other than for diagnostic and evaluation purposes) are subject to the medical services exclusion, but services that can be provided in the school setting by a nurse or qualified layperson are not.” 106 F. 3d, at 825.
In its petition for certiorari, the District challenged only the second step of the Court of Appeals’ analysis. The District pointed out that some federal courts have not asked whether the requested health services must be delivered by a physician, but instead have applied a multifactor test that considers, generally speaking, the nature and extent of the services at issue. See, e.g., Neely v. Rutherford County School, 68 F.3d 965, 972-973 (CA6 1995), cert. denied, 517 U.S. 1134 (1996); Detsel v. Board of Ed. of Auburn Enlarged City School Dist., 820 F.2d 587, 588 (CA2) (per curiam), cert. denied, 484 U.S. 981 (1987). We granted the District’s petition to resolve this conflict. 523 U.S. 1117 (1998). [526 U.S. 66, 73]
II
The District contends that § 1401(a)(17) does not require it to provide Garret with “continuous oneon-one nursing services” during the schoolday, even though Garret cannot remain in school without such care. Brief for Petitioner 10. However, the IDEA’s definition of “related services,” our decision in Irving Independent School Dist. v. Tatro, 468 U.S. 883 (1984), and the overall statutory scheme all support the decision of the Court of Appeals.
The text of the “related services” definition, see n. 1, supra, broadly encompasses those supportive services that “may be required to assist a child with a disability to benefit from special education.” As we have already noted, the District does not challenge the Court of Appeals’ conclusion that the inschool services at issue are within the covered category of “supportive services.” As a general matter, services that enable a disabled child to remain in school during the day provide the student with “the meaningful access to education that Congress envisioned.” Tatro, 468 U.S., at 891 (“‘Congress sought primarily to make public education available to handicapped children’ and ‘to make such access meaningful’” (quoting Board of Ed. of Hendrick Hudson Central School Dist., Westchester Cty. v. Rowley, 458 U.S. 176, 192 (1982))).
This general definition of “related services” is illuminated by a parenthetical phrase listing examples of particular services that are included within the statute’s coverage. § 1401(a)(17). “[M]edical services” are enumerated in this list, but such services are limited to those that are “for diagnostic and evaluation purposes.” Ibid. The statute does not contain a more specific definition of the “medical services” that are excepted from the coverage of § 1401(a)(17).
The scope of the “medical services” exclusion is not a matter of first impression in this Court. In Tatro we concluded that the Secretary of Education had reasonably determined that the term “medical services” referred only to services [526 U.S. 66, 74] that must be performed by a physician, and not to school health services. 468 U.S., at 892-894. Accordingly, we held that a specific form of health care (clean intermittent catheterization) that is often, though not always, performed by a nurse is not an excluded medical service. We referenced the likely cost of the services and the competence of school staff as justifications for drawing a line between physician and other services, ibid., but our endorsement of that line was unmistakable. 1.6 It is thus settled that the phrase [526 U.S. 66, 75] “medical services” in § 1401(a)(17) does not embrace all forms of care that might loosely be described as “medical” in other contexts, such as a claim for an income tax deduction. See 26 U.S.C. § 213(d)(1) (1994 ed. and Supp. II) (defining “medical care”).
The District does not ask us to define the term so broadly. Indeed, the District does not argue that any of the items of care that Garret needs, considered individually, could be excluded from the scope of 20 U.S.C. § 1401(a)(17). 1.7 It could not make such an argument, considering that one of the services Garret needs (catheterization) was at issue in Tatro, and the others may be provided competently by a school nurse or other trained personnel. See App. to Pet. for Cert. 15a, 52a. As the ALJ concluded, most of the requested services are already provided by the District to other students, and the in-school care necessitated by Garret’s ventilator dependency does not demand the training, knowledge, and judgment of a licensed physician. Id., at 51a-52a. While more extensive, the inschool services Garret needs are no more “medical” than was the care sought in Tatro.
Instead, the District points to the combined and continuous character of the required care, and proposes a test under which the outcome in any particular case would “depend upon a series of factors, such as [1] whether the care is continuous or intermittent, [2] whether existing school health personnel can provide the service, [3] the cost of the service, and [4] the potential consequences if the service is not properly performed.” Brief for Petitioner 11; see also id., at 34-35.
The District’s multifactor test is not supported by any recognized source of legal authority. The proposed factors can be found in neither the text of the statute nor the regulations that we upheld in Tatro. Moreover, the District offers no explanation why these characteristics make one service [526 U.S. 66, 76] any more “medical” than another. The continuous character of certain services associated with Garret’s ventilator dependency has no apparent relationship to “medical” services, much less a relationship of equivalence. Continuous services may be more costly and may require additional school personnel, but they are not thereby more “medical.” Whatever its imperfections, a rule that limits the medical services exemption to physician services is unquestionably a reasonable and generally workable interpretation of the statute. Absent an elaboration of the statutory terms plainly more convincing than that which we reviewed in Tatro, there is no good reason to depart from settled law. 1.8
Finally, the District raises broader concerns about the financial burden that it must bear to provide the services that Garret needs to stay in school. The problem for the District in providing these services is not that its staff cannot be trained to deliver them; the problem, the District contends, is that the existing school health staff cannot meet all of their [526 U.S. 66, 77] responsibilities and provide for Garret at the same time. 1.9 Through its multifactor test, the District seeks to establish a kind of undue-burden exemption primarily based on the cost of the requested services. The first two factors can be seen as examples of cost-based distinctions: Intermittent care is often less expensive than continuous care, and the use of existing personnel is cheaper than hiring additional employees. The third factor-the cost of the servicewould then encompass the first two. The relevance of the fourth factor is likewise related to cost because extra care may be necessary if potential consequences are especially serious.
The District may have legitimate financial concerns, but our role in this dispute is to interpret existing law. Defining “related services” in a manner that accommodates the cost concerns Congress may have had, cf. Tatro, 468 U.S., at 892, is altogether different from using cost itself as the definition. Given that § 1401(a)(17) does not employ cost in its definition of “related services” or excluded “medical services,” accepting the District’s cost-based standard as the sole test for determining the scope of the provision would require us to engage in judicial lawmaking without any guidance from Congress. It would also create some tension with the purposes of the IDEA. The statute may not require public schools to maximize the potential of disabled students commensurate [526 U.S. 66, 78] with the opportunities provided to other children, see Rowley, 458 U.S., at 200; and the potential financial burdens imposed on participating States may be relevant to arriving at a sensible construction of the IDEA, see Tatro, 468 U.S., at 892. But Congress intended “to open the door of public education” to all qualified children and “require[d] participating States to educate handicapped children with nonhandicapped children whenever possible.” Rowley, 458 U.S., at 192, 202; see id., at 179-181; see also Honig v. Doe, 484 U.S. 305, 310-311, 324 (1988); §§ 1412(1), (2)(C), (5)(B). 1.10 [526 U.S. 66, 79]
This case is about whether meaningful access to the public schools will be assured, not the level of education that a school must finance once access is attained. It is undisputed that the services at issue must be provided if Garret is to remain in school. Under the statute, our precedent, and the purposes of the IDEA, the District must fund such “related services” in order to help guarantee that students like Garret are integrated into the public schools.
The judgment of the Court of Appeals is accordingly
Affirmed.
Footnotes
[ 1.1 ] “The term ‘related services’ means transportation, and such developmental, corrective, and other supportive services (including speech pathology and audiology, psychological services, physical and occupational therapy, recreation, including therapeutic recreation, social work services, counseling services, including rehabilitation counseling, and medical services, except that such medical services shall be for diagnostic and evaluation purposes only) as may be required to assist a child with a disability to benefit from special education, and includes the early identification and assessment of disabling conditions in children.” 20 U.S.C. § 1401(a)(17).
Originally, the statute was enacted without a definition of “related services.” See Education of the Handicapped Act, 84 Stat. 175. In 1975, Congress added the definition at issue in this case. Education for All Handicapped Children Act of 1975, § 4(a)(4), 89 Stat. 775. Aside from nonsubstantive changes and added examples of included services, see, e.g., Individuals with Disabilities Education Act [526 U.S. 66, 69] Amendments of 1997, § 101, 111 Stat. 45; Individuals with Disabilities Education Act Amendments of 1991, § 25(a)(1)(B), 105 Stat. 605; Education of the Handicapped Act Amendments of 1990, § 101(c), 104 Stat. 1103, the relevant language in § 1401(a)(17) has not been amended since 1975. All references to the IDEA herein are to the 1994 version as codified in Title 20 of the United States Code-the version of the statute in effect when this dispute arose.
[ 1.2 ] In his report in this case, the Administrative Law Judge explained:
“Being ventilator dependent means that [Garret] breathes only with external aids, usually an electric ventilator, and occasionally by someone else’s manual pumping of an air bag attached to his tracheotomy tube when the ventilator is being maintained. This later procedure is called ambu bagging.” App. to Pet. for Cert. 19a.
[ 1.3 ] “He needs assistance with urinary bladder catheterization once a day, the suctioning of his tracheotomy tube as needed, but at least once every six hours, with food and drink at lunchtime, in getting into a reclining position for five minutes of each hour, and ambu bagging occasionally as needed when the ventilator is checked for proper functioning. He also needs assistance from someone familiar with his ventilator in the event there is a malfunction or electrical problem, and someone who can perform emergency procedures in the event he experiences autonomic hyperreflexia. Autonomic hyperreflexia is an uncontrolled visceral reaction to anxiety or a full bladder. Blood pressure increases, heart rate increases, [526 U.S. 66, 70] and flushing and sweating may occur. Garret has not experienced autonomic hyperreflexia frequently in recent years, and it has usually been alleviated by catheterization. He has not ever experienced autonomic hyperreflexia at school. Garret is capable of communicating his needs orally or in another fashion so long as he has not been rendered unable to do so by an extended lack of oxygen.” Id., at 20a.
[ 1.4 ] “Included are such services as care for students who need urinary catheterization, food and drink, oxygen supplement positioning, and suctioning.” Id., at 28a; see also id., at 53a.
[ 1.5 ] In addition, the ALJ’s opinion contains a thorough discussion of “other tests and criteria” pressed by the District, id., at 52a, including the burden on the District and the cost of providing assistance to Garret. Although the ALJ found no legal authority for establishing a cost-based test for determining what related services are required by the statute, he went on to reject the District’s arguments on the merits. See id., at 42a-53a. We do not reach the issue here, but the ALJ also found that Garret’s in-school needs must be met by the District under an Iowa statute as well as the IDEA. Id., at 54a-55a.
[ 1.6 ] “The regulations define ‘related services’ for handicapped children to include ‘school health services,’ 34 CFR § 300.13(a) (1983), which are defined in turn as ‘services provided by a qualified school nurse or other qualified person,’ § 300.13(b)(10). ‘Medical services’ are defined as ‘services provided by a licensed physician.’ § 300.13(b)(4). Thus, the Secretary has [reasonably] determined that the services of a school nurse otherwise qualifying as a ‘related service’ are not subject to exclusion as a ‘medical service,’ but that the services of a physician are excludable as such.
. . . . .
“ . . . By limiting the ‘medical services’ exclusion to the services of a physician or hospital, both far more expensive, the Secretary has given a permissible construction to the provision.” 468 U.S., at 892-893 (emphasis added) (footnote omitted); see also id., at 894 (“[T]he regulations state that school nursing services must be provided only if they can be performed by a nurse or other qualified person, not if they must be performed by a physician”).
Based on certain policy letters issued by the Department of Education, it seems that the Secretary’s postTatro view of the statute has not been entirely clear. E.g., App. to Pet. for Cert. 64a. We may assume that the Secretary has authority under the IDEA to adopt regulations that define the “medical services” exclusion by more explicitly taking into account the nature and extent of the requested services; and the Secretary surely has the authority to enumerate the services that are, and are not, fairly included within the scope of § 1407(a)(17). But the Secretary has done neither; and, in this Court, he advocates affirming the judgment of the Court of Appeals. Brief for United States as Amicus Curiae 7-8, 30; see also Auer v. Robbins, 519 U.S. 452, 462 (1997) (an agency’s views as amicus curiae may be entitled to deference). We obviously have no authority to rewrite the regulations, and we see no sufficient reason to revise Tatro, either.
[ 1.7 ] See Tr. of Oral Arg. 4-5, 12.
[ 1.8 ] At oral argument, the District suggested that we first consider the nature of the requested service (either “medical” or not); then, if the service is “medical,” apply the multifactor test to determine whether the service is an excluded physician service or an included school nursing service under the Secretary of Education’s regulations. See Tr. of Oral Arg. 7, 13-14. Not only does this approach provide no additional guidance for identifying “medical” services, it is also disconnected from both the statutory text and the regulations we upheld in Irving Independent School Dist. v. Tatro, 468 U.S. 883 (1984). “Medical” services are generally excluded from the statute, and the regulations elaborate on that statutory term. No authority cited by the District requires an additional inquiry if the requested service is both “related” and non- ”medical.” Even if § 1401(a)(17) demanded an additional step, the factors proposed by the District are hardly more useful in identifying “nursing” services than they are in identifying “medical” services; and the District cannot limit educational access simply by pointing to the limitations of existing staff. As we noted in Tatro, the IDEA requires schools to hire specially trained personnel to meet disabled student needs. Id., at 893.
[ 1.9 ] See Tr. of Oral Arg. 4-5, 13; Brief for Petitioner 6-7, 9. The District, however, will not necessarily need to hire an additional employee to meet Garret’s needs. The District already employs a one-on-one teacher associate (TA) who assists Garret during the schoolday. See App. to Pet. for Cert. 26a-27a. At one time, Garret’s TA was a licensed practical nurse (LPN). In light of the state Board of Nursing’s recent ruling that the District’s registered nurses may decide to delegate Garret’s care to an LPN, see Brief for United States as Amicus Curiae 9-10 (filed Apr. 22, 1998), the dissent’s future-cost estimate is speculative. See App. to Pet. for Cert. 28a, 58a-60a (if the District could assign Garret’s care to a TA who is also an LPN, there would be “a minimum of additional expense”).
[ 1.10 ] The dissent’s approach, which seems to be even broader than the District’s, is unconvincing. The dissent’s rejection of our unanimous decision in Tatro comes 15 years too late, see Patterson v. McLean Credit Union, 491 U.S. 164, 172-173 (1989) (stare decisis has “special force” in statutory interpretation), and it offers nothing constructive in its place. Aside from rejecting a “provider-specific approach,” the dissent cites unrelated statutes and offers a circular definition of “medical services.” Post, at 81 (opinion of THOMAS, J.) (“ ‘services’ that are ‘medical’ in ‘nature’ ”). Moreover, the dissent’s approach apparently would exclude most ordinary school nursing services of the kind routinely provided to nondisabled children; that anomalous result is not easily attributable to congressional intent. See Tatro, 468 U.S., at 893.
In a later discussion the dissent does offer a specific proposal: that we now interpret (or rewrite) the Secretary’s regulations so that school districts need only provide disabled children with “health-related services that school nurses can perform as part of their normal duties.” Post, at 85. The District does not dispute that its nurses “can perform” the requested services, so the dissent’s objection is that District nurses would not be performing their “normal duties” if they met Garret’s needs. That is, the District would need an “additional employee.” Ibid. This proposal is functionally similar to a proposed regulation-ultimately withdrawn-that would have replaced the “school health services” provision. See 47 Fed. Reg. 33838, 33854 (1982) (the statute and regulations may not be read to affect legal obligations to make available to handicapped children services, including school health services, made available to nonhandicapped children). The dissent’s suggestion is unacceptable for several reasons. Most important, such revisions of the regulations are better left to the Secretary, and an additional staffing need is generally not a sufficient objection to the requirements of § 1401(a)(17). See n. 8, supra.
JUSTICE THOMAS, with whom JUSTICE KENNEDY joins, dissenting.
The majority, relying heavily on our decision in Irving Independent School Dist. v. Tatro, 468 U.S. 883 (1984), concludes that the Individuals with Disabilities Education Act (IDEA), 20 U.S.C. § 1400 et seq., requires a public school district to fund continuous, one-on-one nursing care for disabled children. Because Tatro cannot be squared with the text of IDEA, the Court should not adhere to it in this case. Even assuming that Tatro was correct in the first instance, the majority’s extension of it is unwarranted and ignores the constitutionally mandated rules of construction applicable to legislation enacted pursuant to Congress’ spending power.
I
As the majority recounts, ante, at 68, IDEA authorizes the provision of federal financial assistance to States that agree to provide, inter alia, “special education and related services” for disabled children. § 1401(a)(18). In Tatro, supra, we held that this provision of IDEA required a school district to provide clean intermittent catheterization to a disabled child several times a day. In so holding, we relied on Department of Education regulations, which we concluded had reasonably interpreted IDEA’s definition of “related [526 U.S. 66, 80] services” 2.1 to require school districts in participating States to provide “school nursing services” (of which we assumed catheterization was a subcategory) but not “services of a physician.” Id., at 892-893. This holding is contrary to the plain text of IDEA, and its reliance on the Department of Education’s regulations was misplaced.
A
Before we consider whether deference to an agency regulation is appropriate, “we first ask whether Congress has ‘directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.’” National Credit Union Admin. v. First Nat. Bank & Trust Co., 522 U.S. 479, 499-500 (1998) (quoting Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-843 (1984)).
Unfortunately, the Court in Tatro failed to consider this necessary antecedent question before turning to the Department of Education’s regulations implementing IDEA’s related services provision. The Court instead began “with the regulations of the Department of Education, which,” it said, “are entitled to deference.” 468 U.S., at 891-892. The Court need not have looked beyond the text of IDEA, which expressly indicates that school districts are not required to provide medical services, except for diagnostic and evaluation purposes. 20 U.S.C. § 1401(a)(17). The majority asserts that Tatro precludes reading the term “medical services” [526 U.S. 66, 81] to include “all forms of care that might loosely be described as ‘medical.’” Ante, at 75. The majority does not explain, however, why “services” that are “medical” in nature are not “medical services.” Not only is the definition that the majority rejects consistent with other uses of the term in federal law, 2.2 it also avoids the anomalous result of holding that the services at issue in Tatro (as well as in this case), while not “medical services,” would nonetheless qualify as medical care for federal income tax purposes. Ante, at 74-75.
The primary problem with Tatro, and the majority’s reliance on it today, is that the Court focused on the provider of the services rather than the services themselves. We do not typically think that automotive services are limited to those provided by a mechanic, for example. Rather, anything done to repair or service a car, no matter who does the work, is thought to fall into that category. Similarly, the term “food service” is not generally thought to be limited to work performed by a chef. The term “medical” similarly does not support Tatro’s provider-specific approach, but encompasses services that are “of, relating to, or concerned with physicians or with the practice of medicine.” See Webster’s Third New International Dictionary 1402 (1986) (emphasis added); see also id., at 1551 (defining “nurse” as “a person skilled in caring for and waiting on the infirm, the injured, or the sick; specif: one esp. trained to carry out such duties under the supervision of a physician”). [526 U.S. 66, 82]
IDEA’s structure and purpose reinforce this textual interpretation. Congress enacted IDEA to increase the educational opportunities available to disabled children, not to provide medical care for them. See 20 U.S.C. § 1400(c) (“It is the purpose of this chapter to assure that all children with disabilities have . . . a free appropriate public education”); see also § 1412 (“In order to qualify for assistance . . . a State shall demonstrate . . . [that it] has in effect a policy that assures all children with disabilities the right to a free appropriate public education”); Board of Ed. of Hendrick Hudson Central School Dist., Westchester Cty. v. Rowley, 458 U.S. 176, 179 (1982) (“The Act represents an ambitious federal effort to promote the education of handicapped children”). As such, where Congress decided to require a supportive service-including speech pathology, occupational therapy, and audiology-that appears “medical” in nature, it took care to do so explicitly. See § 1401(a)(17). Congress specified these services precisely because it recognized that they would otherwise fall under the broad “medical services” exclusion. Indeed, when it crafted the definition of related services, Congress could have, but chose not to, include “nursing services” in this list.
B
Tatro was wrongly decided even if the phrase “medical services” was subject to multiple constructions, and therefore, deference to any reasonable Department of Education regulation was appropriate. The Department of Education has never promulgated regulations defining the scope of IDEA’s “medical services” exclusion. One year before Tatro was decided, the Secretary of Education issued proposed regulations that defined excluded medical services as “services relating to the practice of medicine.” 47 Fed. Reg. 33838 (1982). These regulations, which represent the Department’s only attempt to define the disputed term, were never adopted. Instead, “[t]he regulations actually define only those ‘medical services’ that are owed to handicapped [526 U.S. 66, 83] children,” Tatro, 468 U.S., at 892, n. 10 (emphasis in original), not those that are not. Now, as when Tatro was decided, the regulations require districts to provide services performed “’by a licensed physician to determine a child’s medically related handicapping condition which results in the child’s need for special education and related services.’” Ibid. (quoting 34 CFR § 300.13(b)(4) (1983), recodified and amended as 34 CFR § 300.16(b)(4) (1998).
Extrapolating from this regulation, the Tatro Court presumed that this meant that “’medical services’ not owed under the statute are those ‘services by a licensed physician’ that serve other purposes.” Tatro, supra, at 892, n. 10 (emphasis deleted). The Court, therefore, did not defer to the regulation itself, but rather relied on an inference drawn from it to speculate about how a regulation might read if the Department of Education promulgated one. Deference in those circumstances is impermissible. We cannot defer to a regulation that does not exist. 2.3
II
Assuming that Tatro was correctly decided in the first instance, it does not control the outcome of this case. Because IDEA was enacted pursuant to Congress’ spending power, Rowley, supra, at 190, n. 11, our analysis of the statute in this case is governed by special rules of construction. We have repeatedly emphasized that, when Congress places conditions on the receipt of federal funds, “it must do so unambiguously.” Pennhurst State School and Hospital v. Halderman, [526 U.S. 66, 84] 451 U.S. 1, 17 (1981). See also Rowley, supra, at 190, n. 11; South Dakota v. Dole, 483 U.S. 203, 207 (1987); New York v. United States, 505 U.S. 144, 158 (1992). This is because a law that “condition[s] an offer of federal funding on a promise by the recipient . . . amounts essentially to a contract between the Government and the recipient of funds.” Gebser v. Lago Vista Independent School Dist., 524 U.S. 274, 286 (1998). As such, “[t]he legitimacy of Congress’ power to legislate under the spending power . . . rests on whether the State voluntarily and knowingly accepts the terms of the ‘contract.’ There can, of course, be no knowing acceptance if a State is unaware of the conditions or is unable to ascertain what is expected of it.” Pennhurst, supra, at 17 (citations omitted). It follows that we must interpret Spending Clause legislation narrowly, in order to avoid saddling the States with obligations that they did not anticipate.
The majority’s approach in this case turns this Spending Clause presumption on its head. We have held that, in enacting IDEA, Congress wished to require “States to educate handicapped children with nonhandicapped children whenever possible,” Rowley, supra, at 202. Congress, however, also took steps to limit the fiscal burdens that States must bear in attempting to achieve this laudable goal. These steps include requiring States to provide an education that is only “appropriate” rather than requiring them to maximize the potential of disabled students, see 20 U.S.C. § 1400(c); Rowley, supra, at 200, recognizing that integration into the public school environment is not always possible, see § 1412(5), and clarifying that, with a few exceptions, public schools need not provide “medical services” for disabled students, §§ 1401(a)(17) and (18).
For this reason, we have previously recognized that Congress did not intend to “impos[e] upon the States a burden of unspecified proportions and weight” in enacting IDEA. Rowley, supra, at 190, n. 11. These federalism concerns require us to interpret IDEA’s related services provision, consistent [526 U.S. 66, 85] with Tatro, as follows: Department of Education regulations require districts to provide disabled children with health-related services that school nurses can perform as part of their normal duties. This reading of Tatro, although less broad than the majority’s, is equally plausible and certainly more consistent with our obligation to interpret Spending Clause legislation narrowly. Before concluding that the district was required to provide clean intermittent catheterization for Amber Tatro, we observed that school nurses in the district were authorized to perform services that were “difficult to distinguish from the provision of [clean intermittent catheterization] to the handicapped.” Tatro, 468 U.S., at 893. We concluded that “[i]t would be strange indeed if Congress, in attempting to extend special services to handicapped children, were unwilling to guarantee them services of a kind that are routinely provided to the nonhandicapped.” Id., at 893-894
Unlike clean intermittent catheterization, however, a school nurse cannot provide the services that respondent requires, see ante, at 69-70, n. 3, and continue to perform her normal duties. To the contrary, because respondent requires continuous, one-on-one care throughout the entire schoolday, all agree that the district must hire an additional employee to attend solely to respondent. This will cost a minimum of \$18,000 per year. Although the majority recognizes this fact, it nonetheless concludes that the “more extensive” nature of the services that respondent needs is irrelevant to the question whether those services fall under the medical services exclusion. Ante, at 75. This approach disregards the constitutionally mandated principles of construction applicable to Spending Clause legislation and blindsides unwary States with fiscal obligations that they could not have anticipated.
***
For the foregoing reasons, I respectfully dissent.
[ 2.1 ] IDEA currently defines “related services” as “transportation, and such developmental, corrective, and other supportive services (including speech pathology and audiology, psychological services, physical and occupational therapy, recreation, including therapeutic recreation, social work services, counseling services, including rehabilitation counseling, and medical services, except that such medical services shall be for diagnostic and evaluation purposes only) as may be required to assist a child with a disability to benefit from special education. . . .” 20 U.S.C. § 1401(a)(17) (emphasis added).
[ 2.2 ] See, e.g., 38 U.S.C. § 1701(6) (“The term ‘medical services’ includes, in addition to medical examination, treatment, and rehabilitative services— . . . surgical services, dental services . . . , optometric and podiatric services, . . . preventive health services, . . . [and] such consultation, professional counseling, training, and mental health services as are necessary in connection with the treatment”); § 101(28) (“The term ‘nursing home care’ means the accommodation of convalescents . . . who require nursing care and related medical services”); 26 U.S.C. § 213(d)(1) (“The term ‘medical care’ means amounts paid— . . . for the diagnosis, cure, mitigation, treatment, or prevention of disease”).
[ 2.3 ] Nor do I think that it is appropriate to defer to the Department of Education’s litigating position in this case. The agency has had ample opportunity to address this problem but has failed to do so in a formal regulation. Instead, it has maintained conflicting positions about whether the services at issue in this case are required by IDEA. See ante, at 74, n. 6. Under these circumstances, we should not assume that the litigating position reflects the “agency’s fair and considered judgment.” Auer v. Robbins, 519 U.S. 452, 462 (1997). | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/06%3A_IDEA_and_IDEIA/6.01%3A_New_Page.txt |
Learning Objectives
Burlington School Comm. v. Mass. Dept. of Ed.
471 U.S. 359 (1985)
United States Supreme Court, Docket No. 84-433
Argued: March 26, 1985 Decided: April 29, 1985
The Education of the Handicapped Act requires participating state and local educational agencies to assure that handicapped children and their parents are guaranteed procedural safeguards with respect to the provision of free appropriate public education for such children. These procedures include the parents’ right to participate in the development of an “individualized education program” (IEP) for the child and to challenge in administrative and court proceedings a proposed IEP with which they disagree. With respect to judicial review, the Act in 20 U.S.C. § 1415(e)(2) authorizes the reviewing court to “grant such relief as the court determines is appropriate.” Section 1415(e)(3) provides that during the pendency of any review proceedings, unless the state or local educational agency and the parents otherwise agree, “the child shall remain in the then current educational placement of such child.” Respondent father of a handicapped child rejected petitioner town’s proposed IEP for the 1979-1980 school year calling for placement of the child in a certain public school, and sought review by respondent Massachusetts Department of Education’s Bureau of Special Education Appeals (BSEA). Meanwhile, the father, at his own expense, enrolled the child in a stateapproved private school for special education. The BSEA thereafter decided that the town’s proposed IEP was inappropriate and that the private school was better suited for the child’s educational needs, and ordered the town to pay the child’s expenses at the private school for the 1979-1980 school year. The town then sought review in Federal District Court. Ultimately, after the town in the meantime had agreed to pay for the child’s private-school placement for the 1980-1981 school year but refused to reimburse the father for the 1979-1980 school year as ordered by the BSEA, the court overturned the BSEA’s decision, holding that the appropriate 1979-1980 placement was the one proposed in the IEP and that the town was not responsible for the costs at the private school for the 1979-1980 through 1981-1982 school years. The Court of Appeals, remanding, held that the father’s unilateral change of the child’s placement during the pendency of the [471 U.S. 359, 360] administrative proceedings would not be a bar to reimbursement if such change were held to be appropriate.
Held:
1. The grant of authority to a reviewing court under § 1415(e)(2) includes the power to order school authorities to reimburse parents for their expenditures on private special education for a child if the court ultimately determines that such placement, rather than a proposed IEP, is proper under the Act. The ordinary meaning of the language in § 1415(e)(2) directing the court to “grant such relief as [it] determines is appropriate” confers broad discretion on the court. To deny such reimbursement would mean that the child’s right to a free appropriate public education, the parents’ right to participate fully in developing a proper IEP, and all of the procedural safeguards of the Act would be less than complete. Pp. 369-371.
2. A parental violation of § 1415(e)(3) by changing the “then current educational placement” of their child during the pendency of proceedings to review a challenged proposed IEP does not constitute a waiver of the parents’ right to reimbursement for expenses of the private placement. Otherwise, the parents would be forced to leave the child in what may turn out to be an inappropriate educational placement or to obtain the appropriate placement only by sacrificing any claim for reimbursement. But if the courts ultimately determine that the proposed IEP was appropriate, the parents would be barred from obtaining reimbursement for any interim period in which their child’s placement violated § 1415(e)(3). Pp. 371-374.
736 F.2d 773, affirmed.
REHNQUIST, J., delivered the opinion for a unanimous Court.
David Berman argued the cause for petitioners. With him on the briefs was Jane Kenworthy Lewis
Ellen L. Janos, Assistant Attorney General of Massachusetts, argued the cause for respondent Department of Education of Massachusetts. With her on the brief were Francis X. Bellotti, Attorney General, Judith S. Yogman, Assistant Attorney General, and Kristen Reasoner Apgar. David W. Rosenberg argued the cause and filed a brief for respondent Panico. *
[ * ] Thomas A. Mela and Stanley J. Eichner filed a brief for Developmental Disabilities Law Center et al. as amici curiae urging affirmance. [471 U.S. 359, 361]
JUSTICE REHNQUIST delivered the opinion of the Court.
The Education of the Handicapped Act (Act), 84 Stat. 175, as amended, 20 U.S.C. § 1401 et seq., requires participating state and local educational agencies “to assure that handicapped children and their parents or guardians are guaranteed procedural safeguards with respect to the provision of free appropriate public education” to such handicapped children. § 1415(a). These procedures include the right of the parents to participate in the development of an “individualized education program” (IEP) for the child and to challenge in administrative and court proceedings a proposed IEP with which they disagree. §§ 1401(19), 1415(b), (d), (e). Where as in the present case review of a contested IEP takes years to run its course—years critical to the child’s development—important practical questions arise concerning interim placement of the child and financial responsibility for that placement. This case requires us to address some of those questions.
Michael Panico, the son of respondent Robert Panico, was a first grader in the public school system of petitioner Town of Burlington, Mass., when he began experiencing serious difficulties in school. It later became evident that he had “specific learning disabilities” and thus was “handicapped” within the meaning of the Act, 20 U.S.C. § 1401(1). This entitled him to receive at public expense specially designed instruction to meet his unique needs, as well as related transportation. §§ 1401(16), 1401(17). The negotiations and other proceedings between the Town and the Panicos, thus far spanning more than eight years, are too involved to relate in full detail; the following are the parts relevant to the issues on which we granted certiorari.
In the spring of 1979, Michael attended the third grade of the Memorial School, a public school in Burlington, Mass., under an IEP calling for individual tutoring by a reading specialist for one hour a day and individual and group counselling. Michael’s continued poor performance and the fact that [471 U.S. 359, 362] Memorial School was not equipped to handle his needs led to much discussion between his parents and Town school officials about his difficulties and his future schooling. Apparently the course of these discussions did not run smoothly; the upshot was that the Panicos and the Town agreed that Michael was generally of above average to superior intelligence, but had special educational needs calling for a placement in a school other than Memorial. They disagreed over the source and exact nature of Michael’s learning difficulties, the Town believing the source to be emotional and the parents believing it to be neurological.
In late June, the Town presented the Panicos with a proposed IEP for Michael for the 1979-1980 academic year. It called for placing Michael in a highly structured class of six children with special academic and social needs, located at another Town public school, the Pine Glen School. On July 3, Michael’s father rejected the proposed IEP and sought review under § 1415(b)(2) by respondent Massachusetts Department of Education’s Bureau of Special Education Appeals (BSEA). A hearing was initially scheduled for August 8, but was apparently postponed in favor of a mediation session on August 17. The mediation efforts proved unsuccessful.
Meanwhile the Panicos received the results of the latest expert evaluation of Michael by specialists at Massachusetts General Hospital, who opined that Michael’s “emotional difficulties are secondary to a rather severe learning disorder characterized by perceptual difficulties” and recommended “a highly specialized setting for children with learning handicaps . . . such as the Carroll School,” a stateapproved private school for special education located in Lincoln, Mass. App. 26, 31. Believing that the Town’s proposed placement of Michael at the Pine Glen School was inappropriate in light of Michael’s needs, Mr. Panico enrolled Michael in the Carroll School in mid-August at his own expense, and Michael started there in September. [471 U.S. 359, 363]
The BSEA held several hearings during the fall of 1979, and in January 1980 the hearing officer decided that the Town’s proposed placement at the Pine Glen School was inappropriate and that the Carroll School was “the least restrictive adequate program within the record” for Michael’s educational needs. The hearing officer ordered the Town to pay for Michael’s tuition and transportation to the Carroll School for the 1979-1980 school year, including reimbursing the Panicos for their expenditures on these items for the school year to date.
The Town sought judicial review of the State’s administrative decision in the United States District Court for the District of Massachusetts pursuant to 20 U.S.C. § 1415(e)(2) and a parallel state statute, naming Mr. Panico and the State Department of Education as defendants. In November 1980, the District Court granted summary judgment against the Town on the state-law claim under a “substantial evidence” standard of review, entering a final judgment on this claim under Federal Rule of Civil Procedure 54(b). The court also set the federal claim for future trial. The Court of Appeals vacated the judgment on the state-law claim, holding that review under the state statute was preempted by § 1415(e)(2), which establishes a “preponderance of the evidence” standard of review and which permits the reviewing court to hear additional evidence. 655 F.2d 428, 431-432 (1981).
In the meantime, the Town had refused to comply with the BSEA order, the District Court had denied a stay of that order, and the Panicos and the State had moved for preliminary injunctive relief. The State also had threatened outside of the judicial proceedings to freeze all of the Town’s special education assistance unless it complied with the BSEA order. Apparently in response to this threat, the Town agreed in February 1981 to pay for Michael’s Carroll School placement and related transportation for the 1980-1981 term, none of which had yet been paid, and to continue [471 U.S. 359, 364] paying for these expenses until the case was decided. But the Town persisted in refusing to reimburse Mr. Panico for the expenses of the 1979-1980 school year. When the Court of Appeals disposed of the state claim, it also held that under this status quo none of the parties could show irreparable injury and thus none was entitled to a preliminary injunction. The court reasoned that the Town had not shown that Mr. Panico would not be able to repay the tuition and related costs borne by the Town if he ultimately lost on the merits, and Mr. Panico had not shown that he would be irreparably harmed if not reimbursed immediately for past payments which might ultimately be determined to be the Town’s responsibility.
On remand, the District Court entered an extensive pretrial order on the Town’s federal claim. In denying the Town summary judgment, it ruled that 20 U.S.C. § 1415(e) (3) did not bar reimbursement despite the Town’s insistence that the Panicos violated that provision by changing Michael’s placement to the Carroll School during the pendency of the administrative proceedings. The court reasoned that § 1415(e)(3) concerned the physical placement of the child and not the right to tuition reimbursement or to procedural review of a contested IEP. The court also dealt with the problem that no IEP had been developed for the 1980-1981 or 1981-1982 school years. It held that its power under § 1415(e)(2) to grant “appropriate” relief upon reviewing the contested IEP for the 1979-1980 school year included the power to grant relief for subsequent school years despite the lack of IEPs for those years. In this connection, however, the court interpreted the statute to place the burden of proof on the Town to upset the BSEA decision that the IEP was inappropriate for 1979- 1980 and on the Panicos and the State to show that the relief for subsequent terms was appropriate.
After a 4-day trial, the District Court in August 1982 overturned the BSEA decision, holding that the appropriate 1979-1980 placement for Michael was the one proposed by [471 U.S. 359, 365] the Town in the IEP and that the parents had failed to show that this placement would not also have been appropriate for subsequent years. Accordingly, the court concluded that the Town was “not responsible for the cost of Michael’s education at the Carroll School for the academic years 1979-80 through 1981-82.”
In contesting the Town’s proposed form of judgment embodying the court’s conclusion, Mr. Panico argued that, despite finally losing on the merits of the IEP in August 1982, he should be reimbursed for his expenditures in 1979-1980, that the Town should finish paying for the recently completed 1981-1982 term, and that he should not be required to reimburse the Town for its payments to date, apparently because the school terms in question fell within the pendency of the administrative and judicial review contemplated by § 1415(e)(2). The case was transferred to another District Judge and consolidated with two other cases to resolve similar issues concerning the reimbursement for expenditures during the pendency of review proceedings.
In a decision on the consolidated cases, the court rejected Mr. Panico’s argument that the Carroll School was the “current educational placement” during the pendency of the review proceedings and thus that under § 1415(e)(3) the Town was obligated to maintain that placement. Doe v. Anrig, 561 F. Supp. 121 (1983). The court reasoned that the Panicos’ unilateral action in placing Michael at the Carroll School without the Town’s consent could not “confer thereon the imprimatur of continued placement,” id., at 129, n. 5, even though strictly speaking there was no actual placement in effect during the summer of 1979 because all parties agreed Michael was finished with the Memorial School and the Town itself proposed in the IEP to transfer him to a new school in the fall.
The District Court next rejected an argument, apparently grounded at least in part on a state regulation, that the Panicos were entitled to rely on the BSEA decision upholding [471 U.S. 359, 366] their placement contrary to the IEP, regardless of whether that decision were ultimately reversed by a court. With respect to the payments made by the Town after the BSEA decision, under the State’s threat to cut off funding, the court criticized the State for resorting to extrajudicial pressure to enforce a decision subject to further review. Because this “was not a case where the town was legally obliged under section 1415(e)(3) to continue payments preserving the status quo,” the State’s coercion could not be viewed as “the basis for a final decision on liability,” and could only be “regarded as other than wrongful . . . on the assumption that the payments were to be returned if the order was ultimately reversed.” Id., at 130. The court entered a judgment ordering the Panicos to reimburse the Town for its payments for Michael’s Carroll placement and related transportation in 1980-1981 and 1981-1982. The Panicos appealed.
In a broad opinion, most of which we do not review, the Court of Appeals for the First Circuit remanded the case a second time. 736 F.2d 773 (1984). The court ruled, among other things, that the District Court erred in conducting a full trial de novo, that it gave insufficient weight to the BSEA findings, and that in other respects it did not properly evaluate the IEP. The court also considered several questions about the availability of reimbursement for interim placement. The Town argued that § 1415(e)(3) bars the Panicos from any reimbursement relief, even if on remand they were to prevail on the merits of the IEP, because of their unilateral change of Michael’s placement during the pendency of the § 1415(e)(2) proceedings. The court held that such unilateral parental change of placement would not be “a bar to reimbursement of the parents if their actions are held to be appropriate at final judgment.” Id., at 799. In dictum the court suggested, however, that a lack of parental consultation with the Town or “attempt to achieve a negotiated compromise and agreement on a private placement,” as [471 U.S. 359, 367] contemplated by the Act, “may be taken into account in a district court’s computation of an award of equitable reimbursement.” Ibid. To guide the District Court on remand, the court stated that “whether to order reimbursement, and at what amount, is a question determined by balancing the equities.” Id., at 801. The court also held that the Panicos’ reliance on the BSEA decision would estop the Town from obtaining reimbursement “for the period of reliance and requires that where parents have paid the bill for the period, they must be reimbursed.” Ibid.
The Town filed a petition for a writ of certiorari in this Court challenging the decision of the Court of Appeals on numerous issues, including the scope of judicial review of the administrative decision and the relevance to the merits of an IEP of violations by local school authorities of the Act’s procedural requirements. We granted certiorari, 469 U.S. 1071 (1984), only to consider the following two issues: whether the potential relief available under § 1415(e)(2) includes reimbursement to parents for private school tuition and related expenses, and whether § 1415(e)(3) bars such reimbursement to parents who reject a proposed IEP and place a child in a private school without the consent of local school authorities. We express no opinion on any of the many other views stated by the Court of Appeals.
Congress stated the purpose of the Act in these words:
“to assure that all handicapped children have available to them . . . a free appropriate public education which emphasizes special education and related services designed to meet their unique needs [and] to assure that the rights of handicapped children and their parents or guardians are protected.” 20 U.S.C. § 1400(c).
The Act defines a “free appropriate public education” to mean
“special education and related services which (A) have been provided at public expense, under public supervision [471 U.S. 359, 368] and direction, and without charge, (B) meet the standards of the State educational agency, (C) include an appropriate preschool, elementary, or secondary school education in the State involved, and (D) are provided in conformity with [an] individualized education program.” 20 U.S.C. § 1401(18).
To accomplish this ambitious objective, the Act provides federal money to state and local educational agencies that undertake to implement the substantive and procedural requirements of the Act. See Hendrick Hudson District Bd. of Education v. Rowley, 458 U.S. 176, 179-184 (1982).
The modus operandi of the Act is the already mentioned “individualized educational program.” The IEP is in brief a comprehensive statement of the educational needs of a handicapped child and the specially designed instruction and related services to be employed to meet those needs. § 1401 (19). The IEP is to be developed jointly by a school official qualified in special education, the child’s teacher, the parents or guardian, and, where appropriate, the child. In several places, the Act emphasizes the participation of the parents in developing the child’s educational program and assessing its effectiveness. See §§ 1400(c), 1401(19), 1412(7), 1415(b)(1)(A), (C), (D), (E), and 1415(b)(2); 34 CFR § 300.345 (1984).
Apparently recognizing that this cooperative approach would not always produce a consensus between the school officials and the parents, and that in any disputes the school officials would have a natural advantage, Congress incorporated an elaborate set of what it labeled “procedural safeguards” to insure the full participation of the parents and proper resolution of substantive disagreements. Section 1415(b) entitles the parents “to examine all relevant records with respect to the identification, evaluation, and educational placement of the child,” to obtain an independent educational evaluation of the child, to notice of any decision to initiate or change the identification, evaluation, or educational placement [471 U.S. 359, 369] of the child, and to present complaints with respect to any of the above. The parents are further entitled to “an impartial due process hearing,” which in the instant case was the BSEA hearing, to resolve their complaints.
The Act also provides for judicial review in state or federal court to “[a]ny party aggrieved by the findings and decision” made after the due process hearing. The Act confers on the reviewing court the following authority:
“[T]he court shall receive the records of the administrative proceedings, shall hear additional evidence at the request of a party, and, basing its decision on the preponderance of the evidence, shall grant such relief as the court determines is appropriate.” § 1415(e)(2).
The first question on which we granted certiorari requires us to decide whether this grant of authority includes the power to order school authorities to reimburse parents for their expenditures on private special education for a child if the court ultimately determines that such placement, rather than a proposed IEP, is proper under the Act.
We conclude that the Act authorizes such reimbursement. The statute directs the court to “grant such relief as [it] determines is appropriate.” The ordinary meaning of these words confers broad discretion on the court. The type of relief is not further specified, except that it must be “appropriate.” Absent other reference, the only possible interpretation is that the relief is to be “appropriate” in light of the purpose of the Act. As already noted, this is principally to provide handicapped children with “a free appropriate public education which emphasizes special education and related services designed to meet their unique needs.” The Act contemplates that such education will be provided where possible in regular public schools, with the child participating as much as possible in the same activities as nonhandicapped children, but the Act also provides for placement in private schools at public expense where this is not possible. See § 1412(5); 34 CFR §§ 300.132, 300.227, 300.307(b), 300.347 [471 U.S. 359, 370] (1984). In a case where a court determines that a private placement desired by the parents was proper under the Act and that an IEP calling for placement in a public school was inappropriate, it seems clear beyond cavil that “appropriate” relief would include a prospective injunction directing the school officials to develop and implement at public expense an IEP placing the child in a private school.
If the administrative and judicial review under the Act could be completed in a matter of weeks, rather than years, it would be difficult to imagine a case in which such prospective injunctive relief would not be sufficient. As this case so vividly demonstrates, however, the review process is ponderous. A final judicial decision on the merits of an IEP will in most instances come a year or more after the school term covered by that IEP has passed. In the meantime, the parents who disagree with the proposed IEP are faced with a choice: go along with the IEP to the detriment of their child if it turns out to be inappropriate or pay for what they consider to be the appropriate placement. If they choose the latter course, which conscientious parents who have adequate means and who are reasonably confident of their assessment normally would, it would be an empty victory to have a court tell them several years later that they were right but that these expenditures could not in a proper case be reimbursed by the school officials. If that were the case, the child’s right to a free appropriate public education, the parents’ right to participate fully in developing a proper IEP, and all of the procedural safeguards would be less than complete. Because Congress undoubtedly did not intend this result, we are confident that by empowering the court to grant “appropriate” relief Congress meant to include retroactive reimbursement to parents as an available remedy in a proper case.
In this Court, the Town repeatedly characterizes reimbursement as “damages,” but that simply is not the case. Reimbursement merely requires the Town to belatedly pay [471 U.S. 359, 371] expenses that it should have paid all along and would have borne in the first instance had it developed a proper IEP. Such a post hoc determination of financial responsibility was contemplated in the legislative history:
“If a parent contends that he or she has been forced, at that parent’s own expense, to seek private schooling for the child because an appropriate program does not exist within the local educational agency responsible for the child’s education and the local educational agency disagrees, that disagreement and the question of who remains financially responsible is a matter to which the due process procedures established under [the predecessor to § 1415] appl[y].” S. Rep. No. 94-168, p. 32 (1975) (emphasis added).
See 34 CFR § 300.403(b) (1984) (disagreements and question of financial responsibility subject to the due process procedures).
Regardless of the availability of reimbursement as a form of relief in a proper case, the Town maintains that the Panicos have waived any right they otherwise might have to reimbursement because they violated § 1415(e)(3), which provides:
“During the pendency of any proceedings conducted pursuant to [§ 1415], unless the State or local educational agency and the parents or guardian otherwise agree, the child shall remain in the then current educational placement of such child. . . .”
We need not resolve the academic question of what Michael’s “then current educational placement” was in the summer of 1979, when both the Town and the parents had agreed that a new school was in order. For the purposes of our decision, we assume that the Pine Glen School, proposed in the IEP, was Michael’s current placement and, therefore, that the Panicos did “change” his placement after they had rejected the IEP and had set the administrative review in motion. In [471 U.S. 359, 372] so doing, the Panicos contravened the conditional command of § 1415(e)(3) that “the child shall remain in the then current educational placement.”
As an initial matter, we note that the section calls for agreement by either the State or the local educational agency. The BSEA’s decision in favor of the Panicos and the Carroll School placement would seem to constitute agreement by the State to the change of placement. The decision was issued in January 1980, so from then on the Panicos were no longer in violation of § 1415(e)(3). This conclusion, however, does not entirely resolve the instant dispute because the Panicos are also seeking reimbursement for Michael’s expenses during the fall of 1979, prior to the State’s concurrence in the Carroll School placement.
We do not agree with the Town that a parental violation of § 1415(e)(3) constitutes a waiver of reimbursement. The provision says nothing about financial responsibility, waiver, or parental right to reimbursement at the conclusion of judicial proceedings. Moreover, if the provision is interpreted to cut off parental rights to reimbursement, the principal purpose of the Act will in many cases be defeated in the same way as if reimbursement were never available. As in this case, parents will often notice a child’s learning difficulties while the child is in a regular public school program. If the school officials disagree with the need for special education or the adequacy of the public school’s program to meet the child’s needs, it is unlikely they will agree to an interim private school placement while the review process runs its course. Thus, under the Town’s reading of § 1415(e)(3), the parents are forced to leave the child in what may turn out to be an inappropriate educational placement or to obtain the appropriate placement only by sacrificing any claim for reimbursement. The Act was intended to give handicapped children both an appropriate education and a free one; it should not be interpreted to defeat one or the other of those objectives. [471 U.S. 359, 373]
The legislative history supports this interpretation, favoring a proper interim placement pending the resolution of disagreements over the IEP:
“The conferees are cognizant that an impartial due process hearing may be required to assure that the rights of the child have been completely protected. We did feel, however, that the placement, or change of placement should not be unnecessarily delayed while long and tedious administrative appeals were being exhausted. Thus the conference adopted a flexible approach to try to meet the needs of both the child and the State.” 121 Cong. Rec. 37412 (1975) (Sen. Stafford).
We think at least one purpose of § 1415(e)(3) was to prevent school officials from removing a child from the regular public school classroom over the parents’ objection pending completion of the review proceedings. As we observed in Rowley, 458 U.S., at 192, the impetus for the Act came from two federal-court decisions, Pennsylvania Assn. for Retarded Children v. Commonwealth, 334 F. Supp. 1257 (ED Pa. 1971), and 343 F. Supp. 279 (1972), and Mills v. Board of Education of District of Columbia, 348 F. Supp. 866 (DC 1972), which arose from the efforts of parents of handicapped children to prevent the exclusion or expulsion of their children from the public schools. Congress was concerned about the apparently widespread practice of relegating handicapped children to private institutions or warehousing them in special classes. See § 1400(b)(4); 34 CFR § 300.347(a) (1984). We also note that § 1415(e)(3) is located in a section detailing procedural safeguards which are largely for the benefit of the parents and the child.
This is not to say that § 1415(e)(3) has no effect on parents. While we doubt that this provision would authorize a court to order parents to leave their child in a particular placement, we think it operates in such a way that parents who unilaterally change their child’s placement during the pendency of [471 U.S. 359, 374] review proceedings, without the consent of state or local school officials, do so at their own financial risk. If the courts ultimately determine that the IEP proposed by the school officials was appropriate, the parents would be barred from obtaining reimbursement for any interim period in which their child’s placement violated § 1415(e)(3). This conclusion is supported by the agency’s interpretation of the Act’s application to private placements by the parents:
“(a) If a handicapped child has available a free appropriate public education and the parents choose to place the child in a private school or facility, the public agency is not required by this part to pay for the child’s education at the private school or facility. . . . “
(b) Disagreements between a parent and a public agency regarding the availability of a program appropriate for the child, and the question of financial responsibility, are subject to the due process procedures under [§ 1415].” 34 CFR § 300.403 (1984).
We thus resolve the questions on which we granted certiorari; because the case is here in an interlocutory posture, we do not consider the estoppel ruling below or the specific equitable factors identified by the Court of Appeals for granting relief. We do think that the court was correct in concluding that “such relief as the court determines is appropriate,” within the meaning of § 1415(e) (2), means that equitable considerations are relevant in fashioning relief.
The judgment of the Court of Appeals is
Affirmed. [471 U.S. 359, 375] | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/06%3A_IDEA_and_IDEIA/6.02%3A_New_Page.txt |
Learning Objectives
Stuart v. Nappi 443
F. Supp. 1235 (D. Conn. 1978)
United States District Court, D. Connecticut, Civ. No. B-77-381
Decided: January 4, 1978
[443 F. Supp. 1235, 1236] Wenner A. Lohe, Jr., Danbury, Conn., John A. Dziamba, Willimantic, Conn., for plaintiffs.
Russell Lee Post, Jr., Avon, Conn., Robert W. Garvey, Hartford, Conn., for defendants. [443 F. Supp. 1235, 1237]
DALY, District Judge.
Plaintiff, Kathy Stuart, 1.1 is in her third year at Danbury High School. The records kept by the Danbury School System concerning plaintiff tell of a student with serious academic and emotional difficulties. They describe her as having deficient academic skills caused by a complex of learning disabilities and limited intelligence. Not surprising, her record also reflects a history of behavioral problems. It was precisely for handicapped children such as plaintiff that Congress enacted the Education of the Handicapped Act (Handicapped Act), 20 U.S.C. § 1401 et seq. See 20 U.S.C. § 1401(1).
Plaintiff seeks a preliminary injunction of an expulsion hearing to be held by the Danbury Board of Education. She claims that she has been denied rights afforded her by the Handicapped Act. Her claims raise novel issues concerning the impact of recent regulations to the Handicapped Act on the disciplinary process of local schools.
The Handicapped Act was passed in 1970 and amended in 1975. Its purpose is to provide states with federal assistance for the education of handicapped children. See 45 C.F.R. § 121a at 374 (Appendix § 2.1) (1976). The regulations on which this decision turns became effective on October 1, 1977. See 42 Fed.Reg. 42,473 (1977) (to be codified in 45 C.F.R. § 121a). State eligibility for federal funding under the Handicapped Act is made contingent upon the implementation of a detailed state plan and upon compliance with certain procedural safeguards. See 20 U.S.C. § 1413, 1415. The state plan must require all public schools within the state to provide educational programs which meet the unique needs of handicapped children. See Kruse v. Campbell, 431 F. Supp. 180, 186 (E.D.Va.), [443 F. Supp. 1235, 1238] vacated and remanded, ___ U.S. ___, ___, 98 S. Ct. 38, 54 L. Ed. 2d 65 (October 4, 1977); cf. Cuyahoga County Association For Retarded Children and Adults v. Essex, 411 F. Supp. 46, 61 n. 7 (N.D.Ohio 1976). Connecticut’s plan has been approved and the state presently receives federal funds. As a handicapped student in a recipient state, plaintiff is entitled to a special education program that is responsive to her needs and may insist on compliance with the procedural safeguards contained in the Handicapped Act. After scrutinizing the recent regulations to the Handicapped Act and reviewing both plaintiff ’s involved school record and the evidence introduced at the preliminary injunction hearing, this Court is persuaded that a preliminary injunction should issue.
The events leading to the present controversy began in 1975 when one of plaintiff ’s teachers reported to the school guidance counselor that plaintiff was “academically unable to achieve success in his class.” As a result of this report and corroboration from her other teachers, it was suggested that plaintiff be given a psychological evaluation and that she be referred to a Planning and Placement Team (PPT). The members of a PPT are drawn from a variety of disciplines, but in all cases they are “professional personnel” employed by the local board of education. 1.2 The PPT’s functions are to identify children requiring special education, to prescribe special education programs, and to evaluate these programs.
A meeting of the PPT was held in February of 1975, at which plaintiff was diagnosed as having a major learning disability. The PPT recommended that plaintiff be scheduled on a trial basis in the special education program for remediating learning disabilities and that she be given a psychological evaluation. Although the PPT report specifically stated that the psychological evaluation be given “at the earliest feasible time,” no such evaluation was administered.
A second PPT meeting was held in May in order to give plaintiff the annual review mandated by Conn.Reg. § 10-76b-7(b). The PPT reported plaintiff had made encouraging gains, but she suffered from poor learning behaviors and emotional difficulties. A psychological evaluation was again recommended. Her continued participation in the special educational program was also advised, but it was made contingent upon the results of the psychological evaluation.
When school commenced in September of 1975, the PPT requested an immediate psychological evaluation. The PPT stated that an evaluation was essential in order to develop an appropriate special education program. For reasons which have not been explained to the Court, the psychological evaluation was not administered for some time, and the clinical psychologist’s report of the evaluation was not completed until January 22, 1976. The report stated that plaintiff had severe learning disabilities derived from either a minimal brain dysfunction or an organically rooted perceptual disorder. It recommended her continued participation in the special education program and concluded: “I can only imagine that someone with such deficit and lack of development must feel utterly lost and humiliated at this point in adolescence in a public school where other students . . . are performing in such contrast to her.” The report of plaintiff ’s psychological evaluation was reviewed at a March, 1976 PPT meeting. The PPT noted that plaintiff was responding remarkably well to the intensive one-to-one teaching she received in the special education program, and recommended that she continue the program until the close of the 1975-1976 school year.
The first indication that the special education program was no longer appropriate came in May of 1976. At that time plaintiff ’s special education teacher reported that plaintiff had all but stopped attending the program. The teacher requested a PPT meeting to consider whether plaintiff ’s primary handicap was an emotional disability [443 F. Supp. 1235, 1239] rather than a learning disability. Despite this request, plaintiff ’s schedule was not changed nor was a PPT meeting held to review her program before the close of the school year.
At the beginning of the 1976-1977 school year, plaintiff was scheduled to participate in a learning disability program on a part-time basis. Her attendance continued to decline throughout the first half of the school year. By late fall she had completely stopped attending her special education classes and had begun to spend this time wandering the school corridors with her friends. Although she was encouraged to participate in the special education classes, the PPT meeting concerning plaintiff ’s program, which had been requested at the end of the previous school year, was not conducted in the fall of 1976.
In December of 1976 plaintiff was involved in several incidents which resulted in a series of disciplinary conferences between her mother and school authorities. These conferences were followed by a temporary improvement in plaintiff ’s attendance and behavior. In light of these improvements, the annual PPT review held in March of 1977 concluded that plaintiff should continue to participate in the special education program on a part-time basis for the remaining three months of the school year. The PPT also recommended that in the next school year plaintiff be scheduled for daily special education classes and that she be considered for a special education vocational training program. The PPT report stated that it was of primary importance for plaintiff to be given a program of study in the 1977-1978 school year which was based on a realistic assessment of her abilities and interests.
Despite the PPT recommendation, plaintiff has not been attending any learning disability program this school year. It is unclear whether this resulted from the school’s failure to schedule plaintiff properly or from plaintiff ’s refusal to attend the program. Regardless of the reason, the school authorities were on notice in the early part of September that the program prescribed by the PPT in March of 1977 was not being administered. In fact, a member of the school staff who was familiar with plaintiff requested that a new PPT review be conducted. This review has never been undertaken.
On September 14, 1977 plaintiff was involved in school-wide disturbances which erupted at Danbury High School. As a result of her complicity in these disturbances, she received a ten-day disciplinary suspension and was scheduled to appear at a disciplinary hearing on November 30, 1977. The Superintendent of Danbury Schools recommended to the Danbury Board of Education that plaintiff be expelled for the remainder of the 1977-1978 school year at this hearing.
Plaintiff ’s counsel made a written request on November 16, 1977 to the Danbury Board of Education for a hearing and a review of plaintiff ’s special education program in accordance with Conn.Gen.Stat. § 10-76h. On November 29, 1977 plaintiff obtained a temporary restraining order from this Court which enjoined the defendants from conducting the disciplinary hearing. This order was continued on December 12, 1977 at the conclusion of the preliminary injunction hearing. Between the time the first temporary restraining order was issued and the preliminary injunction hearing was held plaintiff was given a psychological evaluation. However, the results of this evaluation were unavailable at the time of the hearing. A PPT review of plaintiff ’s program has not been conducted since March of 1977, nor has the school developed a new special education program for plaintiff. Furthermore, there was no showing at the hearing that plaintiff ’s attendance at Danbury High School would endanger her or others.
Plaintiff is entitled to a preliminary injunction enjoining Danbury Board of Education from conducting a hearing to expel her. The standard which governs the issuance of a preliminary injunction is well-settled. Plaintiff must demonstrate either (1) probable success on the merits of her claim and possible irreparable injury, or (2) [443 F. Supp. 1235, 1240] sufficiently serious questions going to the merits of her claim and a balance of hardship tipping decidedly in her favor. Triebwasser & Katz v. American Tel. & Tel. Co., 535 F.2d 1356, 1358 (2d Cir. 1976); Sonesta Int’l Hotels Corp. v. Wellington Associates, 483 F.2d 247, 250 (2d Cir. 1973); City of Hartford v. Hills, 408 F. Supp. 879, 882 (D.Conn.1975). In Triebwasser supra at 1359 the Second Circuit stated that a demonstration of possible irreparable harm is required under both of these alternatives.
Plaintiff has made a persuasive showing of possible irreparable injury. It is important to note that the issuance of a preliminary injunction is contingent upon possible injury. The irreparable injuries claimed by plaintiff are those which will result from her expulsion at the Board of Education hearing. In this situation the Court must assume that she will, in fact, be expelled, and then proceed to consider the probable consequences of her expulsion. If plaintiff is expelled, she will be without any educational program from the date of her expulsion until such time as another PPT review is held and an appropriate educational program is developed. In light of past delays in the administration of plaintiff ’s special education program, the Court is concerned that some time may pass before plaintiff is afforded the special education to which she is entitled. However, even assuming her new program is developed with dispatch, for a period of time plaintiff will suffer the injury inherent in being without any educational program. The second irreparable injury to which plaintiff will be subjected derives from the fact that her expulsion will preclude her from taking part in any special education programs offered at Danbury High School. If plaintiff is expelled, she will be restricted to placement in a private school or to home-bound tutoring. Regardless of whether these two alternatives are responsive to plaintiff ’s needs, the PPT will be limited to their use in fashioning a new special education program for plaintiff. Of particular concern to the Court is the possibility that an appropriate private placement will be unavailable and plaintiff ’s education will be reduced to some type of homebound tutoring. Such a result can only serve to hinder plaintiff ’s social development and to perpetuate the vicious cycle in which she is caught. See Hairston v. Drosick, 423 F. Supp. 180, 183 (S.D.W.Va.1973) (holding that it is “imperative that every child receive an education with his or her peers insofar as it is at all possible”). The Court is persuaded that plaintiff ’s expulsion would have been accompanied by a very real possibility of irreparable injury.
Plaintiff has also demonstrated probable success on the merits of four federal claims. 1.3 The Handicapped Act and the regulations thereunder detail specific rights to which handicapped children are entitled. Among these rights are: (1) the right to an “appropriate public education”; (2) the right to remain in her present placement until the resolution of her special education complaint; (3) the right to an education in the “least restrictive environment”; and (4) the right to have all changes of placement effectuated in accordance with prescribed procedures. Plaintiff claims she has been or will be denied these rights.
Plaintiff argues with no little force that she has been denied her right to an “appropriate public education.” The meaning of this term is clarified in the definitional section of the Handicapped Act. Essentially, it is defined so as to require Danbury High [443 F. Supp. 1235, 1241] School to provide plaintiff with an educational program specially designed to meet her learning disabilities. See 20 U.S.C. § 1401(1), (15)-(19). The record before this Court suggests that plaintiff has not been provided with an appropriate education. Evidence has been introduced which shows that Danbury High School not only failed to provide plaintiff with the special education program recommended by the PPT in March of 1977, but that the high school neglected to respond adequately when it learned plaintiff was no longer participating in the special education program it had provided. The Court cannot disregard the possibility that Danbury High School’s handling of plaintiff may have contributed to her disruptive behavior. The existence of a causal relationship between plaintiff ’s academic program and her anti-social behavior was supported by expert testimony introduced at the preliminary injunction hearing. Cf. Frederick v. Thomas, 408 F. Supp. 832, 835 (E.D.Pa.1976) (argument that inappropriate educational placement caused anti-social behavior is raised). If a subsequent PPT were to conclude that plaintiff has not been given an appropriate special education placement, then the defendant’s resort to its disciplinary process is unjustifiable. The Court is not making a final determination of whether plaintiff has been afforded an appropriate education. The resolution of this question is beyond the scope of the present inquiry. In order to sustain a preliminary injunction plaintiff need only demonstrate probable success on the merits of her claim. She has satisfied this standard.
Plaintiff also claims that her expulsion prior to the resolution of her special education complaint would be in violation of 20 U.S.C. § 1415(e)(3). 1.4 This subsection of the Handicapped Act states: “During the pendency of any proceedings conducted pursuant to this section, unless the state or local educational agency and the parents or guardian otherwise agree, the child shall remain in the then current educational placement of such child . . . until all such proceedings have been completed.” Plaintiff qualifies for the protection that this subsection provides. She has filed a complaint pursuant to 20 U.S.C. § 1415(b)(1)(E) requesting a hearing and a review of her special education placement. Moreover, there has been no agreement to leave her present special education placement voluntarily. Thus, plaintiff has a right to remain in this placement until her complaint is resolved. The novel issue raised by plaintiff arises from the fact that the right to remain in her present placement directly conflicts with Danbury High Schools’s disciplinary process. If the high school expels plaintiff during the pendency of her special education complaint, then her placement will be changed in contravention of 20 U.S.C. § 1415(e)(3). The Court must determine whether this subsection of the Handicapped Act prohibits the expulsion of handicapped children during the pendency of a special education complaint.
This is a case of first impression. Although there are no decisions in which the relation between the special education processes and disciplinary procedures is discussed, the regulations promulgated under the new law are helpful. The Department of Health, Education and Welfare (HEW) released regulations in August of this year that are aimed at facilitating the implementation of the Handicapped Act. See 42 Fed.Reg. 42,473 (1977) (to be codified in 45 [443 F. Supp. 1235, 1242] C.F.R. § 121a). Contained therein is a comment addressing the conflict between 20 U.S.C. § 1415(e)(3) and the disciplinary procedures of public schools. The comment reiterates the rule that after a complaint proceeding has been initiated, a change in a child’s placement is prohibited. It then states: “While the placement may not be changed, this does not preclude a school from using its normal procedures for dealing with children who are endangering themselves or others.” 42 Fed.Reg. 42,473, 42,496 (1977) (to be codified in 42 C.F.R. § 121a.513). This somewhat cryptic statement suggests that subsection 1415(e)(3) prohibits disciplinary measures which have the effect of changing a child’s placement, while permitting the type of procedures necessary for dealing with a student who appears to be dangerous. This interpretation is supported by a comment-to-the-comment which states that the comment was added to make it clear that schools are permitted to use their regular procedures for dealing with emergencies. 1.5 See 42 Fed. Reg. 42,473, 42,512 (1977) (to follow the codification at 45 C.F.R. § 121a.513). There is no indication in either the regulations or the comments thereto that schools should be permitted to expel a handicapped child while a special education complaint is pending.
The Court concurs with HEW’s reading of subsection 1415(e)(3). As will be discussed, the Handicapped Act establishes procedures which replace expulsion as a means of removing handicapped children from school if they become disruptive. Furthermore, school authorities can deal with emergencies by suspending handicapped children. Suspension will permit the child to remain in his or her present placement, but will allow schools in Connecticut to exclude a student for up to ten consecutive school days. See Conn.Gen. Stat. § 10-233a(c) and note 3 supra. Therefore, plaintiff ’s expulsion prior to the resolution of her complaint would violate the Handicapped Act.
Plaintiff makes a third claim that the Handicapped Act prohibits her expulsion even after her complaint proceedings have terminated. She bases this claim on her right to an education in the “least restrictive environment” and on the overall design of the Handicapped Act. An important feature of the Handicapped Act is its requirement that children be educated in the “least restrictive environment.” This requirement entitles handicapped children to be educated with nonhandicapped children whenever possible. See 20 U.S.C. § 1412(5)(B); 42 Fed.Reg. 42,473, 42,497, 42,513 (1977) (to be codified in 45 C.F.R. § 121a.550). The right of handicapped children to an education in the “least restrictive environment” is implemented, in part, by requiring schools to provide a continuum of alternative placements. See 20 U.S.C. § 1412(5)(B); 42 Fed.Reg. 42,473, 42,497 (1977) (to be codified in 45 C.F.R. § 121a.551). These alternatives include instruction in regular classes, special classes, private schools, the child’s home and other institutions. By providing handicapped children with a range of placements, the Handicapped Act attempts to insure that each child receives an education which is responsive to his or her individual needs while maximizing the child’s opportunity to learn with nonhandicapped peers. See 42 Fed.Reg. 42,473, 42,497 (1977) (to be codified in 45 C.F.R. § 121a.552).
The right to an education in the least restrictive environment may be circumvented if schools are permitted to expel handicapped children. An expulsion has the effect [443 F. Supp. 1235, 1243] not only of changing a student’s placement, but also of restricting the availability of alternative placements. For example, plaintiff ’s expulsion may well exclude her from a placement that is appropriate for her academic and social development. This result flies in the face of the explicit mandate of the Handicapped Act which requires that all placement decisions be made in conformity with a child’s right to an education in the least restrictive environment. See 42 Fed.Reg. 42,473, 42,497 (1977) (to be codified in 45 C.F.R. § 121a.533(a)(4)).
The expulsion of handicapped children not only jeopardizes their right to an education in the least restrictive environment, but is inconsistent with the procedures established by the Handicapped Act for changing the placement of disruptive children. The Handicapped Act prescribes a procedure whereby disruptive children are transferred to more restrictive placements when their behavior significantly impairs the education of other children. See 42 Fed.Reg. 42,473, 42,497 (1977) (to be codified in 45 C.F.R. § 121a.552). 1.6 The responsibility for changing a handicapped child’s placement is allocated to professional teams, such as Connecticut’s PPTs. See 42 Fed.Reg. 42,473, 42,497 (1977) (to be codified in 45 C.F.R. § 121a.533(a)(3)). Furthermore, parents of handicapped children are entitled to participate in and to appeal from these placement decisions. See 42 Fed.Reg. 42,473, 42,490 (1977) (to be codified in 45 C.F.R. § 121a.345); 20 U.S.C. § 1415(b)(1)(C), (c). Thus, the use of expulsion proceedings as a means of changing the placement of a disruptive handicapped child contravenes the procedures of the Handicapped Act. After considerable reflection the Court is persuaded that any changes in plaintiff ’s placement must be made by a PPT after considering the range of available placements and plaintiff ’s particular needs.
It is important that the parameters of this decision are clear. This Court is cognizant of the need for school officials to be vested with ample authority and discretion. It is, therefore, with great reluctance that the Court has intervened in the disciplinary process of Danbury High School. However, this intervention is of a limited nature. Handicapped children are neither immune from a school’s disciplinary process nor are they entitled to participate in programs when their behavior impairs the education of other children in the program. First, school authorities can take swift disciplinary measures, such as suspension, against disruptive handicapped children. Secondly, a PPT can request a change in the placement of handicapped children who have demonstrated that their present placement is inappropriate by disrupting the education of other children. The Handicapped Act thereby affords schools with both short-term and long-term methods of dealing with handicapped children who are behavioral problems.
Defendants contend that their disciplinary procedures are beyond the purview of this Court. They are mistaken. It has long been fundamental to our federalism that public education is under the control of state and local authorities. See Epperson v. Arkansas, 393 U.S. 97, 104, 89 S. Ct. 266, 21 L. Ed. 2d 228 (1968); Buck v. Board of Education of City of New York, 553 F.2d 315, 320 (2d Cir. 1977). Although there is little doubt that the judgment of state and local school authorities is entitled to considerable deference, it is equally clear that even a school’s disciplinary procedures are subject to the scrutiny of the federal judiciary. See e.g., Goss v. Lopez, 419 U.S. 565, 95 S. Ct. 729, 42 L. Ed. 2d 725 (1974); Tinker v. Des Moines School Dist., 393 U.S. 503, 89 S. Ct. 733, 21 L. Ed. 2d 731 (1969); Board of Educ. v. Barnette, 319 U.S. 624, 63 S. Ct. 1178, 87 L. Ed. 1628 (1942). Cf. Yoo v. Moynihan, 28 Conn.Sup. 375, 262 A.2d 814 (1969) (temporary injunction issued by state [443 F. Supp. 1235, 1244] court against expulsion of student for violation of dress code). In the instant case, judicial intervention in Danbury High School’s disciplinary procedures is Congressionally mandated. The Handicapped Act vests jurisdiction in federal district courts over all claims of noncompliance with the Act’s procedural safeguards, regardless of the amount in controversy. See 20 U.S.C. § 1415(e)(4).
Defendants’ principle objection to the issuance of a preliminary injunction is that the procedures for securing a special education are distinct from disciplinary procedures and therefore one process should not interfere with the other. This contention is based on a non sequitur. The inference that the special education and disciplinary procedures cannot conflict, does not follow from the premise that these are separate processes. Defendants are really asking the Court to refuse to resolve an obvious conflict between these procedures. This Court will not oblige them.
Danbury Board of Education is HEREBY ORDERED to require an immediate PPT review of plaintiff ’s special education program and is preliminarily enjoined from conducting a hearing to expel her. Furthermore, any changes in her placement must be effectuated through the proper special education procedures until the final resolution of plaintiff ’s claims.
Notes
[ 1.1 ] Pursuant to counsel’s request, plaintiff is proceeding under a fictitious name. Those sections of the file reflecting her real name have been sealed from public inspection.
[ 1.2 ] The PPT is defined in Conn.Reg. § 10-76b-1(q) as “The group of persons chosen from the teaching, administrative and pupil personnel staff of the school district . . .”
[ 1.3 ] Plaintiff makes an intriguing state claim that her expulsion contravenes Conn.Gen.Stat. § 10-233d, 4-177. This claim is based on the argument that plaintiff is entitled to a current psychological evaluation and a PPT determination of the adequacy of her special education placement prior to an expulsion hearing. The thrust of this argument is that without a current evaluation and PPT determination plaintiff is being denied a meaningful opportunity “to present evidence and argument on all issues involved” as required by Conn.Gen.Stat. § 4-177(c). This is exclusively a state claim and a state court should rule on it in the first instance. Cf. Railroad Comm’n v. Pullman Co., 312 U.S. 496, 61 S. Ct. 643, 85 L. Ed. 971 (1940). Until such time as a state court has clarified the meaning of Conn.Gen.Stat. § 4-177, this Court will decline to exercise its discretionary, pendent jurisdiction over this claim.
[ 1.4 ] The terms “suspension” and “expulsion” are used in accordance with the definitions appearing in Conn.Gen.Stat. § 10-233a(c), (d):
(c) Suspension means an exclusion from school privileges for no more than ten consecutive school days, provided such exclusion shall not extend beyond the end of the school year in which such suspension was imposed.
(d) Expulsion means an exclusion from school privileges for more than ten consecutive days and shall be deemed to include, but not be limited to, exclusion from the school to which such pupil was assigned at the time such disciplinary action was taken, provided such exclusion shall not extend beyond the end of the school year in which such exclusion was imposed.
This decision in no way affects the “removal” of students for all or part of a single class period. See Conn. Gen.Stat. § 10-233a(b).
[ 1.5 ] The complete text of the comment-to-the-comment states:
Commenters suggested a provision be added to allow change of placement for health or safety reasons. One Commenter requested that the regulations indicate that suspension not be considered a change in placement. Another commenter wanted more specificity to make it clear that where an initial placement is involved, the child be placed in the regular education program or if the parents agree, in an interim special placement.
Response: A comment has been added to make it clear that this section would not preclude a public agency from using its regular procedures for dealing with emergencies.
42 Fed.Reg. 42,473, 42,512 (1977) (to follow codification at 45 C.F.R. § 121a.513).
[ 1.6 ] The comment to 45 C.F.R. § 121 A. 552 explains that a handicapped child’s placement is inappropriate whenever the child becomes so disruptive that the “education of other students is significantly impaired.” This explanation is derived from a comment to the Rehabilitation Act of 1973, 29 U.S.C. § 794. See 42 Fed. Reg. 22,676, 22,691 (1977) (to follow codification in 45 C.F.R. § 84.34). | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/06%3A_IDEA_and_IDEIA/6.03%3A_New_Page.txt |
Learning Objectives
Brown v. Board of Education of Topeka (1)
347 U.S. 483 (1954)
United States Supreme Court, Docket No. 1
No. 1. Appeal from the United States District Court for the District of Kansas. *
Argued: December 9, 1952 Reargued: December 8, 1953 Decided: May 17, 1954
Segregation of white and Negro children in the public schools of a State solely on the basis of race, pursuant to state laws permitting or requiring such segregation, denies to Negro children the equal protection of the laws guaranteed by the Fourteenth Amendment—even though the physical facilities and other “tangible” factors of white and Negro schools may be equal. Pp. 486-496.
(a) The history of the Fourteenth Amendment is inconclusive as to its intended effect on public education. Pp. 489-490.
(b) The question presented in these cases must be determined, not on the basis of conditions existing when the Fourteenth Amendment was adopted, but in the light of the full development of public education and its present place in American life throughout the Nation. Pp. 492-493.
(c) Where a State has undertaken to provide an opportunity for an education in its public schools, such an opportunity is a right which must be made available to all on equal terms. P. 493.
(d) Segregation of children in public schools solely on the basis of race deprives children of the minority group of equal educational opportunities, even though the physical facilities and other “tangible” factors may be equal. Pp. 493-494.
(e) The “separate but equal” doctrine adopted in Plessy v. Ferguson, 163 U.S. 537, has no place in the field of public education. P. 495. [347 U.S. 483, 484] (f) The cases are restored to the docket for further argument on specified questions relating to the forms of the decrees. Pp. 495-496.
[ * ] Together with No. 2, Briggs et al. v. Elliott et al., on appeal from the United States District Court for the Eastern District of South Carolina, argued December 9-10, 1952, reargued December 7-8, 1953; No. 4, Davis et al. v. County School Board of Prince Edward County, Virginia, et al., on appeal from the United States District Court for the Eastern District of Virginia, argued December 10, 1952, reargued December 7-8, 1953; and No. 10, Gebhart et al. v. Belton et al., on certiorari to the Supreme Court of Delaware, argued December 11, 1952, reargued December 9, 1953.
Robert L. Carter argued the cause for appellants in No. 1 on the original argument and on the reargument. Thurgood Marshall argued the cause for appellants in No. 2 on the original argument and Spottswood W. Robinson, III, for appellants in No. 4 on the original argument, and both argued the causes for appellants in Nos. 2 and 4 on the reargument. Louis L. Redding and Jack Greenberg argued the cause for respondents in No. 10 on the original argument and Jack Greenberg and Thurgood Marshall on the reargument.
On the briefs were Robert L. Carter, Thurgood Marshall, Spottswood W. Robinson, III, Louis L. Redding, Jack Greenberg, George E. C. Hayes, William R. Ming, Jr., Constance Baker Motley, James M. Nabrit, Jr., Charles S. Scott, Frank D. Reeves, Harold R. Boulware and Oliver W. Hill for appellants in Nos. 1, 2 and 4 and respondents in No. 10; George M. Johnson for appellants in Nos. 1, 2 and 4; and Loren Miller for appellants in Nos. 2 and 4. Arthur D. Shores and A. T. Walden were on the Statement as to Jurisdiction and a brief opposing a Motion to Dismiss or Affirm in No. 2.
Paul E. Wilson, Assistant Attorney General of Kansas, argued the cause for appellees in No. 1 on the original argument and on the reargument. With him on the briefs was Harold R. Fatzer, Attorney General.
John W. Davis argued the cause for appellees in No. 2 on the original argument and for appellees in Nos. 2 and 4 on the reargument. With him on the briefs in No. 2 were T. C. Callison, Attorney General of South Carolina, Robert McC. Figg, Jr., S. E. Rogers, William R. Meagher and Taggart Whipple. [347 U.S. 483, 485]
J. Lindsay Almond, Jr., Attorney General of Virginia, and T. Justin Moore argued the cause for appellees in No. 4 on the original argument and for appellees in Nos. 2 and 4 on the reargument. On the briefs in No. 4 were J. Lindsay Almond, Jr., Attorney General, and Henry T. Wickham, Special Assistant Attorney General, for the State of Virginia, and T. Justin Moore, Archibald G. Robertson, John W. Riely and T. Justin Moore, Jr. for the Prince Edward County School Authorities, appellees.
H. Albert Young, Attorney General of Delaware, argued the cause for petitioners in No. 10 on the original argument and on the reargument. With him on the briefs was Louis J. Finger, Special Deputy Attorney General.
By special leave of Court, Assistant Attorney General Rankin argued the cause for the United States on the reargument, as amicus curiae, urging reversal in Nos. 1, 2 and 4 and affirmance in No. 10. With him on the brief were Attorney General Brownell, Philip Elman, Leon Ulman, William J. Lamont and M. Magdelena Schoch. James P. McGranery, then Attorney General, and Philip Elman filed a brief for the United States on the original argument, as amicus curiae, urging reversal in Nos. 1, 2 and 4 and affirmance in No. 10.
Briefs of amici curiae supporting appellants in No. 1 were filed by Shad Polier, Will Maslow and Joseph B. Robison for the American Jewish Congress; by Edwin J. Lukas, Arnold Forster, Arthur Garfield Hays, Frank E. Karelsen, Leonard Haas, Saburo Kido and Theodore Leskes for the American Civil Liberties Union et al.; and by John Ligtenberg and Selma M. Borchardt for the American Federation of Teachers. Briefs of amici curiae supporting appellants in No. 1 and respondents in No. 10 were filed by Arthur J. Goldberg and Thomas E. Harris [347 U.S. 483, 486] for the Congress of Industrial Organizations and by Phineas Indritz for the American Veterans Committee, Inc.
MR. CHIEF JUSTICE WARREN delivered the opinion of the Court.
These cases come to us from the States of Kansas, South Carolina, Virginia, and Delaware. They are premised on different facts and different local conditions, but a common legal question justifies their consideration together in this consolidated opinion. 1.1 [347 U.S. 483, 487]
In each of the cases, minors of the Negro race, through their legal representatives, seek the aid of the courts in obtaining admission to the public schools of their community on a nonsegregated basis. In each instance, [347 U.S. 483, 488] they had been denied admission to schools attended by white children under laws requiring or permitting segregation according to race. This segregation was alleged to deprive the plaintiffs of the equal protection of the laws under the Fourteenth Amendment. In each of the cases other than the Delaware case, a three-judge federal district court denied relief to the plaintiffs on the so-called “separate but equal” doctrine announced by this Court in Plessy v. Ferguson, 163 U.S. 537. Under that doctrine, equality of treatment is accorded when the races are provided substantially equal facilities, even though these facilities be separate. In the Delaware case, the Supreme Court of Delaware adhered to that doctrine, but ordered that the plaintiffs be admitted to the white schools because of their superiority to the Negro schools.
The plaintiffs contend that segregated public schools are not “equal” and cannot be made “equal,” and that hence they are deprived of the equal protection of the laws. Because of the obvious importance of the question presented, the Court took jurisdiction. 1.2 Argument was heard in the 1952 Term, and reargument was heard this Term on certain questions propounded by the Court. 1.3 [347 U.S. 483, 489]
Reargument was largely devoted to the circumstances surrounding the adoption of the Fourteenth Amendment in 1868. It covered exhaustively consideration of the Amendment in Congress, ratification by the states, then existing practices in racial segregation, and the views of proponents and opponents of the Amendment. This discussion and our own investigation convince us that, although these sources cast some light, it is not enough to resolve the problem with which we are faced. At best, they are inconclusive. The most avid proponents of the post-War Amendments undoubtedly intended them to remove all legal distinctions among “all persons born or naturalized in the United States.” Their opponents, just as certainly, were antagonistic to both the letter and the spirit of the Amendments and wished them to have the most limited effect. What others in Congress and the state legislatures had in mind cannot be determined with any degree of certainty.
An additional reason for the inconclusive nature of the Amendment’s history, with respect to segregated schools, is the status of public education at that time. 1.4 In the South, the movement toward free common schools, supported [347 U.S. 483, 490] by general taxation, had not yet taken hold. Education of white children was largely in the hands of private groups. Education of Negroes was almost nonexistent, and practically all of the race were illiterate. In fact, any education of Negroes was forbidden by law in some states. Today, in contrast, many Negroes have achieved outstanding success in the arts and sciences as well as in the business and professional world. It is true that public school education at the time of the Amendment had advanced further in the North, but the effect of the Amendment on Northern States was generally ignored in the congressional debates. Even in the North, the conditions of public education did not approximate those existing today. The curriculum was usually rudimentary; ungraded schools were common in rural areas; the school term was but three months a year in many states; and compulsory school attendance was virtually unknown. As a consequence, it is not surprising that there should be so little in the history of the Fourteenth Amendment relating to its intended effect on public education.
In the first cases in this Court construing the Fourteenth Amendment, decided shortly after its adoption, the Court interpreted it as proscribing all state-imposed discriminations against the Negro race. 1.5 The doctrine of [347 U.S. 483, 491] “separate but equal” did not make its appearance in this Court until 1896 in the case of Plessy v. Ferguson, supra, involving not education but transportation. 1.6 American courts have since labored with the doctrine for over half a century. In this Court, there have been six cases involving the “separate but equal” doctrine in the field of public education. 1.7 In Cumming v. County Board of Education, 175 U.S. 528, and Gong Lum v. Rice, 275 U.S. 78, the validity of the doctrine itself was not challenged. 1.8 In more recent cases, all on the graduate school [347 U.S. 483, 492] level, inequality was found in that specific benefits enjoyed by white students were denied to Negro students of the same educational qualifications. Missouri ex rel. Gaines v. Canada, 305 U.S. 337; Sipuel v. Oklahoma, 332 U.S. 631; Sweatt v. Painter, 339 U.S. 629; McLaurin v. Oklahoma State Regents, 339 U.S. 637. In none of these cases was it necessary to re-examine the doctrine to grant relief to the Negro plaintiff. And in Sweatt v. Painter, supra, the Court expressly reserved decision on the question whether Plessy v. Ferguson should be held inapplicable to public education.
In the instant cases, that question is directly presented. Here, unlike Sweatt v. Painter, there are findings below that the Negro and white schools involved have been equalized, or are being equalized, with respect to buildings, curricula, qualifications and salaries of teachers, and other “tangible” factors. 1.9 Our decision, therefore, cannot turn on merely a comparison of these tangible factors in the Negro and white schools involved in each of the cases. We must look instead to the effect of segregation itself on public education.
In approaching this problem, we cannot turn the clock back to 1868 when the Amendment was adopted, or even to 1896 when Plessy v. Ferguson was written. We must consider public education in the light of its full development and its present place in American life throughout [347 U.S. 483, 493] the Nation. Only in this way can it be determined if segregation in public schools deprives these plaintiffs of the equal protection of the laws.
Today, education is perhaps the most important function of state and local governments. Compulsory school attendance laws and the great expenditures for education both demonstrate our recognition of the importance of education to our democratic society. It is required in the performance of our most basic public responsibilities, even service in the armed forces. It is the very foundation of good citizenship. Today it is a principal instrument in awakening the child to cultural values, in preparing him for later professional training, and in helping him to adjust normally to his environment. In these days, it is doubtful that any child may reasonably be expected to succeed in life if he is denied the opportunity of an education. Such an opportunity, where the state has undertaken to provide it, is a right which must be made available to all on equal terms.
We come then to the question presented: Does segregation of children in public schools solely on the basis of race, even though the physical facilities and other “tangible” factors may be equal, deprive the children of the minority group of equal educational opportunities? We believe that it does.
In Sweatt v. Painter, supra, in finding that a segregated law school for Negroes could not provide them equal educational opportunities, this Court relied in large part on “those qualities which are incapable of objective measurement but which make for greatness in a law school.” In McLaurin v. Oklahoma State Regents, supra, the Court, in requiring that a Negro admitted to a white graduate school be treated like all other students, again resorted to intangible considerations: “. . . his ability to study, to engage in discussions and exchange views with other students, and, in general, to learn his profession.” [347 U.S. 483, 494] Such considerations apply with added force to children in grade and high schools. To separate them from others of similar age and qualifications solely because of their race generates a feeling of inferiority as to their status in the community that may affect their hearts and minds in a way unlikely ever to be undone. The effect of this separation on their educational opportunities was well stated by a finding in the Kansas case by a court which nevertheless felt compelled to rule against the Negro plaintiffs:
“Segregation of white and colored children in public schools has a detrimental effect upon the colored children. The impact is greater when it has the sanction of the law; for the policy of separating the races is usually interpreted as denoting the inferiority of the negro group. A sense of inferiority affects the motivation of a child to learn. Segregation with the sanction of law, therefore, has a tendency to [retard] the educational and mental development of negro children and to deprive them of some of the benefits they would receive in a racial[ly] integrated school system.” 1.10
Whatever may have been the extent of psychological knowledge at the time of Plessy v. Ferguson, this finding is amply supported by modern authority. 1.11 Any language [347 U.S. 483, 495] in Plessy v. Ferguson contrary to this finding is rejected.
We conclude that in the field of public education the doctrine of “separate but equal” has no place. Separate educational facilities are inherently unequal. Therefore, we hold that the plaintiffs and others similarly situated for whom the actions have been brought are, by reason of the segregation complained of, deprived of the equal protection of the laws guaranteed by the Fourteenth Amendment. This disposition makes unnecessary any discussion whether such segregation also violates the Due Process Clause of the Fourteenth Amendment. 1.12
Because these are class actions, because of the wide applicability of this decision, and because of the great variety of local conditions, the formulation of decrees in these cases presents problems of considerable complexity. On reargument, the consideration of appropriate relief was necessarily subordinated to the primary question—the constitutionality of segregation in public education. We have now announced that such segregation is a denial of the equal protection of the laws. In order that we may have the full assistance of the parties in formulating decrees, the cases will be restored to the docket, and the parties are requested to present further argument on Questions 4 and 5 previously propounded by the Court for the reargument this Term. 1.13 The Attorney General [347 U.S. 483, 496] of the United States is again invited to participate. The Attorneys General of the states requiring or permitting segregation in public education will also be permitted to appear as amici curiae upon request to do so by September 15, 1954, and submission of briefs by October 1, 1954. 1.14
It is so ordered.
Footnotes
[ 1.1 ] In the Kansas case, Brown v. Board of Education, the plaintiffs are Negro children of elementary school age residing in Topeka. They brought this action in the United States District Court for the District of Kansas to enjoin enforcement of a Kansas statute which permits, but does not require, cities of more than 15,000 population to maintain separate school facilities for Negro and white students. Kan. Gen. Stat. § 72-1724 (1949). Pursuant to that authority, the Topeka Board of Education elected to establish segregated elementary schools. Other public schools in the community, however, are operated on a nonsegregated basis. The three-judge District Court, convened under 28 U.S.C. §§ 2281 and 2284, found that segregation in public education has a detrimental effect upon Negro children, but denied relief on the ground that the Negro and white schools were substantially equal with respect to buildings, transportation, curricula, and educational qualifications of teachers. 98 F. Supp. 797. The case is here on direct appeal under 28 U.S.C. § 1253.
In the South Carolina case, Briggs v. Elliott, the plaintiffs are Negro children of both elementary and high school age residing in Clarendon County. They brought this action in the United States District Court for the Eastern District of South Carolina to enjoin enforcement of provisions in the state constitution and statutory code which require the segregation of Negroes and whites in public schools. S. C. Const., Art. XI, § 7; S. C. Code § 5377 (1942). The three-judge District Court, convened under 28 U.S.C. §§ 2281 and 2284, denied the requested relief. The court found that the Negro schools were inferior to the white schools and ordered the defendants to begin immediately to equalize the facilities. But the court sustained the validity of the contested provisions and denied the plaintiffs admission [347 U.S. 483, 487] to the white schools during the equalization program. 98 F. Supp. 529. This Court vacated the District Court’s judgment and remanded the case for the purpose of obtaining the court’s views on a report filed by the defendants concerning the progress made in the equalization program. 342 U.S. 350. On remand, the District Court found that substantial equality had been achieved except for buildings and that the defendants were proceeding to rectify this inequality as well. 103 F. Supp. 920. The case is again here on direct appeal under 28 U.S.C. 1253.
In the Virginia case, Davis v. County School Board, the plaintiffs are Negro children of high school age residing in Prince Edward county. They brought this action in the United States District Court for the Eastern District of Virginia to enjoin enforcement of provisions in the state constitution and statutory code which require the segregation of Negroes and whites in public schools. Va. Const., § 140; Va. Code § 22-221 (1950). The three-judge District Court, convened under 28 U.S.C. §§ 2281 and 2284, denied the requested relief. The court found the Negro school inferior in physical plant, curricula, and transportation, and ordered the defendants forthwith to provide substantially equal curricula and transportation and to “proceed with all reasonable diligence and dispatch to remove” the inequality in physical plant. But, as in the South Carolina case, the court sustained the validity of the contested provisions and denied the plaintiffs admission to the white schools during the equalization program. 103 F. Supp. 337. The case is here on direct appeal under 28 U.S.C. § 1253.
In the Delaware case, Gebhart v. Belton, the plaintiffs are Negro children of both elementary and high school age residing in New Castle County. They brought this action in the Delaware Court of Chancery to enjoin enforcement of provisions in the state constitution and statutory code which require the segregation of Negroes and whites in public schools. Del. Const., Art. X, § 2; Del. Rev. Code § 2631 (1935). The Chancellor gave judgment for the plaintiffs and ordered their immediate admission to schools previously attended only by white children, on the ground that the Negro schools were inferior with respect to teacher training, pupil-teacher ratio, extracurricular activities, physical plant, and time and distance involved [347 U.S. 483, 488] in travel. 87 A. 2d 862. The Chancellor also found that segregation itself results in an inferior education for Negro children (see note 10, infra), but did not rest his decision on that ground. Id., at 865. The Chancellor’s decree was affirmed by the Supreme Court of Delaware, which intimated, however, that the defendants might be able to obtain a modification of the decree after equalization of the Negro and white schools had been accomplished. 91 A. 2d 137, 152. The defendants, contending only that the Delaware courts had erred in ordering the immediate admission of the Negro plaintiffs to the white schools, applied to this Court for certiorari. The writ was granted, 344 U.S. 891. The plaintiffs, who were successful below, did not submit a cross-petition.
[ 1.2 ] 344 U.S. 1, 141, 891.
[ 1.3 ] 345 U.S. 972. The Attorney General of the United States participated both Terms as amicus curiae
[ 1.4 ] For a general study of the development of public education prior to the Amendment, see Butts and Cremin, A History of Education in American Culture (1953), Pts. I, II; Cubberley, Public Education in the United States (1934 ed.), cc. II-XII. School practices current at the time of the adoption of the Fourteenth Amendment are described in Butts and Cremin, supra, at 269-275; Cubberley, supra, at 288-339, 408- 431; Knight, Public Education in the South (1922), cc. VIII, IX. See also H. Ex. Doc. No. 315, 41st Cong., 2d Sess. (1871). Although the demand for free public schools followed substantially the same pattern in both the North and the South, the development in the South did not begin to gain momentum until about 1850, some twenty years after that in the North. The reasons for the somewhat slower development in the South (e.g., the rural character of the South and the different regional attitudes toward state assistance) are well explained in Cubberley, supra, at 408-423. In the country as a whole, but particularly in the South, the War [347 U.S. 483, 490] virtually stopped all progress in public education. Id., at 427-428. The low status of Negro education in all sections of the country, both before and immediately after the War, is described in Beale, A History of Freedom of Teaching in American Schools (1941), 112-132, 175-195. Compulsory school attendance laws were not generally adopted until after the ratification of the Fourteenth Amendment, and it was not until 1918 that such laws were in force in all the states. Cubberley, supra, at 563-565.
[ 1.5 ] Slaughter-House Cases, 16 Wall. 36, 67-72 (1873); Strauder v. West Virginia, 100 U.S. 303, 307-308 (1880):
“It ordains that no State shall deprive any person of life, liberty, or property, without due process of law, or deny to any person within its jurisdiction the equal protection of the laws. What is this but [347 U.S. 483, 491] declaring that the law in the States shall be the same for the black as for the white; that all persons, whether colored or white, shall stand equal before the laws of the States, and, in regard to the colored race, for whose protection the amendment was primarily designed, that no discrimination shall be made against them by law because of their color? The words of the amendment, it is true, are prohibitory, but they contain a necessary implication of a positive immunity, or right, most valuable to the colored race,—the right to exemption from unfriendly legislation against them distinctively as colored,—exemption from legal discriminations, implying inferiority in civil society, lessening the security of their enjoyment of the rights which others enjoy, and discriminations which are steps towards reducing them to the condition of a subject race.”
See also Virginia v. Rives, 100 U.S. 313, 318 (1880); Ex parte Virginia, 100 U.S. 339, 344-345 (1880).
[ 1.6 ] The doctrine apparently originated in Roberts v. City of Boston, 59 Mass. 198, 206 (1850), upholding school segregation against attack as being violative of a state constitutional guarantee of equality. Segregation in Boston public schools was eliminated in 1855. Mass. Acts 1855, c. 256. But elsewhere in the North segregation in public education has persisted in some communities until recent years. It is apparent that such segregation has long been a nationwide problem, not merely one of sectional concern.
[ 1.7 ] See also Berea College v. Kentucky, 211 U.S. 45 (1908).
[ 1.8 ] In the Cumming case, Negro taxpayers sought an injunction requiring the defendant school board to discontinue the operation of a high school for white children until the board resumed operation of a high school for Negro children. Similarly, in the Gong Lum case, the plaintiff, a child of Chinese descent, contended only that state authorities had misapplied the doctrine by classifying him with Negro children and requiring him to attend a Negro school.
[ 1.9 ] In the Kansas case, the court below found substantial equality as to all such factors. 98 F. Supp. 797, 798. In the South Carolina case, the court below found that the defendants were proceeding “promptly and in good faith to comply with the court’s decree.” 103 F. Supp. 920, 921. In the Virginia case, the court below noted that the equalization program was already “afoot and progressing” (103 F. Supp. 337, 341); since then, we have been advised, in the Virginia Attorney General’s brief on reargument, that the program has now been completed. In the Delaware case, the court below similarly noted that the state’s equalization program was well under way. 91 A. 2d 137, 149.
[ 1.10 ] A similar finding was made in the Delaware case: “I conclude from the testimony that in our Delaware society, State-imposed segregation in education itself results in the Negro children, as a class, receiving educational opportunities which are substantially inferior to those available to white children otherwise similarly situated.” 87 A. 2d 862, 865.
[ 1.11 ] K. B. Clark, Effect of Prejudice and Discrimination on Personality Development (Midcentury White House Conference on Children and Youth, 1950); Witmer and Kotinsky, Personality in the Making (1952), c. VI; Deutscher and Chein, The Psychological Effects of Enforced Segregation: A Survey of Social Science Opinion, 26 J. Psychol. 259 (1948); Chein, What are the Psychological Effects of [347 U.S. 483, 495] Segregation Under Conditions of Equal Facilities?, 3 Int. J. Opinion and Attitude Res. 229 (1949); Brameld, Educational Costs, in Discrimination and National Welfare (MacIver, ed., (1949), 44-48; Frazier, The Negro in the United States (1949), 674-681. And see generally Myrdal, An American Dilemma (1944).
[ 1.12 ] See Bolling v. Sharpe, post, p. 497, concerning the Due Process Clause of the Fifth Amendment.
[ 1.13 ] “4. Assuming it is decided that segregation in public schools violates the Fourteenth Amendment (a) would a decree necessarily follow providing that, within the [347 U.S. 483, 496] limits set by normal geographic school districting, Negro children should forthwith be admitted to schools of their choice, or (b) may this Court, in the exercise of its equity powers, permit an effective gradual adjustment to be brought about from existing segregated systems to a system not based on color distinctions? 5. On the assumption on which questions 4(a) and (b) are based, and assuming further that this Court will exercise its equity powers to the end described in question 4(b), (a) should this Court formulate detailed decrees in these cases; (b) if so, what specific issues should the decrees reach; (c) should this Court appoint a special master to hear evidence with a view to recommending specific terms for such decrees; (d) should this Court remand to the courts of first instance with directions to frame decrees in these cases, and if so what general directions should the decrees of this Court include and what procedures should the courts of first instance follow in arriving at the specific terms of more detailed decrees?”
[ 1.14 ] See Rule 42, Revised Rules of this Court (effective July 1, 1954). [347 U.S. 483, 497] | textbooks/biz/Civil_Law/Legal_Contexts_of_Education_(Gerry)/06%3A_IDEA_and_IDEIA/6.04%3A_New_Page.txt |
The oceans cover some three-quarters of the Earth. The United States (U.S.) alone governs an ocean area—consisting of both water and land below the surface–over three million square miles, more extensive than the fifty states’ land area. U.S. management spans fisheries, wildlife, energy and minerals, telecommunications, shipping and transportation, weather prediction, military training and national security on behalf of the people of the U.S., who are the ocean’s owners. Even single-sector management, such as fisheries, is complex and involves many different laws and government players that have the challenging goal of balancing conservation with resource harvest or extraction. Many different agencies and personnel are involved in ocean law and policy; many former students are now professionals within this fascinating management mosaic. Let’s get started on our quest to develop a foundation for ocean law knowledge by beginning to understand how things fit together.
Collectively, the oceans are estimated by the United Nations to represent assets equivalent to the seventh largest economy in the world. Within a single nation, such as the United States, the coasts and oceans represent a vast and diverse wealth in terms of living and nonliving resources, jobs, recreation and cultural amenities. The ocean economy is complex and difficult to measure. According to the US Ocean Commission’s 2004 Final Report, values that are critical but evade measure include intangibles such as “clean water, safe seafood, healthy habitats, and desirable living and recreational environments,” a lack of information the Report says have prevented full appreciation by Americans of the economic importance of oceans and coasts. The Report also notes, for comparison, that while the US spends \$100 million annually on economic research on agriculture, ocean-related employment (two million jobs, \$117 billion) is 1.5 times than agricultural employment (2000) and the economic output of the ocean economy in 2000 was 2.5 times larger than that of agriculture.
Figure 1.1 The national Value of the oceans, Final Report of the US Commission on Ocean Policy 2004
A major feature of the ocean economy pertinent to ocean law study is that the nations’ oceans are owned by its citizens.
The Public Trust Doctrine
One of the most interesting and unique management aspects of the oceans is that they are ours and cannot be privately owned. This has several important implications for how we take care of, use, and impact ocean ecosystems and marine resources. For public ownership of the oceans, we have an ancient legal doctrine to thank: the Public Trust Doctrine. The Public Trust Doctrine began as part of the Institutes of Justinian, a Byzantine Roman emperor who codified (made into law) the concept in the year 533. The Institutes had the force of law, and in fact served as the learning materials for first year law students for hundreds of years! Justinian’s laws included, for our purposes, that no one could own the air, shoreline (seaward of the high water mark), the sea bed, oceans waters, running rivers or the resources of animals therein. The sovereign holds these resources in trust for the people of the nation.
Figure 1.2: Emperor Justinian I
This Public Trust carries affirmative legal duties, the same as any form of modern trust, as in a family trust managed by a financial institution. The Public Trustee (the sovereign government) has the duty to conserve and protect the contents of the Trust: the duty not to commit waste of the Trust’s resources, and so forth.
The Public Trust Doctrine eventually became part of English common law, the basis for our own case law in the United States. Far from remaining a static or stale ancient doctrine, the conceptual framework of the Public Trust continues to evolve. The most important thing you need to remember for our explorations in this course is that the public maintains a powerful and defensible legal interest in coastal waters (where the sovereign trustee is the coastal state government), the oceans, their ecosystems and their resources (living and nonliving). For example, if a coastal state leases a parcel of its seabed for the purpose of anchoring a device to harvest ocean energy such as from wind or waves, on behalf of its citizens the state must collect a fair rent through a lease. Similarly, for activities in federal waters petroleum companies must, under law, provide a “fair return in value” of resources extracted from the outer continental shelf to the American people via the United States Treasury, because these are public resources that government manages on the public’s behalf.
Boundaries: Coastal Waters, the Territorial Sea, and the Contiguous Zone
In the United States, there are 35 coastal states — we include the states bordering the Great Lakes. In most cases, each coastal state manages its waters out to three nautical miles off shore (a nautical mile is the equivalent of 1.508 geographic miles). The three-mile zone is commonly understood to derive from the practical necessity of defending the coastline—three miles is the distance a cannon could be effectively fired in the nation’s colonial period.
There are narrow exceptions (Florida’s Gulf coast and Texas have nine-mile limits, as does Puerto Rico) due to particular historical foundations. If you are interested in geographical boundaries and would like to learn more, take a look at the U.S. Ocean Commission’s report: “An Ocean Blueprint for the 21st-Century, Primer on Ocean Jurisdictions: Drawing Lines in the Water.”
Each state governs the resources within its state waters in accordance with the Coastal Zone Management Act (CZMA) of 1972 (16 United States Code [abbreviated USC] Sections [marked §§ 1451-1464, Chapter 33).
The next boundaries to be aware of are the US Territorial Sea, and the adjacent Contiguous Zone (the boundary is 24 miles off shore). Be aware that the term territorial sea can be confusing because the states can use the term to describe coastal state waters (the three-mile zone). However, the US Territorial Sea extends to 12 nautical miles and pre-dates the Truman Proclamation (Proclamation 2667, see http://cclme.org/viewcontents/?f=1-USCFR-truman.txt (1945) asserting US jurisdiction beyond the (previous) twelve-mile limit to the United States’ adjacent continental shelf.
Figure 1.3: This illustration, courtesy of the US Coast Guard, is helpful to aid boundary recognition.
The Exclusive Economic Zone or EEZ
President Ronald Reagan established the United States’ Exclusive Economic Zone (EEZ, 200 nautical miles off shore) by Proclamation 5030 following international law and custom (established by the United Nations Convention on the Law of the Sea, UNCLOS) in 1982. The 200-mile zone encompasses United States national waters.
To view Proclamation 5030, see here. For further background on the EEZ, browse here.
It is staggering to realize the management and law enforcement implications of the US’ EEZ’s vast area, which includes not only the range within 200 miles of our continental coastline but also the 200-mile zone surrounding Hawai’i and United States Territories (Guam, Northern Mariana Islands, Wake Island, Howland and Baker Islands, Midway Islands, Johnston Atoll, Palmyra Atoll, Kingman Reef, Jarvis Island, American Samoa, Navassa Island, Puerto Rico, and the US Virgin Islands). The coastline of the US is 13000 miles long; the area within the US’ EEZ is roughly 3.4 million square nautical miles. Within this area lay vast living and nonliving resources including fisheries, wildlife, seabed minerals, and energy potential (including wind and wave energy).
Figure 1.4 Illustration depicting the Exclusive Economic Zone of the United States. From the National Oceanic and Atmospheric Administration, National Ocean Service.
Under international law, each nation has affirmative mandatory legal duties, beginning with conservation, in the seabed and water column within its EEZ. What rights does the Exclusive Economic Zone impart to the United States? There are three major categories of rights that nations possess in their EEZs. These sovereign rights include exploration/exploitation (but not over-exploitation) of living and nonliving resources, jurisdiction for law enforcement (domestic and international), and other rights defined by international law. Regulatory rights include marine scientific research, and prevention of pollution and dumping. Finally, within their EEZs nations have the right to create artificial islands or other structures with 500-meter safety zones. Unit 6 will discuss responsibilities and rights embodied in UNCLOS as it pertains to international fisheries management within nations’ EEZs.
The open ocean beyond each nation’s EEZ is known as the high seas, or international waters.
Historically, oceans all over the world were freely open to navigation and fishing for all, under a doctrine called Mare Liberum (Latin for “Freedom of the Seas”). This concept appears in a book published in 1609 by Dutch jurist Hugo Grotius. Grotius’ claim was, in part, made in order to justify Dutch exploration of the East Indies.
Today, key points to keep in mind relevant to freedom of navigation, the Territorial Sea, and the EEZ include: 1) a federal navigation servitude derived from the commerce clause within the United States Constitution, the customary right of innocent passage, and 2) a nation’s right to enforce its laws and protect its economic interests. Navigation is so critical to the public interest, that the federal government can order structures that impede navigation removed without compensation under the navigation servitude, the authority governing navigation in all navigable waters. States may also claim state navigation servitudes in state waters under their police power. While state servitudes vary slightly, the main idea is that no compensation is due landowners if structures were removed for a public purpose, including access to riparian areas or for navigation. State navigation servitudes are subject to the supremacy of the federal servitude.
Freedom of navigation is still a customary right, but has been necessarily curtailed by modern international law. Prior to the US’ establishment of a 200-mile EEZ, it was fairly common to see fishing fleets from other nations from shore with the naked eye. Civilian (not military) foreign vessels may travel (a right known as innocent passage) through the 12-mile Territorial Sea or even the EEZ if they obey applicable laws and are not interfering with the sovereign nation’s economic rights. The EEZ prioritizes fishing, as all other economic activities, to US vessels.
Beyond the nation’s 200-mile EEZ lay the high seas. The high seas are interesting as a topic for research and discussion in terms of international law, exploration, scientific research, conservation, piracy (including illegal, undocumented, and unregulated, IUU fishing) and law enforcement. A good place to learn more about the high seas is by viewing a TED talk by expert Kristina Gjerde. The United States Coast Guard is tasked with law enforcement in US waters and on the high seas. For a detailed summary of the topic generally, see the paper by Commander Jeffrey Randall, USCG, Ready for Future? The US Coast Guard and 21st Century Law Enforcement on the High Seas at http://brook.gs/2bFmSiB. For more information on fisheries law enforcement on the high seas, take a look at this site http://www.fao.org/newsroom/en/focus/2004/47127/article_47140en.html hosted by the United Nations Food and Agriculture Organization (FAO).
The Roles of Federal and State Government in American Ocean Management
Coastal states maintain jurisdiction in their coastal waters and resources, subject to preemption by the federal government in constitutionally reserved jurisdictional areas that historically include navigation (via the navigation servitude), energy, commerce, international treaties, military matters and national security. State police powers extend to persons, geographic areas, and resources within their boundaries, which include coastal waters.
Under the Coastal Zone Management Act’s consistency provisions, activities offshore that require a federal permit (referred to as federally permitted activities) must be consistent with the adjacent state’s coastal management plan. States may even assert concurrent jurisdiction in activities or resources beyond their own coastal waters (including federally permitted activities in adjacent states’ waters) if they can show the activities will foreseeably impact their own waters, resources or citizens. An example of when a state might assert jurisdiction is for the siting of an offshore energy facility adjacent to the state but outside the three nautical mile zone.
With regard to fisheries management, state programs maintain licensing for sport and commercial fisheries within their waters and also regulate mariculture (fish farming) within their waters. If the federal regional fisheries management agency does not have a management plan for certain fish species, states may even regulate their licensed vessels in the relevant fishery outside of the three-mile line.
State fish and wildlife agencies police state coastal waters to enforce fisheries laws. In the case of species that are also federally managed, such as endangered species and marine mammals, law enforcement is a joint effort, led by federal enforcement officials.
As we will see in the unit on fisheries management, states also participate in the eight national regional management councils by having a seat at their regional decision-making table. Particularly more recently, coastal states are leading in management innovations in fisheries management, ecosystem-based management, and the establishment of marine protected areas, as well as coastal zone management and conservation, convening ocean science boards and other advances.
In state waters, coastal state and federal managers also collaborate with regard to species protected under federal law, particularly under the Endangered Species Act and Marine Mammal Protection Act.
Finally, states work together with federal authorities on matters involving coastal water quality management: assessing pollutants, prioritizing water quality issues, reporting, and enforcing standards under the Clean Water Act of 1972 (33 USC §1251 et seq.). States may prohibit the dumping of ballast water containing invasive species in their waters, or prohibit ships from dumping sewage under Section 402 of the CWA regulating discharges from discrete sources or pipes (the National Pollutant Discharge Elimination System, NPDES, 33 USC §1342) as well as the Rivers and Harbors Act. Other examples of cooperative state and federal management will be discussed.
A Closer Look at Offshore Uses and Players
The view from any beach in the United States (including those of the five Great Lakes: Lakes Eerie, Huron, Michigan, Ontario, and Superior included in NOAA’s coastal management programs) seems uncluttered and unencumbered. Ocean law study involves becoming aware of the many activities, uses, laws and regulations, and management entities involved offshore.
The governments involved range from coastal counties (and even cities in certain instances), state agencies, and federal agencies. Among them, they share various significant responsibilities of governing living and nonliving resources from the shore, within the state coastal zone, and federal waters beyond, representing public and private access, coastal development, forestry, fishing, conservation, recreation, public health, mineral resources such as sand and gravel, and protecting coastal communities from coastal hazards. The following diagram, from the Oregon Territorial Sea Plan, provides a glimpse into how these responsibilities are organized and distributed within a specific coastal state context as an example.
Figure 1.5 Illustration of the Range of Agency Programs and Authorities in State Territorial Sea and Ocean Shore: Oregon, from State of Oregon Territorial Sea Plan
Key to the Acronyms in Figure 1.5
Left to Right in the Illustration:
• ODLCD: Oregon Department of Land Conservation and Development
• USEPA: United States Environmental Protection Agency
• USCG: United States Coast Guard, also in charge of drug interdiction
• ODOGMI: Oregon Department of Geology and Mineral Industries
• NMFS: National Marine Fisheries Service (of NOAA)
• USFWS: United States Fish and Wildlife Service (within the US United States Department of the Interior, or DOI)
• ODFW: Oregon Department of Fish and Wildlife
• ODSL: Oregon Department of State Lands
• USFAA: United States Federal Aviation Administration
• ODEQ: Oregon Department of Environmental Quality
• OSMB: Oregon State Marine Board
• OPRD: Oregon Parks and Recreation Department
• USFS: United States Forest Service (within the US Department of Agriculture or USDA)
• USCOE: United States Army Corps of Engineers (USACE, the Corps; within the Army)
• OHD: Oregon Health Department
• ODOA: Oregon Department of Agriculture
• USBLM: United States Bureau of Land Management (within the United States Department of the Interior, or DOI)
An appendix of Resources at the end of the book contains additional details about these agencies (see resources for unit one) as well as other information pertinent to ocean law.
Unit 2 will discuss the regulation and management of specific species under the Endangered Species Act and Marine Mammal Protection Act.
Unit 1 Study Questions
1. What are some contemporary implications of public ownership of the oceans and their resources?
2. Why do you think we maintain the Public Trust Doctrine? What is the Trust property being protected? Who is the Trustee in state waters? Who is the Trustee in federal waters?
3. Who are the Trust beneficiaries?
4. What might be some effects if areas of the ocean were to be opened to privatization?
5. Can you think of analogies to how the ocean is managed from land management?
6. When President Reagan issued Executive Order 5030, what did the United States gain? What are some of the implications for law enforcement and resource management of an area that is larger than the land area of the fifty states? What are the significant differences between land and ocean management?
Unit One Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/01%3A_Our_Public_Oceans.txt |
In 2018, 2300 species are listed as threatened or endangered (1625 domestic, and 675 foreign) under the Endangered Species Act (ESA) according to the National Oceanic and Atmospheric Administration (NOAA) Fisheries (also called the National Marine Fisheries Service, NMFS).
Two federal agencies share the administration of the ESA and the Marine Mammal Protection Act (MMPA). The Secretary of the Interior, through the US Fish and Wildlife Service (USFWS), administers the list of threatened and endangered species under ESA and also oversees CITES (the Convention on International Trade in Endangered Species of Wild Fauna and Flora). The USFWS manages land and freshwater species as well as eight marine mammal species. The Secretary of Commerce, through (NOAA/NMFS) is in charge of determining listing or delisting for marine species and anadromous fish (species that go back and forth between fresh and salt waters during their life cycles; examples are steelhead and salmon). NMFS currently has jurisdiction over 161 threatened or endangered marine species (including 65 foreign species).
With regard to both the ESA and the MMPA, there is federal preemption. The term means that, under the Supremacy Clause of the United States Constitution states are subject to and must obey federal law; in order to prevent conflict with state agencies or conflicting laws, the requirements of ESA and the MMPA are paramount, their policies rule management or enforcement questions pertaining to endangered and marine mammal species. Importantly, however, the ESA (in §6(f)) encourages state law to be more protective; the ESA also contains provisions for cooperation with state partners. Also, in cases where the MMPA is more restrictive than the ESA, the MMPA’s protections take precedence.
The Endangered Species Act of 1973, 16 USC § 1531 et seq.
In the Endangered Species Act opening statutory section,
(a) Findings The Congress finds and declares that—
(1) various species of fish, wildlife, and plants in the United States have been rendered extinct as a consequence of economic growth and development untempered by adequate concern with conservation;
(2) other species of fish, wildlife, and plants have been so depleted in numbers that they are in danger of or threatened with extinction;
(3) these species of fish, wildlife, and plants are of esthetic, ecological, educational, historical, recreational, and scientific value to the Nation and its people; … (https://www.law.cornell.edu/uscode/text/16/1531)
Two agencies administer the ESA: the US Fish and Wildlife Service under the Secretary of Interior (USFWS, species of birds, land animals, and freshwater animals, polar bears, walrus, manatee, sea otter, and sea turtles when on land) and the National Oceanic and Atmospheric Administration, under the Secretary of Commerce (NOAA, anadramous and marine species including fisheries, marine turtles when they are in the ocean).
Under the Act, “threatened” means a species is likely to become endangered in the foreseeable future. “Endangered” means the species is at risk of extinction throughout all of its range, or a significant portion of its range (SPR), which the Act does not define. To fill the gap, in 2014 NMFS and USFWS issued a policy guidance, after public notice and comment, to provide more precise meaning to SPR.
“Range,” under the guidance refers to the geographical area where the species is found at the time of listing. SPR, which only comes into play in certain situations, means that there is an area that contributes so substantially to the species’ overall viability that
“without the individuals in it, the species as a whole would be in danger of extinction (meriting an endangered status), or likely to become so in the foreseeable future (meriting a threatened status) (NOAA Fisheries).
In other words, if a species is threatened or endangered wherever it occurs, it will be listed as such (no need for the SPR guidance). The purpose of the new policy, while the agencies expect it to be applied infrequently, is to afford species ESA protection before “large-scale declines or threats occur throughout the species’ entire range.” (June 27, 2014 NOAA/USFWS Policy Guidance on SPR). The SPR guidance has important implications for Distinct Population Segments (DPS).
Key provisions of the ESA include Sections 4, 6, 7, 8, 9, 10 and 11.
Pertinent ESA Sections, adapted from NOAA Fisheries, which contains a concise description of the procedural process for listing.
Under ESA Section 4, listing decisions must be based solely on any one of five factors and the best scientific and commercial information available.
• The species’ habitat or range is at risk of present or threatened destruction, modification, or curtailment.
• The species is over-utilized for commercial, recreational, scientific, or educational purposes.
• The species is threatened or endangered due to disease or predation.
• Existing regulatory mechanisms are inadequate.
• The species’ continued existence is affected by other natural or human-caused factors.
ESA Section 4 covers the process and deadlines for the listing of threatened and endangered species (16 USC §1533; refer to the procedural flow graphic in the appendix of Resources for Unit 2).Section 4 of the ESA requires the identification of habitat when the species is listed (unless such habitat is undetermined, in which case critical habitat must be identified within one year) critical to the species’ recovery, thus helping focus conservation activities and funding. There are rare exceptions. If the cognizant Secretary concludes that factors, including national security or economic cost of critical habitat designation are greater than the benefit to the species in question, areas may be excluded or simply not designated. The exception applies if even identifying critical habitat could worsen a threat to the species (16 USC § 1533(b)(2); https://www.law.cornell.edu/uscode/text/16/1533) Recovery plans, described in 16 USC 1533(f), must incorporate three factors: site-specific management actions to achieve the species’ conservation and survival, objective and measurable criteria that, once met, would allow the species to be delisted, and time and cost estimates to implement the necessary measures.In conjunction with Section 7’s consultation between agencies, critical habitat designation also helps ensure, overall, that federal agencies are required to broadly consider the effects of their actions, avoiding actions that “are likely to destroy or adversely modify critical habitat.” Examples of such activities Section 4 seeks to prevent include “water management, flood control, regulation of resource extraction and other industries” ensuring that federally permitted activities do not inadvertently conflict with habitat goals (February 11, 2016 Rule).ESA Section 7(a)(2) contains consultation provisions. Consultation, begun as early as possible in the initial phases of a federally permitted activity (for example, construction of a dam) is intended to allow the involved agencies and non-federal project proponent more thorough consideration of resource conservation needs. This proactive approach can decrease the necessity for major project modifications later in the process. If a listed species is present, and that species or a designated critical habitat, will not likely be adversely affected by the activity then the consultation concludes. The consultation statutory time limit is 90 days; regulations provide for an extra 45 days for USFWS to prepare a biological opinion.The biological opinion contains an analysis of whether the activity will likely have an adverse effect on the listed species or critical habitat. If adverse effects are likely, the opinion must further include any alternatives that are reasonable and prudent sufficient to allow the project to advance.If the proposed project could result in an “incidental take” of the listed species but not to the extent of jeopardizing the species’ existence, the USFWS must include a statement noting that in the opinion effectively authorizing an incidental take. However, according to USFWS, the agency may include an incidental take statement in either a jeopardy or non-jeopardy opinion. In short, the legally imposed but collaborative process of Section 7 ESA consultation prevents foreseeable adverse impacts by promoting project design modifications to avoid negative effects. (For more information, see https://www.fws.gov/endangered/esa-library/pdf/consultations.pdf)
Figure 2.1: © flickr.com / Stuart Hamilton / 2003
Along with Section 4, Section 10 of the ESA is perhaps the most controversial of the statute’s provisions and governs how the federal government reviews and issues permits for activities that could in a “taking” of a threatened or endangered species.The law defines a taking (in Section 3, Definitions, at 16 USC § 1532 (19)):The term ‘take’ means to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect, or to attempt to engage in any such conduct.
The regulations define harm (50 CFR 17.3) as ‘an act which actually kills or injures wildlife. Such an act may include significant habitat modification or degradation where it actually kills or injures wildlife by significantly impairing essential behavioral patterns, including breeding, feeding, or sheltering.’In the course of ordinary activities, avoiding harm to wildlife can be challenging. On land, Section 10 is frequently seen in development situations where listed species are present. Section 10 is available to landowners, states, Tribes, counties, and companies to obtain permits for “incidental” takes, that is, takes that could occur in the ordinary course of otherwise legal activities. With regard to Section 10 permits in conjunction with development, landowners must have an approved habitat conservation plan (HCP) that includes the evaluation of likely impacts on the listed species, steps to avoid the impact (or to minimize or mitigate the impact) and a statement of funding set aside to ensure the steps are followed.In the ocean, as on land, instances requiring Section 10 permits to take a listed species require the consideration of alternatives that would result in lower impacts. In 2016, the Ninth Circuit Court of Appeals decided a case dealing with the ESA and similar provisions within the Marine Mammal Protection Act in the context of cetaceans and US Navy sonar during training missions. The case (Natural Resources Defense Council, Inc. vs. Pritzker, 828 F.3d 1125, Ninth Cir. July 15, 2016) eloquently presents the difficulty of the analyses of harm and balancing that the ESA requires, and the exacting process that the ESA and MMPA require agencies to conduct. The Pritzker case will be discussed at the end of the unit.
The Marine Mammal Protection Act of 1972 (16 USC Ch. 31)
The MMPA focuses on identification of species of concern and the promotion of ecosystem protection, research, and international cooperation.
Figure 2.2: © NOAA photo library
In the Marine Mammal Protection Act opening statutory section,Sec. 2 The Congress finds and declares that—(1) certain species and population stocks of marine mammals are, or may be, in danger of extinction or depletion as a result of man’s activities;
(2) such species and population stocks should not be permitted to diminish beyond the point at which they cease to be a significant functioning element in the ecosystem of which they are a part, and …they should not be permitted to diminish below their optimum sustainable population. Further measures should be immediately taken to replenish any species or population stock which has already diminished below that population. In particular, efforts should be made to protect essential habitats, including the rookeries, mating grounds, and areas of similar significance for each species of marine mammal from the adverse effect of man’s actions….(https://www.law.cornell.edu/uscode/text/16/1361)
Marine mammal management is consolidated under federal agency management. The MMPA works in concert with the ESA. The prohibition on “taking” in the MMPA transfers the burden of proof from agency managers on the conservation side of the equation to the party requesting a permit for incidental take, who must demonstrate that the activity it plans to undertake will not cause harm to the species.Important definitions include the following. MMPA (16 usc § 1362(13)) defines take as:“to harass, hunt, capture, or kill, or attempt to harass, hunt, capture, or kill any marine mammal.” The associated enforcement regulations add detail to the statutory definition (see 50 CFR § 18.3). Interestingly, the Act prohibits feeding marine mammals in the wild an addition that NMFS added in 1991 to curb this practice among tour boat companies. The original Act and regulations did not define harass, which in 1994 clarified that harassment includes section (18)(A):…any act of pursuit, torment, or annoyance which—
(i) any act that injures or has the significant potential to injure a marine mammal or marine mammal stock in the wild; or
(ii) any act that disturbs or is likely to disturb a marine mammal stock in the wild by causing disruption of behavior patterns, including, but not limited to, migration, breathing, nursing, breeding, feeding, or sheltering.
16 USC § 1362(18)(A).Military training has special relevance to marine mammal protection. The MMPA dedicates special harassment language with regard to this important activity in section (18)(B).In the case of military readiness activity….or a scientific research activity conducted by or on behalf of the Federal Government…the term ‘harassment’ means—
(i) any act that injures or has the significant potential to injure a marine mammal or marine mammal stock in the wild; or
(ii) any act that disturbs or is likely to disturb a marine mammal stock in the wild by causing disruption of behavior patterns, including, but not limited to, migration, breathing, nursing, breeding, feeding, or sheltering to a point where such behavioral patterns are abandoned or significantly altered. [emphasis added]
Incidental (unintended) take occurring during commercial fishing is covered by special permits from the Marine Mammal Authorization Program. Nonfishing activities also require permits. Examples include US military training, offshore energy development (including alternative energies), construction projects, and scientific research. Special permits are provided for Alaskan natives (who participate in co-management) for taking for purposes of traditional subsistence, clothing, and so forth. Just as with the nation’s fisheries, NOAA Fisheries conducts stock assessments for marine mammals, provides additional management details (https://www.fisheries.noaa.gov/topic/laws-policies#marine-mammal-protection-act).The US military is not required to obtain permits for taking during actual combat or times of war. Preparing for real-life engagements at sea requires training expeditions; for the US Navy, submarine use of sonar is part of that training.Since marine mammals communicate across vast distances, military sonar has the potential to interfere with communication as well as to cause harm to these animals’ hearing (specifically at levels at, or higher than 180 decibels (dB) referred to as Level A harassment, 16 USC § 1362(18)(B), (C); however exposure to levels less than 180 dB (16 USC § 1362(18)(B), (D) ‘can cause short-term disruption or abandonment of natural behavior patterns’ (Pritzker 2016).These behavioral disruptions can cause affected marine mammals to stop communicating…,to flee or avoid an ensonified area, to cease foraging…, to separate from their calves, and to interrupt mating. LFA sonar can also cause heightened stress responses from marine mammals. Such behavioral disruptions can force marine mammals to make trade-offs like delaying migration,…reproduction, reducing growth, or migrating with reduced energy reserves. (Pritzker 2016)
In 2016, the United States Ninth Circuit Court of Appeals reviewed the steps that NOAA Fisheries must follow before granting an incidental take permit under the MMPA for military readiness training.The case is instructive (and worth reading, see Unit 2 Resources) because it demonstrates the law’s rigorous standards in the context of an important and necessary activity in pursuit of national security.(Natural Resources Defense Council, Inc. vs. Pritzker, 828 F.3d 1125, Ninth Cir. July 15, 2016) Brief SynopsisIn 2012, the National Marine Fisheries Service (NMFS or NOAA Fisheries) approved a Final Rule (77 Fed. Reg. 50290, Aug. 20, 2012) specifically dealing with incidental take permits in conjunction with peacetime uses of Low Frequency Active (LFA) sonar for five years (as 16 USC § 1371(a)(5)(A)(i) provides).Claiming that the 2012 Rule did not adequately require the “least practicable adverse impact (16 USC § 1371(a)(5)(A)(i)(II)(aa))” on marine mammals, the plaintiffs sued to enforce this statutory mandate within MMPA. The lower court (United States District Court for Northern California) granted summary judgment to the agency. Upon review, the Federal Ninth Circuit Court of Appeals reversed. Specifically, the Ninth Circuit noted the following in its holding: The 2012 Rule failed to contain means for effecting the least practicable adverse impact on marine mammals, stocks, and habitats, as required by law. Second, the Ninth Circuit found that the agency mistakenly conflated the two necessary standards (least practicable adverse impact, and negligible impact (16 USC § 1371(a)(5)(A)(i)(I)) and that, before authorizing any incidental take, both standards must be independently analyzed.Under the regulation implementing MMPA, negligible impact is defined as an impact resulting from the specified activity that cannot be reasonably expected to, and is not reasonably likely to, adversely affect the species or stock through effects on annual rates of recruitment or survival (50 CFR § 216.103). If the agency finds that a proposed activity will have negligible impact, it still must separately consider mitigation measures to reduce effects of the activity to the least practicable adverse impact (15 USC § 1371(a)(5)(A)(i)-(II) considered a stringent standard.Third, the Court noted that the agency was obligated to take areas of the ocean signified as “biologically important” by its own scientists into account when reviewing permit applications, whether or not the agency judged the existing data for those areas as sufficient—the agency was to rely on the data it presently has. The Court remanded the case for further proceedings.An appendix of Resources at the end of the book contains additional information relevant to protected species management (see resources for unit two).Unit 3 will discuss the tools for selecting and setting aside special geographic areas for species protection, management and conservation.
Purpose/Theme Section Notes Citation
Listing Section 4 Five factors; agencies may initiate; ANY PERSON may initiate petition. Listing may ONLY be based on best scientific and commercial information. Economic impacts are prohibited and not considered. 16 USC § 1533(a)-(c)
Critical Habitat Designation Section 4 One year after listing unless undetermined. Unlike listing, CHD must consider economics. 16 USC § 1533(b)(6)(C)
Recovery and Monitoring Section 4 Involve Five-Year Reviews. Specific species information: https://www.fisheries.noaa.gov/national/endangered-species-conservation/endangered-species-act-5-year-reviews
Reports to Congress every two years; see
https://www.fisheries.noaa.gov/feature-story/endangered-species-biennial-report-2014-2016
16 USC § 1533(f) and (g)
State-Federal Cooperation Section 6 The cognizant Secretary “shall” (mandatory) “cooperate to the maximum extent practicable with the States”…including the ability to enter into formal cooperative agreements 16 USC § 1535
Interagency Consultation Section 7 The Secretary “shall” review other programs s/he administers…all other federal agencies “shall” “utilize their authorities in furtherance of the purposes of this chapter by carrying out programs for the conservation of endangered and threatened species…” making sure efforts are consistent 16 USC § 1536
International Cooperation Section 8 Contains provisions authorizing the President to use various examples of funds and tools to provide assistance to other nations to develop and manage programs that support the species in question 16 USC § 1537
Prohibited Acts Section 9 Contains actions that are prohibited: import, export, take, possess, sell, deliver, carry, transport, ship etc. species in violation of the Act 16 USC § 1538
Permits Section 10 Permits may only be issued under certain circumstances; requires applicant to provide specific information regarding impact, mitigation, alternatives; requires Notice and Comment opportunity to the Public 16 USC § 1539
Penalties/Enforcement Section 11 Civil penalties, criminal violations,
provision for citizens to sue for enforcement
16 USC § 1540
Unit 2 Study Questions
1. Would simply listing species as threatened or endangered alone under ESA be enough?
2. What are some proactive examples of management of species to avoid listing in the first place?
3. Does the ESA include international species protection? What is the relationship of ESA to the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES)?
4. Articulate the difference between the analytical steps that NOAA Fisheries must undergo before authorizing an incidental take under MMPA. Why does the difference matter?
Unit Two Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/02%3A__Management_of_Protected_Marine_Species.txt |
Rocky reefs support a wide variety of species quite different from those that depend on sand flats. The coastal ocean teems with abundance and biodiversity and is a nursery for brooding and rearing for many species, including economically valuable fish, which, in their adult stages, are important for supporting commercial fisheries. The open ocean supports an entirely different complement of living organisms. The deep ocean contains unique species adapted to extreme conditions, including life on hydrothermal vents.
Ecosystem-based management pertains to a movement toward holistically understanding the ocean as a system, rather than a collection of species to exploit and manage. Species prefer certain types of ocean habitats, and cannot survive without the food and shelter that their particular ecosystems provide. Conceptually, then, the ocean is many different ecosystems nested into one large and dynamic system.
Advances in our understanding of the inseparability of habitats and the species that depend on them are reflected in contemporary environmental law (protection of habitat, ESA, Unit 2) and science alike. Technology, including ocean sampling, monitoring (both shipboard and satellite), and the spatial information provided by sophisticated Geographic Information Systems and Science (GIS) continue to support the revolution from single-species management to higher resolution ecosystem-based management. Now we can see the forest for the trees, to revise an old expression.
Ecosystem Based Management (EBM)
There are many different definitions of ecosystem-based management (EBM). Here are two useful descriptions. The first is from the United Nations Educational, Scientific, and Cultural Organization (UNESCO) in 2009. The entire report is available at msp.ioc-unesco.org
an integrated approach to management that considers the entire ecosystem, including humans. The goal of ecosystem-based management is to maintain an ecosystem in a healthy, productive and resilient condition so that it can provide the goods and services humans want and need. Ecosystem-based management differs from current approaches that usually focus on a single species, sector, activity or concern; it considers the cumulative impacts of different sectors.
This concept of EBM emphasizes connectivity between all systems (the ocean, atmosphere, and land) necessarily founded upon protection of the whole: structure, functions, and processes. The UNESCO vision recognizes that human dimensions are part of ecosystems: social, economic, and governance structures are also integrated into ecological systems. Finally, because we cannot realistically focus on the entire system at once, EBM is place-based, necessitating adapting the approach to specific ecosystems and their human impacts or influences.
A major concept in support of robust EBM (universally, not just in marine settings) is adaptive management. Informed decision-making moves forward with caution, even when data are incomplete. NOAA describes adaptive management in the following passage (NOAA 2018)
Adaptive management is an essential aspect of EBM; it is a way of managing the dynamic nature of ecosystems in the face of uncertainty by considering a broad range of influences within a region, including external influences, factors, and stressors. To increase effectiveness, adaptive management is often based on an open and mutually agreed upon process for monitoring and assessing the outcome of management actions; a process that allows for mid-course corrections to achieve desired outcomes.
Adaptive management also takes into account socioeconomic considerations, stakeholder participation, conflict resolution, legal and policy barriers, and institutional challenges. Being adaptive requires people and institutions to be flexible, innovative, and highly responsive to new information and experiences. Adaptive management succeeds when there are clear linkages among information, actions, and results and a strong climate of trust among partners. Considering local, state, federal, and international actions and sharing data are also critical to success.
At least three major points stand out in regard to EBM.
First, adaptive management is a priority. According to McLeod and Leslie (2009), ecosystem-based management in the ocean context requires a transition in focus from purely monitoring conventional indicators to including the monitoring of changes in processes (such as those that impact biodiversity) in order to understand reasons for the change.
Second, EBM realistically involves identifying and confronting potential resource tradeoffs. A prime example exists in establishing a management area where lower harvest levels are permitted in order to allow fish species to rebound. Explicitly considering trade-offs in a transparent decision-making process is intended to reduce surprises (unintended consequences) over time that could be damaging to ecosystems and their functions, and heighten tension and confusion among stakeholders. Trade-offs can be examined through a variety of options. One option involves assigning different values to the functions of the system (financial values “monetized” or non-monetized). Another approach is known as the ecological endpoints approach that measures production functions within a system. This approach uses two kinds of functional relationships (supply functions, or ecological production functions, or demand functions, an approach that analyzes relevant aspects of a user group, such as commercial or recreational fishing).
Third, holistic systems management anticipates cooperation and collaboration between governing entities. This is sometimes known as vertical or horizontal EBM. Vertical EBM is the coordination for consistent management from the bottom up, or the top down. Imagine vertical EBM as information sharing and planning across nested but discrete governance entities; for example, consistent cooperation and coordination throughout coastal city, county, state, region, national and international entities.
By contrast, horizontal EBM describes the collaboration and cooperation between entities at comparable governance levels: for example, in Oregon (as in many states), six to nine state agencies may be involved in a coastal decision. At the federal level, similarly several agencies may consult with each other over an ocean management decision, also consulting the appropriate state and regional authorities. Horizontal EBM can and often does include industry sectors as well. For example, the siting of an offshore alternative energy facility can include consultation with several different agencies at the state and federal levels, as well as a variety of permits and permit conditions. While each agency has individual (and complementary, sometimes overlapping or joint) legal and public resource stewardship responsibilities, they must coordinate their review and licensing of the proposed energy facility.
The energy-siting example would involve placing artificial structures in the ocean, requiring the designation of a certain kind of special area. The vast majority of special area management decisions are made in conjunction with restoring, maintaining or preserving areas important for species life stages, biodiversity, or other aspects of habitat structure and function. Each management area must be founded according to its species, resources, needs, stresses, and intended management purposes and goals.
Incorporating EBM and Prioritizing Conservation Objectives in Marine Planning
As long ago as 1972, Congress established the National Estuarine Research Reserve (NERR) System (in the Coastal Zone Management Act). This program can perhaps be seen as an early example of ecosystem thinking. The Reserve system contains 1.3 million acres and 29 estuaries where fresh water systems interact with salt water. The purpose of the program, administered by NOAA Office for Coastal Management, is to promote stewardship through research and education. Through the program, Congress recognized that estuaries are unique, economically critical environments that contain abundant ecosystem functions and services, including habitat (food, nesting, migration corridors, breeding) nurseries for important fisheries, water filtration, and buffering from coastal storms. The national reserves are collaboratively managed with coastal states. (NOAA Office of Coastal Management 2018)
Within Section 320 of the federal Clean Water Act, Congress established complementary non-regulatory estuary conservation program overseen by the US Environmental Protection Agency: the National Estuary Program (NEP). NEP protects water quality and ecosystems in 28 estuaries, managed by individual Comprehensive Conservation and Management Plans (CCMPs). The NEP is centered on collaborative public involvement; the priorities and objectives in the CCMPs are community based: determined by stakeholders spanning local, city, state, federal, private and nonprofit sectors according (EPA 2018).
A prime example of EBM-influenced spatial planning from a coastal state can be seen in the Commonwealth of Massachusetts. In 2008, Massachusetts passed the Oceans Act (Session Laws, Acts 2008, Chapter 114). In 2009, the state passed the Ocean Management Plan, where one of the key planning purposes was for the proper siting of offshore wind energy. By engaging powerful fishing interests, the environmental and recreation communities, among other stakeholders, Massachusetts underwent an offshore planning and mapping process that took several years to complete.
The Massachusetts map reflects an off-limits area, two wind energy areas, and a multi-use area. The general division and labeling of offshore space was based on directing new ocean development away from ecologically sensitive areas (termed SSU for special, sensitive, or unique), in order to decrease competition and conflict between ecosystems and human uses of the areas. Logically, then, the planning and mapping process was preceded by data-gathering toward the establishment of an inventory of species and habitats offshore, but also including evaluations of resource areas most promising (and suitable) for wind energy.
Massachusetts revised the 2009 offshore maps in 2015. The data, process documents, and 2015 edition of the Ocean Plan are available at mass.gov. Volume 1 contains information relevant to management and administration; Volume 2 features the baseline assessment and science framework.
Two core habitats for whales (the North Atlantic Right Whale, and the Humpback Whale) were both increased based on data (effort-corrected sightings dating back to 1970 and running through 2014), using the adaptive management approach described above as a key part of EBM. North Atlantic Right Whales are protected under the ESA, MMPA, and Canada’s Species At Risk Act because they are among the most endangered in the world.
As a practical application of EBM, marine planning is flexible and adaptable. While it requires a major investment of time, funding, expert technical staff, scientific inquiry, and community involvement, marine planning is essential to marine conservation and the future provision of ecosystem services to society, particularly as resources shrink and human populations grow. The oceans seem vast to us, but they are not limitless. As with all Earth systems, oceans are dynamic and undergoing constant change. Impacts on the oceans from a warming planet make proactive, science-based marine planning more urgent. A major conservation-focused aspect of marine planning involves the establishment of marine protected areas worldwide.
Marine Protected Areas (MPAs) generally describe a wide range of levels of protection (including no-take areas known as marine reserves). In 1999, the International Union for the Conservation of Nature (IUCN) defined an MPA as:
any area of intertidal or subtidal terrain, together with its overlying water and associated flora, fauna, historical and cultural features, which has been reserved by law or other effective means to protect part or all of the enclosed environment (Kelleher and Phillips 1999).
In the United States (by Executive Order 13158), a marine protected area is:
any area of the marine environment that has been reserved by Federal, State, territorial, tribal or local laws or regulations to provide lasting protection for all of the natural and cultural resources therein.
As defined by the World Wildlife Fund (WWF), an MPA is
An area designated and effectively managed to protect marine ecosystems, processes, habitats, and species, which can contribute to the restoration and replenishment of resources for social, economic, and cultural enrichment.
Just as with habitat protection on land, connectivity is crucial; linking MPAs multiplies positive outcomes. Most species move, many migrate long distances, and all species use particular areas when breeding or rearing young.
MPAs are conservation centered, with levels of protection that are permanent and constant. Areas may be designated as closed to human activity altogether, or allow one or more activities such as diving, or even limited fishing.
Figure 3.1: The Great Barrier Reef, Australia © Jürgen Freund / WWF
United States waters cover 1.4 times the nation’s terrestrial area. As of 2017 (NOAA publication, Conserving Our Oceans, One Place at a Time) in the US, more than 12oo MPAs cover more than 3.2 million square kilometers—26% of US waters. Commercial fishing is prohibited in 23% of the US protected area. Only 3% of all MPAs in US waters provide the highest level of protection by banning all extractive uses. From 2005-2016, the quantity of area protected in the US increased by more than 20 times.
Figure 3.2 Graphic depicting locations and coverage of US Marine Protected Areas. Image by the National Marine Protected Areas Center.
As EBM continues to be refined, the approach is major tool for holistic ocean planning around the world. Advancing the application of EBM spatially across eight national regions, NOAA is developing a program of integrated ecosystem assessments (IEAs). The initial eight regions are tied to eight Large Marine Ecosystems (LME).
Thirty years ago, the concept of LMEs was developed by NOAA and the University of Rhode Island as a means to implement EBM approaches to LME systems. Of the 64 global LME, 11 are in the US EEZ (NOAA Office of Science and Technology 2018). NOAA defines a large marine ecosystem is defined as “large areas of ocean space (200,000 km2 or greater) adjacent to the continents in coastal waters where primary productivity in generally higher than open ocean areas.” (NOAA 2018)
Figure 3.3 Diagram showing North American LMEs, sites of high biodiversity (from Fautin et al. 2010)
Integrated Ecosystem Assessments (IEAs) collect essential information to inform better management decisions. Below are examples of data gathered or tools included in an IEA.
Data Examples
ASSESSMENTS
Status and trends of ecosystem condition
Ecosystem services
Activities or elements constituting stressors
PREDICTIONS
Future condition of the ecosystem under stress if no action taken
Future condition under variety of management options or scenarios
Evaluation of potential for success of various management options
NOAA Fisheries 2018
Designing and finalizing an IEA to determine ecosystem status involves deriving outputs from five different modules of indicators (spatial and temporal) illustrated below.
Figure 3.4 Indicators that go into an Integrated Ecosystem Assessment (NOAA 2018). Currently, IEA work is unfolding in five of the regions: Alaska Complex, California Current, Gulf of Mexico, Northeast US Shelf, and the Pacific Islands. As the IEA program grows, the agency will move on to add assessments for the Caribbean, Great Lakes and Southeast US Shelf (NOAA 2018).
The appendix of Resources at the end of the book contains additional details relevant to managing through specially designated areas (see resources for unit three).
Unit 3 Study Questions
1. What does Ecosystem Based Management require to be effective? Robust?
2. What are the benefits of managing the marine environment through specially designated areas?
3. Theorize and describe examples of technical or economic issues that managers could confront in stewardship of specially designated areas.
4. From the perspective of managing present and future (often competing) human uses and impacts, what are the implications of ocean zoning and planning for society? For managers?
Unit Three Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/03%3A__Managing_Through_Specially_Designated_Areas.txt |
Prior to 1976, fisheries management almost exclusively performed by the 35 coastal states; now the states manage cooperatively with federal government.
The Magnuson Stevens Fishery Conservation and Management Act of 1976 (or MSA, or Fisheries Conservation Management Act FCMA, as amended 2006) covers all commercial and recreational fishing beyond state waters (three nautical miles offshore). Highly migratory species were added in 1990. Over the past forty years, the MSA has adapted to the times, conservation methodology, and developments in marine science and technology. In many respects the MSA is a successful piece of legislation, which will continue to grow and adapt.
History and Overview of The Magnuson-Stevens Fishery Conservation and Management Act (MSA) 16 USC Ch. 38, and the Sustainable Fisheries Act (SFA)
Findings, Purpose and Policy (16 USC § 1801; excerpts only)
a) FINDINGS The Congress finds and declares the following:
(1) The fish off the coasts of the United States, the highly migratory species of the high seas, the species which dwell on or in the Continental Shelf appertaining to the United States, and the anadromous species which spawn in United States rivers or estuaries, constitute valuable and renewable natural resources. These fishery resources contribute to the food supply, economy, and health of the Nation and provide recreational opportunities.
(2) Certain stocks of fish have declined to the point where their survival is threatened, and other stocks of fish have been so substantially reduced in number that they could become similarly threatened as a consequence of (A) increased fishing pressure, (B) the inadequacy of fishery resource conservation and management practices and controls, or (C) direct and indirect habitat losses which have resulted in a diminished capacity to support existing fishing levels.
(3) Commercial and recreational fishing constitutes a major source of employment and contributes significantly to the economy of the Nation. Many coastal areas are dependent upon fishing and related activities, and their economies have been badly damaged by the overfishing of fishery resources at an ever-increasing rate over the past decade. The activities of massive foreign fishing fleets in waters adjacent to such coastal areas have contributed to such damage, interfered with domestic fishing efforts, and caused destruction of the fishing gear of United States fishermen.
(4) International fishery agreements have not been effective in preventing or terminating the overfishing of these valuable fishery resources. There is danger that irreversible effects from overfishing will take place before an effective international agreement on fishery management jurisdiction can be negotiated, signed, ratified, and implemented.
(5) Fishery resources are finite but renewable. If placed under sound management before overfishing has caused irreversible effects, the fisheries can be conserved and maintained so as to provide optimum yields on a continuing basis.
(6) A national program for the conservation and management of the fishery resources of the United States is necessary to prevent overfishing, to rebuild overfished stocks, to insure conservation, to facilitate long-term protection of essential fish habitats, and to realize the full potential of the Nation’s fishery resources. ……
(b) PURPOSES It is therefore declared to be the purposes of the Congress in this chapter—
(1) to take immediate action to conserve and manage the fishery resources found off the coasts of the United States, and the anadromous species and Continental Shelf fishery resources of the United States, by exercising (A) sovereign rights for the purposes of exploring, exploiting, conserving, and managing all fish, within the exclusive economic zone established by Presidential Proclamation 5030, dated March 10, 1983, and (B) exclusive fishery management authority beyond the exclusive economic zone over such anadromous species and Continental Shelf fishery resources; …
(c) POLICY It is further declared to be the policy of the Congress in this chapter—
(1) to maintain without change the existing territorial or other ocean jurisdiction of the United States for all purposes other than the conservation and management of fishery resources, as provided for in this chapter;
(2) to authorize no impediment to, or interference with, recognized legitimate uses of the high seas, except as necessary for the conservation and management of fishery resources, as provided for in this chapter;
(3) to assure that the national fishery conservation and management program utilizes, and is based upon, the best scientific information available; involves, and is responsive to the needs of, interested and affected States and citizens; considers efficiency; draws upon Federal, State, and academic capabilities in carrying out research, administration, management, and enforcement; considers the effects of fishing on immature fish and encourages development of practical measures that minimize bycatch and avoid unnecessary waste of fish; and is workable and effective; …(end of excerpt)
(law.cornell.edu/uscode/text/16/1801)
1976-1996
Senator Theodore (Ted) Stevens (Alaska, 1968-2009) and Senator (Washington State, 1955-1977) Warren Magnuson (NOAA Fisheries)
Under MSA, the eight US regional fisheries management councils determine the annual allowable catch for each fishery (Maximum Sustained Yield or MSY) and develop a Fishery Management Plan (FMP). Subsequently authors of the FMP determine Optimum Sustained Yield (OSY). OSY = MSY as modified by any relevant social, economic, or ecological factor, and must provide the “greatest overall benefit to the Nation, with particular reference to food production and recreational opportunities.”
Before MSA, foreign fleets could fish up to 12 nm offshore. In accordance with international law since 1983, Coastal States (in this context, we mean nations) have sovereign rights out to the limits of their Exclusive Economic Zones (200 nm) to explore, exploit, and conserve living and nonliving resources. These rights cover every aspect of marine environmental management, including transport, military, pollution, research, and fisheries management.
During 1976-1996, the eight US Regional Fishery Management Councils had broad discretion to meet the short-term needs of the fishing industry; the goal in this early period was Americanization due to increased pressure from foreign fleets. In keeping with the International Law of the Sea, in 1983 Reagan Proclaimed 200 nm EEZ for the United States.
By 1996, US fisheries had become depleted, and the American public became angry. In response, Congress enacted the 1996 Sustainable Fisheries Act (SFA, Public Law PL 104-294), which substantially revised FCMA to refocus efforts toward goals of conservation and ecosystem protection. The Sustainable Fisheries Act requires the eight regional fisheries management councils to make conservation (i.e. rebuilding of stocks) the nation’s the top priority.
It is important to note that fisheries conservation and ecosystem protection as a statutory mandate marks a significant departure from business as usual. Over the short duration of two decades, the post World War II period of scaled-up fishing (driven by protectionism and population-driven consumption) was transformed by lower yields and the practical need to regulate and conserve stocks. It was a national priority to put MSA in place in 1976, before the United Nations Convention on the Law of the Sea (Unit 6) was finalized by nations (including the US) in 1983, establishing the 200 nm EEZ as international customary law.
1996-2006
During the period following 1996, US fisheries management underwent a remarkable, if gradual, statutory (r)evolution to an enforceable conservation emphasis, with accountability and standards built in. The new management paradigm was made possible by technical and scientific advances in ocean and fisheries data availability and sophisticated research methods.
In 1996, Congress revised the MSA with the Sustainable Fisheries Act. The revision incorporated important new definitions, including “overfishing,” a set of ten enforceable National Standards, and a new mandate balancing industry with conservation requirements. Litigation, such as NRDC v Daley, 209 F.3d 747 (DC Cir 2000, discussed later in this Unit) clarified interpretations within the new requirement. The changes introduced in the Sustainable Fisheries Act also required greater management accountability (16 USC § 1854(e)(1)) via mandatory annual reporting to Congress by National Marine Fisheries Service (NMFS, NOAA Fisheries; recent reports are available at nmfs.noaa.gov).
Under the new definitions, overfished means: existing below a prescribed biomass threshold. In a state of being overfished means: Being harvested at a rate above a prescribed fishing mortality threshold (16 USC § 1802(34)).
The term “optimum” … means the amount of fish which—
(A) will provide the greatest overall benefit to the Nation, particularly with respect to food production and recreational opportunities, taking into account the protection of marine ecosystems;
(B) is prescribed on the basis of the maximum sustainable yield from the fishery, as reduced by any relevant social, economic, or ecological factor; and
(C) in the case of an overfished fishery, provides for rebuilding to a level consistent with producing the maximum sustainable yield in such fishery.
MSA National Standards 1 and 2
The enforceable Ten US National Standards (16 USC § 1651; regulations at 50 CFR Chap. VI, Part 600, Subpart D, §600.305) state the following.
Any fishery management plan … shall be consistent with the following national standards:
1) … measures shall prevent overfishing while achieving, on a continuing basis, the optimum yield from each fishery for the US fishing industry.
(2) … measures shall be based upon the best scientific information available.
National Standard Two, requiring actions to be founded on best scientific information available, generates a lot of litigation. Resulting cases provide examples of how the federal courts’ interpretations of statutory terms and phrases can clarify legislative meanings.
Because of precedent (Motor Vehicles Mfrs Assoc., 463 US 29 1983) courts have required plaintiffs to demonstrate that the Councils and Agency relied on no scientific basis whatsoever, a very difficult claim for plaintiffs to prove. Nonetheless, in rare cases plaintiffs have been able to show that a fishery management plan was based purely on political motivations. In cases involving National Standard Two, courts have required that the Councils must expressly provide the scientific rationale they relied on for both conservation and allocation decisions.
MSA National Standards 3 and 4
(3) To the extent practicable, an individual stock of fish shall be managed as a unit throughout its range, and interrelated stocks shall be managed as a unit or in close coordination.
(4) Conservation and management measures shall not discriminate between residents of different States. If it becomes necessary to allocate or assign fishing privileges among various United States fishermen, such allocation shall be
(A) fair and equitable to all such fishermen;
(B) reasonably calculated to promote conservation; and
(C) carried out in such manner that no particular individual, corporation, or other entity acquires an excessive share of such privileges.
Note that 4(C) does not provide details on methods to prevent shares from concentrating in an individual or corporation, nor what to do if shares in a fishery do tend toward or result in a monopolistic entity. However, details to implement fairness could be embedded within individual fisheries’ quota agreements, or other programs for fairly distributing access privileges.
MSA National Standards 5 through 10
(5) Conservation and management measures shall, where practicable, consider efficiency in the utilization of fishery resources; except that no such measure shall have economic allocation as its sole purpose.
(6) Conservation and management measures shall take into account and allow for variations among, and contingencies in, fisheries, fishery resources, and catches.
(7) Conservation and management measures shall, where practicable, minimize costs and avoid unnecessary duplication.
(8) Conservation and management measures shall, consistent with the conservation requirements of this chapter (including the prevention of overfishing and rebuilding of overfished stocks), take into account the importance of fishery resources to fishing communities by utilizing economic and social data that meet the requirements of paragraph (2), in order to
(A) provide for the sustained participation of such communities, and
(B) to the extent practicable, minimize adverse economic impacts on such communities.
(9) Conservation and management measures shall, to the extent practicable,
(A) minimize bycatch and
(B) to the extent bycatch cannot be avoided, minimize the mortality of such bycatch.
(10) Conservation and management measures shall, to the extent practicable, promote the safety of human life at sea.
Figure 4.1: Summer Flounder, tagged, photo from VA Marine Institute
Figure 4.2: Summer Flounder Commercial Landings & Recreational Harvest
The case NRDC v Daley, 209 F.3d 747 (DC Cir 2000) involved National Standard One, which provides that conservation and management measures shall prevent overfishing while achieving, on a continuing basis, the optimum yield from each fishery.
How much certainty must the Regional Fisheries Management Councils have in order to assert that their proposed actions will end overfishing? In balancing between conservation and short-term cost avoidance, the two goals are not equal; conservation comes first. The Daley court held that in order to comply with the MSA, Councils must have >51% certainty that their proposed actions will end overfishing. In the Daley case NMFS (that reviews and authorizes the eight councils’ decisions) had argued that an 18% chance would be sufficient.
In the Daley case (2000): The court said, “The Government concedes, and we agree, that, under the Fishery Act, the Service (NMFS) must give priority to conservation measures. It is only when two different plans achieve similar conservation measures that the Service takes into consideration adverse economic consequences.”
The 2000 Daley court continued, “Where two alternatives achieve similar conservation goals, the alternative that minimizes the adverse impacts on fishing communities would be preferred.” The regulation that the court was interpreting is 50 CFR Section 600.345(b)(1)
That conservation is a mandatory priority over short-term cost avoidance was confirmed again in NRDC v. NMFS, 421 F.3d 872(9th Circuit 2005). Once again, the NMFS had lost—having claimed that the Pacific Council could establish a 47-year rebuilding period for the dark-blotched rockfish (sebastes crameri).
NMFS had underestimated the severity of the rockfish’s depletion. This triggered statutory language requiring the stock to be rebuilt in “as short a time as possible,” taken to be a 14-year period plus one mean generation time, except for the fact that the dark-blotched rockfish lives 33 years. The standard period by regulation must not exceed 10 years– with exceptions.
In summary, the statutory, regulatory and case law of 1996-2006 displays efforts to further refine the MSA, to prioritize conservation, and to make the law’s requirements to more concrete and transparent. The new mandate for best available science underlying FMPs requires Councils to explain the scientific bases for their decisions. This period also marks the first time MSA provisions included Essential Fish Habitat (EFH) and bycatch.
US Fisheries Management 2006-Present
This section presents a brief overview of the rise of science-based management, the reduction of fishing capacity to reverse overfishing, and the increasing prominence of an interesting new player: the rise of non-governmental organizations (NGOs) in at least two roles: first, as a convener and coordinator of scientific support, and second as legislative initiators and collaborators on fisheries and habitat conservation.
Fisheries management since 2006 represents the further development of the emphasis on conservation. In 2007, the reauthorized MSA was implemented to include further emphasis on scientific management, additional conservation and accountability mandates in all Fishery Management Plans (FMPs), Annual Catch Limits (ACLs), and the introduction of an option known as Limited Access Privilege Programs (LAPPs). The new provisions were required to be implemented in all FMPs by 2010 for all overfished species, and in 2011 in all others. FMPs are based on stock assessments.
Fishery management plans must specify objective and measurable criteria, or reference points, to determine when a stock is subject to overfishing or overfished. A scientific analysis of the abundance and composition of a fish stock and the rate of fishing mortality is called a stock assessment. Typically, a stock assessment undergoes peer review by independent scientists before it is accepted as the best scientific information available.
The councils use information from stock assessments to develop and recommend ACLs and other conservation and management measures. While catch limits are set annually, assessments are often done less frequently. To determine whether catch limits have successfully ended or prevented overfishing, NOAA Fisheries may use either the results of a stock assessment or a comparison of catch to the overfishing limit (OFL). If the catch to OFL comparison is used, an overfishing determination is made annually. If a stock assessment is used, due to timing of the next stock assessment, several years may pass before we are able to determine if catch limits successfully ended overfishing (Stocks Status 2016).
From 2007-on, all Fishery Management Plans (FMPs) required conservation mandates, as well as stated Annual Catch Limits (ACLs) designed to avoid overfishing. Data on the progress of ACLs to meet this goal are detailed annually in the MSA-mandated report to Congress. For 2016, for example, 92 percent of all stocks were successfully kept at or below the ACLs set for them. By law, the regional councils must investigate and take steps to correct management of stocks that exceeded ACLs (Stocks Status 2016).
The required Annual Catch Limits (16 U.S.C. § 1853(a)(15))are devised by each Fishery Management Council’s Scientific and Technical Committee. If the Committee does not recommend an ACL, a Council is still required to set one.
According to NOAA, the 2007 reauthorization required two kinds of Accountability Measures (AMs): in-season measures to prevent exceeding the Annual Catch Limit or ACL, and AMs to address any overage of the ACL. The ACL AMs include identification of operational factors that led to the overage, and a plan to mitigate biological harm to the stock, if any. Accountability with regard to ACLs is described in 16 USC § 1853(a)(15). Accountability with regard to the Annual Catch Limits (ACLs) is covered in 16 USC § 1853(a)(15). ACLs are mandatory limits.
Because of uncertainty, there is always a chance that overfishing could occur. To prevent chronic overfishing, the system of ACLs and Accountability Mandates (AMs) should be re-evaluated and modified if the ACL is exceeded more than once in 4 years.
Councils and NMFS can apply a higher performance standard if a stock is particularly vulnerable to the effects of overfishing. Annual Catch Limits (ACLs) must not exceed the recommendations of each council’s scientific and statistical committee or the peer review process (16 USC § 1852(h)(6)).
Determination of an ACL requires three types of data (fisheries data, biological data, and ecological data) followed by analysis:
Data and Analysis
1. Fisheries Data
1. Age, size, sex and weight distributions
2. Geographic distributions
3. Catch and effort data/history
2. Biological Data
1. Abundance
2. Growth rates
3. Where and what the species feeds on
4. Age and size at maturity
5. Life span
6. When, where, and how fish reproduce
7. Vulnerability to overfishing
3. Ecological Data
1. Predator/prey relationships
2. Habitat requirements
3. Other species of fish that coexist within their “neighborhood”
4. Similarities to other, more extensively studied species
Scientists use a variety of information from various sources, including independent research such as National Oceanic and Atmospheric Administration (NOAA) surveys and academic reports; and “fishery dependent” sources such as reported catch data from fishermen’s logbooks, targeted and incidental catch reports from on-board observers, and dealer surveys. This information, combined with analytical methods, such as modeling, helps scientists recommend limits unique to each fish and fishery.
(Source: PEW Fact Sheet; Bringing Back the Fish 2013)
Limited Access Privilege Programs (LAPPs)
Limited Access Privilege Programs (LAPPs) are described in 16 USC § 1853a. LAPPs are an optional, and not mandatory tool (§ 1853a(a)). If a Regional Fishery Management Council elects to develop a LAPP, it must incorporate certain protections outlined in § 1853a.
LAPP Requirements:
Any limited access privilege program to harvest fish submitted by a Council or approved by the Secretary under this section shall—
(A) if established in a fishery that is over- fished or subject to a rebuilding plan, assist in its rebuilding;
(B) if established in a fishery that is determined by the Secretary or the Council to have over-capacity, contribute to reducing capacity;
(C) promote— (i) fishing safety; (ii) fishery conservation and management; and (iii) social and economic benefits (16 USC § 1853a(c)).
Communities are also eligible for LAPPs. To participate, a community must be located in a Council’s area and meet certain criteria. The community must consist of residents who are commercial or recreational fishermen, processors, or fishery-dependent businesses. Finally, the community must develop and submit a Community Sustainability Plan that addresses social and economic development needs. LAPPs and their requirements are covered in 16 USC § 1853a(c)3(A)(i).
The Rise of Best Available Science, and the Role of Nonprofit Organizations
Powerful nonprofit organizations became involved in fisheries conservation and have assumed a leading role in raising public awareness, bridging divides between sectors, and generating independent peer-reviewed reports. In a watershed moment in 2006, the Nature Conservancyand the Environmental Defense Fundpursued a buy-out of permits and vessels in the troubled Pacific groundfish fishery, in exchange for a binding agreement from the Pacific Regional Fishery Management Council to remove particular seafloor areas off central California from bottom trawling as part of the PRFMC Essential Fish Habitat amendment to the groundfish FMP. The final rules designating the EFH and creating the no-trawl zones are available at 71 Fed. Reg. 27408 (May 11, 2006).
At least two important NGO studies and reports from this period are worth noting.
• PEW Charitable Trusts 2013: The Law That’s Saving American Fisheries, The Magnuson-Stevens Fisheries Conservation and Management Act
• NRDC 2013: Bringing Back the Fish
The PEW report includes a list of elements of successful rebuilding programs (PEW)
1. Well-defined objectives
2. Finite timelines
3. Established in an open and transparent process
4. Credible, consistent, and transparent scientific monitoring
5. Simple and easily understood metrics of status and success
6. Predefined rules for triggering corrective management action
7. Substantial, measurable reductions in fishing mortality at the onset of the plan
Figure 4.3: Charitable Trusts 2013
Figure 4.4: PEW Charitable Trusts 2013
Science-based limits, combined with accountability to ensure that catches are consistent with restrictions, get results. The use of science-based limits is not a new idea; it has long proven effective for managing fisheries and rebuilding populations. Analyses from cases all over the world show that fish populations rebound when excess fishing mortality is reduced. Of 24 depleted stocks worldwide with formal rebuilding plans to reduce excess fishing mortality, all but one recovered.
The 2013 report by NRDC 2013 pointed out the following gaps.
• 30% of stocks have inadequate data
• Important stocks (river herring, shad, menhaden, Atlantic sturgeon) are not federally managed so not subject to rebuilding even though recognized as depleted
• NRDC Gaps seem to focus on inconsistencies and lack of information
• The report points out that unmanaged stocks may have state management plans that fall short of MSA standards (inconsistent management in state and federal waters)
• Internationally managed stocks are subject to less stringent rebuilding requirements (inconsistent management across governance structures)
• “more than 200 international stocks (including more than 50 that NMFS considers major stocks) identified as overfished are designated as having ‘unknown’ or ‘undefined’ overfished status”
The NRDC 2013 report estimates that 21 stocks (or 48% of overfished) are considered rebuilt.
Significant Rebuilding Progress (7 stocks or 16%) means that greater than or equal to 50% of the rebuilding target AND greater or equal to 25% increase since the start of the plan
Limited Rebuilding Progress (8 stocks or 18%) means that greater than or equal to 50% of the rebuilding target OR greater or equal to 25% increase since the start of the plan
Lack of Rebuilding Progress (8 stocks or 18%) means less than 50% of rebuilding target AND Less than 25% increase since the start of the plan
Figure 4.5: NRDC 2013
A 2018 NRDC update indicates that 40 federally managed species important to commercial and recreational fishermen are still overfished or at risk. However, the overall recovery shows that the 2007 revisions to MSA are working.
NRDC Fact Sheet 2018, Successfully Rebuilding American Fisheries Under the Magnuson-Stevens Act.
An appendix of Resources at the end of the book contains additional details relevant to fisheries (see resources for unit four).
Unit 5 will discuss regulatory aspects of a wide range of environmental impacts on oceans.
Unit 4 Study Questions
1. For some stocks, little or no data exist. Theorize effective policy options for confronting uncertainty in establishing management plans for those stocks.
2. What are potential methods of achieving (over time) greater consistency at management scales (state, federal, international)?
3. Since 1976 when Congress passed MSA, one of the greatest movements has been toward stakeholder identification, outreach and inclusion. Who are the stakeholders in regard to the nation’s fisheries?
Unit Four Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/04%3A_Our_Fisheries.txt |
The various (and increasing) human uses of ocean resources can cause impacts. The application of federal environmental laws to impact reduction is effective at smaller scales, and indispensable but limited. Most legal and regulatory controls evolved to become relevant after damages have been done and come more from a redress or remedy perspective. Over time, as impacts to the ocean have become more complex and overlapping and the consequences chronic, proactive tools aimed toward awareness and prevention must be developed. The law is only one part of a toolbox that includes public involvement in education and outreach, sophisticated and nuanced long-term stakeholder processes, volunteer programs such as beach clean ups, habitat monitoring, and coastal restoration. This unit will present an overview of statutory approaches to a handful of ocean impacts including overfishing, bycatch, and examples of pollution sources.
Overfishing and Fisheries Recovery
and SFA (the 1996 amendments to the 1976 Magnuson Act) evolved to require science-based management through new accountability measures and the mandatory incorporation of the ten national standards (16 USC § 1651) in each fisheries management plan (FMP) produced by the eight US regional fishery management councils (review the eight councils here).
While US management under the MSA is achieving successes in many fisheries, the over-exploitation of fish stocks remains a significant threat to an important source of high-quality protein for humans, as well as an economic and cultural threat to coastal economies. Overfishing also poses a serious biological impact on marine ecosystems. Overfishing represents disruption of predator-prey and other food-web dynamics, and removal of biomass and nutrients from the biogeochemical cycle. In response, MSA requires Regional Fishery Management Councils to devise an effective FMP for every overfished stock; the FMP must contain concrete steps to rebuild the fishery.
At NOAA’s site detailing Essential Fish Habitat the EFH regulatory guidelines are posted (50 CFR Ch. VI Subpart J, Essential Fish Habitat). A review of these regulations provides a glimpse into the enormous detail that goes into determining, mapping, and improving the EFH required in every FMP.
Coordination is required at two levels (NMFS with federal and state agencies, and NMFS with the eight RFMCs—recall the Unit 3 discussion of administrative examples of EBM).
Declaring certain areas as essential fish habitat (EFH) is a major tool to rebuild fisheries, with west coast groundfish as only one example. Identifying and protecting EFH is an EBM-based strategy (Unit 3). EFH plans are reviewed every five years.
There are over 100 identified types of EFH covering all aquatic habitats. For example, rivers, wetlands, estuaries, coral and rocky reefs, kelp forests and seagrass beds are included. Note that some of these EFH categories are important land-based habitats—not all are ocean ecosystems. Here is the general regulatory definition of EFH (50 CFR §600.10).
Essential fish habitat (EFH) means those waters and substrate necessary to fish for spawning, breeding, feeding, or growth to maturity. For the purpose of interpreting the definition of essential fish habitat: Waters include aquatic areas and their associated physical, chemical, and biological properties that are used by fish and may include aquatic areas historically used by fish where appropriate; substrate includes sediment, hard bottom, structures underlying the waters, and associated biological communities; necessary means the habitat required to support a sustainable fishery and the managed species’ contribution to a healthy ecosystem; and spawning, breeding, feeding, or growth to maturity covers a species’ full life cycle.
For a concrete example, ten species of groundfish on the US west coast were overfished. Today, seven of the ten are declared rebuilt. For a feature about two newly recovered rockfish species, and photographs (darkblotched rockfish and bocaccio) see here.
Geographic delineations are described with precision in the EFH regulation specifically for Pacific Groundfish, see here (50 CFR 660.75). These habitats are mapped and available for viewing. To learn more, take a look at the EFH maps of Pacific Groundfish (the final rule, final Environmental Impact Statement (EIS), and Record of Decision (ROD) are also available here for this fishery).
The Impact of Incidental Take, or Bycatch
Incidental take, also called bycatch, refers to the mortality and discard of species (not just fish, but any ocean species including mammals and sea birds) that are unintentionally caught in the course of commercial fishing activities.
The statutory definition of bycatch is located in MSA Standard 9 (50 CFR Chapter VI Part 600(D).600.350). If marine mammals or endangered species are involved as bycatch, MMPA and ESA also apply since an illegal taking has occurred.
Bycatch represents a serious and persistent ocean impact. Innovations in policy and re-designed fishing gear, seasons and practices to reduce bycatch are still a national work in progress. NOAA Fisheries devised a National Bycatch Strategy, revised in 2016, that contains five main objectives.
The national program emphasizes collaboration with states, other agencies, and stakeholders and includes implementation of fisheries observers. In many cases, fishermen themselves have designed new gear (in collaboration with engineers, scientists, and inventors) to eliminate or reduce bycatch within specific fisheries. Click to see a video (provided by an environmental NGO) that tells the story of a collaborative project to design a better trawl net that lets juvenile fish escape.
Globally, one annual estimate of bycatch is 8.5 million tonnes (or 40.4 percent of the annual catch estimate of 95.2 million tonnes, from the authors’ data). The authors note that using weight alone, hides the true impact and dire consequences of removing tonnes of juvenile fish from the system, thus the impact in terms of ecology (and fisheries future productivity) is far greater (Davies et al. 2009).
Figure 5.2 Summary of all bycatch estimate results, from Davies et al. 2009 (permission to reproduce requested 3.9.18)
Reliable estimates of annual bycatch among US fleets are difficult to identify; previous data are reported from 2011-2013 (US National Bycatch Report 2016).
Moore et al. (2009) reviewed US fishing mortality to sea turtles, marine mammals and birds and found that while policy has led to significant improvement,
cumulative estimates are lacking for all taxa, but particularly for sea turtles and seabirds in most places where it occurs, observer coverage levels are insufficient to accurately characterize these rare bycatch events across fleets (Moore et al. 2009, p. 445).
As of August 2017, NOAA Fisheries (NMFS) awarded \$2.3 M to eighteen different bycatch reduction research projects around the US. To learn more about this initiative, please visit (fisheries.noaa.gov/feature-story/2017-bycatch-reduction-engineering-program-awards).
Pollution
This section will present an overview of US pollution regulation in terms of approaches generally described as prevention and control (via Clean Water Act (CWA) Section 403 Ocean Discharge Criteria). Resources related to reduction and response (oil spill civil and criminal liability in CWA Section 311), or the domestic and international laws prohibiting ocean dumping are provided in Unit 5 Resources in the Appendix.
Marine pollution poses short- and long-term impacts on organisms, biodiversity, food webs (including benthic), and sometimes contains toxic contaminants. In some instances, the compounds were banned decades ago but remain as ‘legacy pollution’—the compound has already dispersed but persists in the environment such as river substrates or bay and ocean bottom sediments. Polychlorinated biphenyls, or PCBs are an example. Banned in the US in 1979 and around the same time in Canada, this contaminant has been shown to be toxic to humans and wildlife (see oceanservice.noaa.gov/facts/pcbs.html).
Another example, polycyclic aromatic hydrocarbons (PAHs), are a component of petroleum entering the sea from oil spills, terrestrial runoff, and other sources. Exposure to contaminated prey can lead to malformed embryos in mammals, and has been suspected in certain lung infections in dolphins following the New Horizon platform blowout (Venn-Watson et al. 2015).
Contaminants in the ocean largely come from terrestrial-based sources, including stormwater runoff and stream outflows that collect trash that blown by the wind. Plastics in the ocean (from land and ships) are an enormous threat to marine life for several reasons: fish, mammals and birds that ingest plastic mistaking it for prey face high mortality. Floating plastic objects are a vector for invasive species and pathogens. As they degrade in saltwater, plastics leach chemical compounds, as they degrade further they become smaller and smaller until they are what is called microplastics—plastic particulates that float in the water column. The increase of major storm events will only exacerbate the problem of plastics in the oceans.
Reducing the use of plastics, recycling them or disposing of them properly, through highly visible, consistent programs to keep plastics and all trash out of coastal watersheds and the ocean are objectives that are clearly achievable through community education, grassroots volunteer programs such as beach clean up events. Within coastal marinas, local ordinances with boater education and onsite recycling centers could be very beneficial. At the state level, regulations related to individual coastal state management plan priorities can help. The strongest intervention options toward a solution are most likely located within organized, focused efforts at the local level.
Many coastal states have marine debris action plans. The NOAA Office of Response and Restoration is a source for examples of published reports and technical memos from the coastal states (marinedebris.noaa.gov/reports-and-technical-memos). NOAA’s 2017 report on the accomplishments provides a snapshot of progress at the national level. During 2017,
• More than 1600 metric tons of marine debris were removed
• Three Marine Debris Emergency Response Guides were created for South Carolina, Georgia and Mississippi
• More than 1800 teachers were reached, and more than 18,300 students
• Forty-two new survey sites were added to the Monitoring and Assessment Project
• The Program responded to debris cleanup from three hurricanes (Harvey, Irma, Maria)
NOAA 2017 Marine Debris Program Accomplishments Report
Figure 5.3 Plastic pollution, from Laura Parker, National Geographic, Ocean Trash: 5.25 Trillion Pieces and Counting, but Big Questions Remain, photo Waterframe, Alamy
However, flows that do not come from a pipe, a ship, or a floating platform (all regulated point sources) are nonpoint source pollution, which is (if regulated at all) a local concern to be touched on in Unit 9 (Coastal Management). Flows that come from pipes, ships, and platforms are regulated through permits, reviewed every five years, via the CWA provisions regarding ocean discharges (33 USC 1343; see below).
Within three miles of the coastline, water-quality criteria are established by EPA-authorized state water quality programs. Coastal water quality monitoring in conjunction with beaches and water recreation can be found on state coastal management agency websites. The EPA, under its mission to protect human health, also provides coastal water quality information and warnings to the public (epa.gov/beaches/find-information-about-your-beach). The grassroots nonprofit Surfrider Foundation also monitors coastal water quality and provides periodic reports online; the most recent Surfrider Report is from November 2017 (surfrider.org/coastal-blog/entry/2017-state-of-the-beach-report).
The CWA’s National Pollution Discharge Elimination System (NPDES) regulates point source (think end-of-pipe) ocean discharges beyond three-mile state waters with criteria set by the EPA. The ocean discharge permit program applies to around 300 types of facilities, including offshore oil and gas activities, and seafood processing.
EPA uses seven guidelines to determine whether or not to issue an ocean discharge permit. Permit applicants must submit analyses of their proposed discharges (biological, ecological, and chemical). EPA reviews the permit applications to evaluate whether the activity will unreasonably degrade the marine environment through an analysis of ten factors (in 40 CFR 125.122; see second table, below). If a proposed discharge meets the adjacent coastal state’s water quality standards, there is a presumption that the discharge will not cause an unreasonable degradation.
Clean Water Act NPDES Ocean Discharge Criteria
33 USC § 1343; see also Regulations at 40 CFR §§ 125.120 – 125.124
(c) Guidelines for determining degradation of waters
(1) The [EPA] Administrator shall, within one hundred and eighty days after October 18, 1972 (and from time to time thereafter), promulgate guidelines for determining the degradation of the waters of the territorial seas, the contiguous zone, and the oceans, which shall include:
(A) the effect of disposal of pollutants on human health or welfare, including but not limited to plankton, fish, shellfish, wildlife, shorelines, and beaches;
(B) the effect of disposal of pollutants on marine life including the transfer, concentration, and dispersal of pollutants or their by-products through biological, physical, and chemical processes; changes in marine ecosystem diversity, productivity, and stability; and species and community population changes;
(C) the effect of disposal, of pollutants on esthetic, recreation, and economic values;
(D) the persistence and permanence of the effects of disposal of pollutants;
(E) the effect of the disposal of varying rates, of particular volumes and
concentrations of pollutants;
(F) other possible locations and methods of disposal or recycling of pollutants including land-based alternatives; and
(G) the effect on alternate uses of the oceans, such as mineral exploitation and scientific study.
(2) In any event where insufficient information exists on any proposed discharge to make a reasonable judgment on any of the guidelines established pursuant to this subsection no permit shall be issued under section 1342 of this title.
NPDES Ocean Discharge Criteria,
Determination of unreasonable degradation of the marine environment
Regulation 40 CFR 125.122
(a) The [EPA] director shall determine whether a discharge will cause unreasonable degradation of the marine environment based on consideration of:
(1) The quantities, composition and potential for bioaccumulation or persistence of the pollutants to be discharged;
(2) The potential transport of such pollutants by biological, physical or chemical processes;
(3) The composition and vulnerability of the biological communities which may be exposed to such pollutants, including the presence of unique species or communities of species, the presence of species identified as endangered or threatened pursuant to the Endangered Species Act, or the presence of those species critical to the structure or function of the ecosystem, such as those important for the food chain;
(4) The importance of the receiving water area to the surrounding biological community, including the presence of spawning sites, nursery/forage areas, migratory pathways, or areas necessary for other functions or critical stages in the life cycle of an organism.
(5) The existence of special aquatic sites including, but not limited to marine sanctuaries and refuges, parks, national and historic monuments, national seashores, wilderness areas and coral reefs;
(6) The potential impacts on human health through direct and indirect pathways;
(7) Existing or potential recreational and commercial fishing, including fin fishing and shellfishing;
(8) Any applicable requirements of an approved Coastal Zone Management plan;
(9) Such other factors relating to the effects of the discharge as may be appropriate;
(10) Marine water quality criteria developed pursuant to section 304(a)(1).
Ocean Acidification
Acidification caused by fossil fuel burning is an urgent climate change impact on the pH of seawater and is a threat to all ocean systems and fisheries, particularly shellfish. Ocean acidification is caused by dissolved CO2, but made worse by warmer ocean temperatures. Outflows of stormwater, the volume of which is increasing due to more frequent and severe storm events, also contribute to acidification because they contain compounds including nutrients such as nitrate from agricultural fertilizer and manure, and deposition (both wet and dry) of nitrogen compounds from air pollution. As 170 nations move ahead implementing their commitments under the most recent Climate Accord, perhaps the best option presently is outreach and education, and to strengthen current regulatory approaches (US Clean Air Act and Clean Water Act) at the local, state, and regional levels regarding improving air quality, and reducing contaminants in stormwater runoff.
Acidification interferes with shell building by oysters, a commercially valuable resource. To get an idea of how changing biogeochemical cycles and ocean chemistry can impact shell building, review this interactive explanation from the Woods Hole Oceanographic Institution.
In regard to large, complex phenomena such as ocean acidification it is important to bring home its importance, to the greatest extent possible, in a local, personal context. Moreover, it is critical to educate and involve community members in actions to confront the problem. Kelly et al. (2013) found that data alone representing the environmental risk of ocean acidification was less effective at motivating decision-making leading to action than developing an effective, accompanying narrative—i.e. telling the story of the impact to give the data more meaning. The case study involved oyster production in the Whiskey Creek Shellfish Hatchery on the Oregon coast. The hatchery, according to the authors, produces approximately 75% of juvenile Pacific oysters for the million-dollar West Coast oyster aquaculture industry. When the hatchery began to experience up to 80% mortality of its larvae, it partnered with scientists and others to begin water quality monitoring, which revealed a strong correlation between the mortality periods and seasonal coastal upwelling of acidic bottom waters. In 2011, the Governor of Washington convened a Blue Ribbon Panel on Ocean Acidification that was widely inclusive of government, nongovernmental organizations, scientists, and the industry. Eventually, the Panel’s efforts led to a set of commitments by the state, “Washington’s Response to Ocean Acidification.”
Kelly et al. point out that narratives can link knowledge to action, partly because audiences remember narrative far more than information presented in an expository format). The authors note:
We suggest that this story gained critical traction because it featured identifiable and sympathetic characters—real people—with both the capacity and the willingness to share their story outside the boundaries of their community, and because their story was consistent with the effects predicted by a growing body of biophysical data. WC [the narrative] personified the economic impacts of one specific form of environmental change—ocean acidification—and did so in a credible and accessible way…[that] … was perceived to clearly link a specific environmental change to effects on real people, the small but important local industry that they support, and the provision of food from the sea. (Kelly et al. 2013)
An appendix of Resources at the end of the book contains supplemental information relevant to water quality problems discussed above as well as the regulation of other pollution impacts (ocean dumping, oil spills, and marine debris such as plastics, lost or discarded fishing gear sometimes called ‘ghost nets’; see resources for unit five).
Unit 6 will present important aspects of international fisheries management.
Unit 5 Study Questions
1. Is there a connection between watershed management, drinking water, wastewater discharges, and ocean water quality?
2. What are possible options for addressing marine debris from land? From offshore sources?
3. Some regional approaches are showing signs of success in decreasing pollution to large water bodies, such as the Chesapeake Bay. The plan for restoring the Bay is a very long-term, ongoing effort, involving multiple and complex efforts to curb pollution from various land use activities, air pollution, and runoff from a 64,000 square mile watershed touching six states and the District of Columbia. The restoration chiefly involves coordination, collaboration, enforceable standards (pollution limits) under the umbrella of a CWA Total Maximum Daily Load (TMDL; see https://www.epa.gov/chesapeake-bay-tmdl). If this holistic, longterm approach can work in a geographic area this large and diverse, could it work elsewhere? What short- and long-term benefits might a cohesive, national coastal watershed effort have for ocean water quality? Recreation? Ecosystems? Fisheries?
Unit Five Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/05%3A_Regulating_Ocean_Impacts.txt |
The primary, holistic purpose of international law is to establish and set forth a set of internationally agreed-upon norms—the instruments are elaborated upon in international discussions with policy objectives reflected in agreements (treaties and conventions). International law is uniquely based on the tension, common interests and common goals among sovereign nations who are the parties to each agreement.
All international instruments, and those governing fishing perhaps most of all, evolved and transformed out of the ancient principle of freedom of the seas (mare liberum, see Unit One) put forth by Hugo Grotius and maintained by nations for centuries. The transition from the perspective of ocean resources as limitless—a free-for-all commons—to the current (and still developing) set of governance structures for a hungrier and more crowded planet, represents a remarkable change.
While nations make their own laws with which to govern themselves, international law emerges out of ambitious, vigorous global discussions and the need to determine goals and principles, equitable and sustainable guidelines for resource distribution and security of nations. Practices that were previously customary become codified in international conventions; codified conventions therefore reflect international custom. Finally, note that in international law nations are “states.” To avoid confusion, States (meaning countries) will be capitalized.
The purpose of this unit is to provide fisheries and wildlife and other natural resource and environmental management professionals and students with walking-around knowledge about how fisheries are managed at the international scale.
Governance and Sustainability of World Fisheries
The United States possesses legal and market-based tools to combat unsustainable and illegal fisheries from outside domestic waters. The 1971 Pelly Amendment to the Fishermen’s Protective Act, 22 USC 1971-79, and the Lacey Act of 1900 that makes it illegal to import and sell fish and shellfish illegally caught (16 USC 3372(a)(2)(A). Amendments to the Magnuson Stevens Act (2000, and 2002) added provisions to indirectly regulate the illegal shark fin trade (Shark Finning Prohibition Act of 2000, 16 USC 1857(1)(P); see also The Shark Conservation Act of 2010, 16 USC 1857(1)(P)). Under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), 182 nations and the European Union (EU) protect approximately 35,000 species of plants and animals.
Certification schemes for sustainable fisheries offer another market-based approach. According to FAO’s Nicolas L. Gutierrez (2016), 30 percent of global stocks are overexploited, despite recoveries in some fisheries and some regions. Certification has early success. Seafood certification labeling can raise awareness and issue visibility, and create higher product values as an economic incentive. Gutierrez notes that well established programs such as the nonprofit Marine Stewardship Council (MSC, https://www.msc.org) have reached ten percent of global fisheries.
International fisheries are regulated by 17 Regional Fisheries Management Organizations (RFMOs), consortia of countries (coastal States, and distant water fishing nations or DWFN) collaborating based on financial and conservation interests, mainly in commercially valuable species but sometimes on ecosystem or habitat also. Not every ocean region is governed by any form of RFMO. RFMOs are diverse, focused on a single or multiple species. For example, five RFMOs manage tuna. Governed by treaties and other international agreements, some regions and nations participate in more than one organization. Each entity’s structure for decision-making is different, although all have a science committee that provides recommendations. Decisions result in plans for annual implementation plans that are consensus-based through voting. While RFMO decisions are binding, compliance varies; according to PEW Charitable Trusts (2012), these organizations could be strengthened by having stronger incentives, political weight, sustainable management mandates and authority for enforcement.
Figure 6.1 Map of Global Tuna Management by RFMOs (PEW 2012)
The World Bank (WB) and FAO studied and summarized the status and value of fisheries sustainability in the landmark report, Sunken Billions: The Economic Justification for Fisheries Reform, first published in 2009, and updated in 2017 (see Unit 6 Resources in appendix).
Within an era since the early 1990s that included stagnant and declining fisheries, the 2009 WB/FAO study pointed to a global fisheries crisis based on observations that despite falling catch, the era featured an “increase in the level of fishing by a factor of four.” Even in the face of a doubling of global fleet size and three-times the number of those involved in fishing, catches did not increase.
Uncertainties complicating sustainability include ongoing ocean changes attributable to climate (rising temperatures, changing currents, acidification, rising sea levels). The purpose of the WB/FAO study and 2017 update is to estimate, as accurately as possible, the costs and benefits of achieving sustainable global fisheries, to encourage fishing nations to understand and address the economic loss of \$83 billion (2012) that declining fisheries represent (the loss to which the sunken billions report title refers).
The report states that if effort were reduced, the oceans living resources would have a chance to regenerate, leading to four improvements (fish biomass by a factor of 2.7, 13 percent increase in annual harvest, 24 percent increase in unit prices in part because of recovery of high-value species severely depleted, and annual net benefits increase from \$3 billion to \$86 billion).
Sunken Billions hypothesized two ways to generate recovery. Although unpopular and therefore impracticable, the first option listed in the report nonetheless provides useful comparison: fishing effort reduced to zero followed by maintaining effort at some level deemed optimal. The report estimates this method would recover over “600 million tons in five years and then taper off…” The report’s second hypothetical method is to reduce global fishing effort by five percent per year for a decade. The report estimates the second method would bring fisheries to the same level (600 million tons) in around 30 years.
An FAO report (State of World Fisheries and Aquaculture 2016) finds 31.4 percent of commercial fish stocks worldwide are presently fished at a level that is not sustainable, three times the 1974 level. Offset by aquaculture, worldwide fish consumption rose above 20 kilograms per year for the first time. The role of aquaculture is considerable: FAO reports that, in 2014, 35 countries (3.3 billion people, or 45 percent of world population) “produced more farmed than wild-caught fish.
The RFMOs, as they gain scientific and compliance capacity, are uniquely positioned to lead fisheries recovery and sustainability. They are the backbone network of international fisheries management.
The United Nations Convention on the Law of the Sea (UNCLOS)
For convenience, the provisions of the Convention most pertinent to this unit are provided in the appendix of resources for Unit 6. They are:
Part V, EEZ Articles 61 – 68
Part VII The High Seas
• Conservation and Management Articles 116-120
• Environmental Protection including Pollution Articles 207-212
Enforcement Articles 213-22
UNCLOS is aptly known as the ocean’s constitution because it provides a holistic vision of cooperative ocean governance spanning the exploitation and management of living and nonliving resources, navigation, marine environmental protection, the resolution of disputes, and scientific research.
Over coming years, areas likely to be revised or expanded might include modernizing the Convention’s fisheries provisions, and the sections on deep seabed (“the Area” designated as part of the heritage of all humankind) issues, especially pertaining to mining of manganese and other valuable metals.
In reviewing the Convention’s sections on fisheries, you may notice the (now familiar) maximum sustained yield (MSY) metric. The Convention’s emphasis on MSY is becoming controversial among some international fisheries experts. The Convention is increasingly faced with complex realities of overfishing, itself a product of multiple forces (weak governance and enforcement, high product market values, fleet overcapacity, or ever-advancing capture technologies). Moreover, the oceans are undergoing profound change (increasing acidity, water temperature, melting ice). Management paradigms in wealthier nations, such as robust science-based management, and ecosystem-based management (EBM) could help inform more prudent decision-making. However, the funding, technology and capacity that could support contemporary tools to improve the concept of MSY toward decreasing overfishing can be lacking in developing nations.
The Convention’s myopic emphasis on the fish themselves (total allowable catch, size, quotas) completely overlooks enormous pressures represented by larger environmental and economic forces. Some experts would like to see MSY modernized and more nuanced to take into account important contemporary influences on global catch including data on global and regional fleet count, boat size, gear types, and fisheries subsidies, as well as area-based bans and moratoria (Hey, 2012).
Conflict Management in the Convention
UNCLOS provides four separate systems for dispute resolution; these feature forums that are third-party, formal, and compulsory. Article 287(1) states that parties in dispute may choose from the International Court of Justice (ICJ), the International Tribunal on the Law of the Sea (ITLOS, under Annex VI), a special arbitration form (Annex VII, the default forum) and a fourth tribunal (Annex VIII) that oversees fisheries, scientific, environmental, and navigation questions.
The following sites provide insights into current controversies.
International Court of Justice (ICJ, The Hague, Netherlands)
The International Tribunal on the Law of the Sea (ITLOS, Hamburg, Germany)
Unit 6 Resources (appendix) contains excerpts from UNCLOS that are relevant to international fisheries management and many other useful global fisheries references.
Unit 7 will present aspects of current problems in ocean management.
Notes: Hey E (2012), The Persistence of a Concept: Maximum Sustainable Yield, 27 The International Journal of Marine and Coastal Law, 763-771.
Unit 6 Study Questions
1. Should nations that are meeting management and sustainability goals share technology and expertise with nations that are falling short? If so, what existing forums or processes do you recommend serving as vehicles for progress?
2. What is at stake nationally and internationally in the case of declining and overfished species?
3. While there are still important stocks being rebuilt, the United States and North America as a region, are among the most well regulated fisheries internationally, with notably smaller fleets. Based on what you know from the readings in Unit 4 and elsewhere, what key principles and tools might underlie these successes?
Unit Six Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/06%3A_Introduction_to_International_Fisheries_Management.txt |
In Unit 5, we looked at examples of how law deals with some contemporary, urgent ocean impacts. Unit 6 shed light on how international fisheries are managed. Unit 6 will provide an overview of tools available to confront the major, complex and serious global problem of illegal fishing. The purpose of this unit is to set the stage by providing an introduction and overview to IUU fishing.
Estimates of IUU fishing vary from 15-30% of global catch, robbing the poorest coastal nations of upwards of \$1 billion annually. The drivers include high seafood demand, high profits with lower perceived risks in the context of a product that historically defied detection of illegality. The United Nations Food and Agriculture Organization, FAO defines IUU here.
Illegal fishing refers to activities:
Conducted by national or foreign vessels in waters under the jurisdiction of a state, without the permission of that state, or in contravention of its laws and regulations;
Conducted by vessels flying the flag of states that are parties to a relevant regional fisheries management organization but operate in contravention of the conservation and management measures adopted by that organization and by which the States are bound, or relevant provisions of the applicable international law; or in violation of national laws or international obligations, including those undertaken by cooperating states to a relevant regional fisheries management organization.
Unreported fishing refers to fishing activities:
Which have not been reported, or have been misreported, to the relevant national authority, in contravention of national laws and regulations; or activities undertaken in the area of competence of a relevant Regional Fisheries Management Organization (RFMO), which have not been reported or have been misreported, in contravention of the reporting procedures of that organization.
Unregulated fishing refers to fishing activities:
In the area of application of a relevant RFMO that are conducted by vessels without nationality, or by those flying the flag of a state not party to that organization, or by a fishing entity, in a manner that is not consistent with or contravenes the conservation and management measures of that Organization; or in areas or for fish stocks in relation to which there are no applicable conservation or management measures and where such fishing activities are conducted in a manner inconsistent with State responsibilities for the conservation of living marine resources under international law.
The topic of IUU is constantly evolving. Governments, grassroots nonprofits, and even celebrities are becoming more involved (if you are intrigued, check out Global Fishing Watch, founded by Leonardo DiCaprio and Google http://globalfishingwatch.org).
As a beginning point, the 2006 reauthorizations to the Magnuson Stevens Fishery Conservation and Management Act included much-needed attention to stocks outside US waters. The reauthorizations provide the Commerce Secretary with the ability to monitor high seas fisheries, including stocks that are subject to international agreements and governing bodies. The 2006 updates initiated a suite of powerful improvements in international monitoring and information sharing, communication between enforcement agencies, and registry for vessels. The reauthorization established a process for the US to identify and then work with specific nations that have lax fisheries enforcement. Those countries may then take action to achieve greater compliance, and if successful then receive “certification” of their fisheries by the US.
To read the text of the MSA section on Illegal, Unregulated or Unreported (IUU) Fishing, go to 16 USC § 1826j):https://www.law.cornell.edu/uscode/text/16/1826j
For more about the strengthening of MSA’s enforcement provisions, explore here.
In conjunction with the 2006 MSA changes, the US focused on achieving greater cooperation with other nations through strengthening the Moratorium Protection Act (16 USC 1826d-k). The Secretary of Commerce reports progress to Congress every two years about consultations with countries with vessel offenses. The Moratorium Protection Act also provides for the Secretary, along with the Secretary of State and regional councils to undertake actions to improve international fisheries management. Within the organizations in which the US is a member, the US is authorized to urge regional fisheries organizations to do any of the following:
• Incorporate multilateral market-related measures against member or non-member governments whose vessels engage in IUU fishing.
• Seek adoption of lists that identify fishing vessels and vessel owners engaged in IUU fishing.
• Seek adoption of a centralized vessel monitoring system (VMS).
• Increase use of observers and technologies to monitor compliance with conservation and management measures.
• Seek adoption of stronger port State controls in all nations.
• Adopt shark conservation measures, including measures to prohibit removal of any of the fins of a shark (including the tail) and discarding the carcass of the shark at sea.
• Adopt and expand the use of market-related measures to combat IUU fishing, including import prohibitions, landing restrictions, and catch documentation schemes (CDSs).
The MSA definition of IUU fishing 16 USC 1826j(e)2(A-C):
(A) fishing activities that violate conservation and management measures required under an international fishery management agreement to which the United States is a party, including catch limits or quotas, capacity restrictions, bycatch reduction requirements, and shark conservation measures;
(B) overfishing of fish stocks shared by the United States, for which there are no applicable international conservation or management measures or in areas with no applicable international fishery management organization or agreement, that has adverse impacts on such stocks; and
(C) fishing activity that has an adverse impact on seamounts, hydrothermal vents, and cold water corals located beyond national jurisdiction, for which there are no applicable conservation or management measures or in areas with no applicable international fishery management organization or agreement.
Very relevant is the Secretary of Commerce’s duty to encourage other nations to adopt measures to prevent trade in fish products taken through IUU practices, bringing in important market forces relevant to traceability (putting systems in place at each step of the custody or supply chain that identify the fish in commerce from ocean to table).
According to Lewis and others (2017) seafood traceability is expanding as a tool to confront estimated IUU fishing losses of \$10 to \$23.5 billion per year (11 to 26 million tons, citing Agnew et al. 2009). As of January 2018, the new Seafood Import Monitoring Program will intercept at-risk seafood entering the US (see fisheries.noaa.gov/topic/international-affairs). The Monitoring Program will focus on eleven priority species: Atlantic and Pacific Cod, blue crab, mahi mahi, grouper, king crab, sea cucumbers, red snapper, sharks, swordfish and tunas. The monitoring will expand to shrimp, abalone and other species in the future.
Trade-related environmental measures (TREMs) can be more successful if accompanied by planning that begins with diplomacy and possible aid, and emphasizes a collaborative approach. Other tools used to combat IUU fishing have included prohibitions on landing, catch documentation requirements, import permits, direct bans on imports, and mandatory labeling schemes. For an example of traceability efforts, check out Fish Tracker Initiative that seeks to “align capital markets with sustainable fisheries management.”
The 2015 and 2017 Reports to Congress provide details about the accomplishments of the previous two years with regard to IUU fishing, bycatch (including seabirds), and shark conservation: https://www.fisheries.noaa.gov/international-affairs/identification-iuu-fishing-activities#magnuson-stevens-reauthorization-act-biennial-reports-to-congress
An interesting international case example of efforts to reduce IUU fishing in the Patagonian Toothfishery off Chile, is available at the site from the Commission for the Conservation of Antarctic Marine Living Resources (CCAMLR). CCAMLR’s conservation, licensing and enforcement program has had some success in reducing IUU fishing in this high-value fishery.
In addition to threatening an important supply of protein for the 4.3 billion people who depend on subsistence fisheries, IUU fishing also engages in devastating practices that include the use of dynamite, kerosene or fertilizer (“blast fishing”) or cyanide fishing, or gear that damages or destroys crucial habitats such as reefs. It is thought that IUU fishing disproportionately affects poor coastal communities.
In some cases, IUU fishing is directly linked to organized crime, with an unquantified portion tied to corruption (bribery of officials for example). In untold human cost, IUU often features forced labor, and is linked to human trafficking/slavery. IUU is known to contribute to piracy.
Finally, observers agree that climate change effects will reduce catch potential, captured in this graphic from IPCC (2014). The areas the most vulnerable reflect poor coastal countries (including Kenya, Madagascar, Mauritius, Seychelles) that rely on subsistence fishing. The following graphic illustrates potential changes in catch by 2060.
Figure 7.2
Enforcement
Enforcement on the high seas is challenging because of the vast area to be patrolled. Under UNCLOS, Coastal States are responsible for vessels flying their flag. However, while the vessels themselves are liable, the contours of flag State liability are ambiguous. A 2015 Advisory Opinion from the International Tribunal on the Law of the Sea (ITLOS) found that flag States must exercise due diligence. Closer to shore, coastal states must prevent IUU fishing. In international waters (beyond 200 nm) flag States have only general responsibilities to ensure normal regulation of vessels, compliance with applicable treaties, and adherence to best practices.
High Seas Task Force
In 2006, a task force made up of NGOs (World Wildlife Fund, International Union for the Conservation of Nature, and Columbia University’s Earth Institute) and government representatives from Australia, Canada, Chile, Namibia, New Zealand, and the United Kingdom published nine proposals within a report, Closing the Net: Stopping Illegal Fishing on the High Seas.
The proposals included specific action steps.
Proposal 1 International *MCS Network
Proposal 2 Global information system on high seas fishing vessels
Proposal 3 Participation in UNFSA and FAO compliance agreement
Proposal 4 Promote better high seas governance
Proposal 5 Adopt and promote guidelines on flag state performance
Proposal 6 Support greater use of port and import measures
Proposal 7 Fill critical gaps in scientific knowledge and assessment
Proposal 8 Address the needs of developing countries
Proposal 9 Promote better use of technological solutions
*International Monitoring, Control and Surveillance (MCS) Network for Fisheries Related Activities (imcsnet.org).
More recently, according to the Organization for Economic Cooperation and Development (OECD), the Task Force formed an independent panel of experts to create a governance model for the Regional Fisheries Management Organizations (RFMOs) to serve as a standard or benchmark for RFMO self-evaluation.
The panel published a set of best practices in 2007 (https://www.oecd.org/sd-roundtable/papersandpublications/39374297.pdf). The impressive document contains the statement that a flag state member of an RFMO should only authorize vessels to fish to the extent that it can effectively exercise its conservation and management responsibilities under UNCLOS, thereby tying compliance ensurance to initial licensing.
Unit 7 Resources in the appendix contains information relevant to IUU Fishing.
Unit 8 will look at how offshore energy leasing works.
Notes
Lewis SG, Boyle M (2017). The Expanding Role of Traceability in Seafood: Tools and Key Initiatives, 82 Journal of Food Science S1, A13 – A21.
Agnew D, Pearce J, Pramod G, Peatman T, Watson R, Beddington JR, Pitcher J (2009). Estimating the Worldwide Extent of Illegal Fishing. PLoS ONE 4(2):e4570. https://doi.org/10.1371/journal.pone.0004570.
Unit Study Questions
1. What conditions contribute to IUU fishing?
2. If solving IUU fishing involves addressing those conditions, what kinds of tools are available in addition to law and policy?
3. Technology-based solutions to monitoring IUU fishing and intercepting illegal catch are developing rapidly. Are they sufficient alone? Are social and economic interventions necessary? | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/07%3A_Current_Problems_in_American_Ocean_Management_-_Illegal%2C_Unreported%2C_and_Unregulated_(IUU)_Fishing.txt |
While most marine management professionals may never encounter energy leasing in their careers, understanding how US ocean energy leasing works is important for several reasons. Leasing, exploration, and extraction can be planned to avoid space conflicts with other ocean uses, these activities potentially impact our ocean ecosystems and resources, and we are consumers of minerals and energy whether it is oil, gas, or electricity potentially powered by wind, waves, tides, or currents.
The provisions of the Endangered Species Act (Unit 2) in Sections 7 and 9 apply to activities related to energy; offshore activities such as oil exploration and the construction of wind turbines require permits (from the Federal Energy Regulatory Commission (FERC) or the Bureau of Ocean Energy Management at the leasing phase (BOEM)) for incidental take, and such activities may not cause a threatened or endangered species to be jeopardized. Leasing within specific regions including portions of Artic seas may be covered by programmatic biological opinions.
This unit will briefly look at how the US manages the exploration and leasing of offshore energy resources (minerals, oil, gas, and alternatives such as wind, wave, tidal and current energy).
The Submerged Lands Act
In order to establish certainty following years of lawsuits between coastal states and the federal government about jurisdiction, in 1953 Congress passed the Submerged Lands Act (SLA, 43 USC §1301 et seq.) to simultaneously quitclaim most federal rights, and establish state rights, in the navigable waters and adjacent seabed within nearshore waters to the coastal states. The SLA applies to waters and submerged areas within three miles (except for the Gulf Coasts of Texas and Florida which extend to three marine leagues or 12 miles due to historic claims). The Act confers jurisdiction, management and stewardship responsibilities to the coastal states, with exceptions. The federal government reserves traditional authorities under with regard to “the use, development, improvement, or control by or under the Constitutional authority of Congress to regulate or improve navigation, or to provide for flood control, or the production of power…” (43 USC § 1311 (d)).
Undersea cable is an example of a seabed use requiring leases and permits. Applications include undersea communications cable, and electric cable used to connect offshore energy installations such as wind energy facilities to the mainland. During the project application and planning phase, companies must be authorized through seabed leases in order to install cable necessary to the project. Both examples (communication, energy) would require both federal (Bureau of Ocean Energy Management, within the US Department of the Interior) and state leases and permits since the cable covers the span of both seabeds.
Figure 8.1 Cable ship deployed to support offshore wind energy generation and transmission to shore. CC-BY-SA by Acabashi.
In state waters, one or more agencies in each coastal state will be involved in reviewing lease applications of the state’s seabed area. The financial proceeds from leases generate revenue for the state, although the fees are often modest. Proposed projects and activities requiring federal permits and licenses within state waters must be consistent with the state’s coastal zone management plan under the US Coastal Zone Management Act of 1972 (CZMA 16 USC Ch. 33 §1451 et seq.).
In Oregon, seabed regulation is divided between two agencies. The Oregon Division of State Lands (DSL) authorizes, permits, and oversees activities involving the seabed and Oregon Department of State Land Conservation and Development (DLCD) handles Coastal Zone Management Act (CZMA) Section 7 federal-state consistency review. The CZMA is covered in Unit 9 on US Coastal Management.
The Outer Continental Shelf Lands Act
Five-year leases for the exploration, development and production of minerals, oil and gas within three to 200 miles offshore are governed by Section 18 of the Outer Continental Shelf Lands Act of 1953 (OCSLA, 43 USC §§1331-1356). OCSLA Section (B) includes the recognition that offshore resource development can have adverse impacts on coastal states, and provides that a portion of the lease receipts from the OCS is available for coastal states and localities to use for mitigation of “adverse economic and environmental effects related to the development of such resources.” Section C provides that coastal states and local governments “are entitled to an opportunity to participate, to the extent consistent with the national interest, in the policy and planning decisions made by the Federal Government relating to exploration for, and development and production of, minerals of the Outer Continental Shelf.”
The term Outer Continental Shelf (OCS) pertains to all submerged lands seaward and outside of the area beneath navigable waters subject to US jurisdiction and control, a definition that adheres to the Law of the Sea (UNCLOS). The US State Department defines the extended shelf (or the ECS, beyond 200 miles from shore) as that part of the shelf beyond our EEZ, currently being studied and mapped here. A BOEM presentation features a useful flowchart (below) of steps in the pre-lease and post-lease phases of oil and gas exploration and development.
In 2016, the US generated around 91% of the energy consumed, with the remainder accounted for by net petroleum imports which have been decreasing for several years, a reduction that also implies fewer oil tankers importing foreign oil to US ports. Fossil fuels (natural gas, petroleum, and coal) still comprise most US energy production (US Energy Information Administration).
Figure 8.2 Flow charts of US oil and gas leasing program, lease sales, exploration and development approvals (Bureau of Ocean Energy and Management, US Department of the Interior)
The national leasing program undergoes periodic changes due to the priorities of Congress and whatever political administration is in power. For example, in April 2017, Executive Order (13795) announced an expansion of offshore leasing to access increased domestic oil and gas supplies. The new leasing program will affect 2019-2024 and will replace all or part of the approved, previous 2017-2022 program. A one-page history of oil drilling (by the US Marine Mammal Commission) is available access it here. In contrast to recent calls for a massive expansion of US offshore areas to oil and gas drilling, in economic reality the chance of ever exploiting those areas may be small. A recent report summarized it this way. “Almost two-thirds of the nation’s oil reserves that companies can hope to drill for while still turning a profit lie in seas already open to drilling…The abundance of cheap oil and gas from onshore fracking in the United States has already diminished the incentive for companies to go drill in new offshore zones.” The article also notes the enormous risks and costs involved in investing in new offshore wells. (New York Times, 2018). For information on the longstanding moratorium on US West Coast (CA, OR, and WA) offshore drilling and former President Obama’s action to extend the West Coast moratoria, see here.
The final Programmatic Environmental Impact Statements (PEIS) for the original 2017-2022 oil and gas program, and the final Record of Decision (ROD) for the original plan, are available here. Any time a federal action (including granting permits or leases) poses any impacts that are economic, social, or environmental, the lead agency must prepare a mandatory Environmental Impact Statement (EIS), under the National Environmental Policy Act of 1969 (NEPA 42 USC §§4321 et seq.).
Figure 8.3 Offshore Oil Rig. From Bureau of Safety and Environmental Enforcement.
Recall that all revenue-producing activities within coastal waters and the United States EEZ must, by law, conserve and protect ecosystems and natural resources as well as provide a fair market return to coastal states and the nation, since the oceans are common property and the state and federal government have a mandatory stewardship responsibility as the Trustee. This responsibility is embedded in the language of SLA and the OCSLA, and is the reason for detailed environmental review documentation.
Offshore Renewable Energy: Wave, Wind, Current, Tidal Energies
The SLA and OCSLA also pertain to offshore renewable energy, which consists of energy derived from wind, waves, tides, or currents. These renewables have varying pros and cons, cost per kW hour and other economic considerations, and empirical environmental data depending on location. However, over time the cost of many offshore renewables is decreasing as the designs become more efficient.
The Bureau of Ocean Energy Management oversees leasing and permits connected to wind power. This jurisdiction was granted in the Energy Act of 2006.
Wind energy is the most advanced and established so far, and the United States first offshore wind project came online through the Block Island Wind Farm in December 2016. As indicated in Unit 3 (Managing Through Specially Designated Areas) offshore energy siting is planned far in advance, after years of collecting scientific data on suitability or sensitivity of offshore ecosystems and input from stakeholders including fishermen and recreationalists, mapping and zoning of the substrate and overlying waters.
The facilities can serve as data collection sites on wildlife. Wind energy installations on land or at sea have potential impacts to wildlife. As of September 2017 the facility at Block Island (off Rhode Island) became one of 40 tracking stations on the East Coast for collecting data on migrating seabirds and bats using VHF technology in conjunction with US Fish and Wildlife Service.
Figure 8.4: Block Island Wind Energy Installation, 2016 (Rhode Island)
While each individual project site will have its own EIS under NEPA, BOEM developed a programmatic EIS for the whole US offshore wind program in 2007. This PEIS is available at: boem.gov/Guide-To-EIS/.
Figure 8.5: Map showing US coastal and OCS wind speed value estimates (National Renewable Energy Laboratory)
The regulations pertinent to leases for OCS renewables are located in 30 CFR Ch. V Subpart B, 500.200-585.437. BOEM also provides information on the regulatory framework for offshore wind, and links to learn more about offshore wind, wave, current and even solar energy: boem.gov/Offshore-Wind-Energy/
At least fifteen coastal states (California, Delaware, Florida, Georgia, Hawaii, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon, Rhode Island, South Carolina, and Virginia, in addition to regional proposals) had some offshore renewable energy projects under development at the end of 2017. A map and a list linked to specific information by state is available at: boem.gov/Renewable-Energy-State-Activities/. Offshore renewables are only one part of states’ renewable energy portfolio standards (REPS) that include other sources such as solar.
California, as a geographically large and populous (39.5 million) state, makes a useful illustration. The state has a 50% renewable energy goal by 2030. The website of the California Offshore Wind Energy Gateway features news, maps, and information about the state’s progress. California’s offshore wind resources are estimated to offer more than 158,000 Gigawatts (GW) of electricity (a single GW can power up to 350,000 homes). At this scale, clean power offers enormous implications for reducing carbon emissions and their impacts on marine and coastal ecosystems (including the potential for reducing ocean acidification) thus also holding promise for protecting coastal economies such as fisheries.
Energy generated by water (hydrokinetic) includes electricity from waves, tides, or currents. BOEM (and any coastal states involved) reviews seafloor lease applications for hydrokinetics. The Federal Energy Regulatory Commission (FERC) governs hydrokinetic energy installations under the Federal Power Act (FPA) of 1935 (16 USC Ch. 12). FERC reviews applications, siting and environmental documents for hydrokinetic pilot projects (three-year permits for trials) and 30-50 year licenses for proven technologies in accordance with state comprehensive plans as dictated by the FPA. To date, very few hydrokinetic projects have been licensed (see FERC Hydrokinetics site).
Unit 9 will present the framework for management of the framework and partnership between the federal government (through NOAA) and the 35 coastal states, which include the Great Lakes, for managing shorelines and resources in coastal waters.
Notes
Tabuchi H, Wallace T (2018) Trump Would Open Nearly All US Waters to Drilling. But Will They Drill? The New York Times, January 23, 2018. Comparing the oil exploration of three presidents, with maps: nytimes.com/interactive/2018/01/23/climate/trump-offshore-oil-drilling.html
Unit Study Questions
1. If the OCSLA anticipates participation of coastal states and localities in decision-making, what does this imply about levels of scrutiny for environmental review? What are some of the stakes for coastal states with proposed leasing in or adjacent to their waters? Why did Congress include these provisions in the statute?
Unit Eight Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/08%3A_U.S._Management_of_Offshore_Energy.txt |
As discussed in Unit 1, the ocean economy worldwide is vast, diverse, and a major contributor (in the US alone, its worth was estimated at \$117 billion with over 2 million jobs in 2000). Coastal areas contribute an even larger share of the US economy, more than \$1 trillion or a tenth of the annual GDP, according to the US Commission on Ocean Policy (2004). In addition to rich biodiversity and valuable fisheries, ocean and coastal areas provide ecosystem services including climate moderation and protection from storms. Managing the interface of land and water is a complex work in progress. This unit examines the tools within the Coastal Zone Management Act of 1972.
The Public-Private Mosaic
In contrast to the public oceans and coastal waters, the terrestrial coast is a complex patchwork of private and public lands. This mosaic of land use and the way it is managed individually and in aggregate has enormous implications on the biological intactness and quality of coastal forests, watersheds and the adjacent ocean, biodiversity, recreational opportunities, capacity to buffer the impacts of storms. Within and apart from the state-federal partnership tools within the CZMA, everyday local planning and land-use decisions matter and can have cumulative and long-ranging impact.
Although each state coastal management program (CMP) is unique, the programs address the broad spectrum of coastal issues identified as priorities by Congress in the CZMA. In reality, the national impact of the Coastal Zone Management Program is the result of many thousands of state and local decisions that impact the management and development of the coastal area. For example, a 2013 NOAA study analyzes the value of using “no-build areas” to protect the shoreftont, revealing the multitude of levels of government and methods used to advance shorefront protection.
Fletcher KM 2015
Figure 9.2 Beach divisions relevant to public and private rights (adapted from Kalo et al. 2007).
While public land beach divisions vary among coastal states, in general in the US common-law private ownership extends above the Mean High Tide (MHT) line, while the wet sand and submerged lands are vested in the state. In some states for historic reasons (Delaware, Maine, Massachusetts, Pennsylvania, Virginia) private rights may include the area to the Mean Low Tide (MLT) line. Coastal states hold legal title as public trustees to coastal waters and substrate and these rights are nontransferable.
Private landowners on waterways have special common law rights in conjunction with their property. Although the terms may be used interchangeably, littoral rights refer to rights pertaining to tidal waters; riparian rights refer to rights pertaining to freshwater. Such rights may include, for example, the right to build a dock or wharf. However, private and state rights are subordinate to important exceptions. The federal government retains two major interests in the coastal zone: navigation and navigation safety. Because of the federal navigation servitude, constructing a dock or wharf requires a permit authorized by the US Army Corps of Engineers.
Coastal states and the federal government interests and responsibilities in the coastal zone are increasingly visible and urgent. These priorities include public safety, flood control, hazard prevention and mitigation as illustrated by the impacts from recent hurricanes such as Harvey (August 17, 2017, \$125 billion in damages), Katrina (August 2005, \$108 billion in damages), Sandy (October 2012, that set the record for largest Atlantic hurricane) and Irene (September 2011). The major framework for coastal protection and the partnership is laid out in the Coastal Zone Management Act CZMA). The two most prominent features of the CZMA for the purposes of this Unit are the provisions regarding consistency with coastal CMPs, and the provisions on nonpoint source water pollution.
The Coastal Zone Management Act of 1972 (CZMA, 16 USC § 1451 et seq.)
The policy statement of CZMA contains a long list of Congressional priorities of resource protection, state assistance, and minimizing life and property loss, improving water quality, and improving public access (coast.noaa.gov/czm/act/sections/#303). Two pillars of the framework are state coastal management programs, which oversee and carry out their state coastal management plans (CMPs).
The 35 individual programs are reviewed, approved, and funded by NOAA’s Office of Ocean and Coastal Resource Management (OCRM). OCRM reviews state CMPs and progress on goals every five years, providing feedback for improvement. Early on, the federal funding provided a major incentive for participation; the annual funding allocations have decreased over time. A second incentive for states to maintain their programs is their right to weigh in on whether or not federally permitted activities should be authorized to take place off their coasts. States regularly review proposed activities to evaluate whether they are consistent with CMP enforceable policies.
The CZMA’s three main purposes are to encourage states to engage in proactive comprehensive planning in relation to the land and water uses in the coastal zone, to improve coordination and communication in governance (municipalities, Tribes, etc.), and to preserve, protect, and restore natural resources in the coastal zone.
In order to be valid, CMPs must include specific elements set forth in the statute (16 USC § 1455(d), see https://www.law.cornell.edu/uscode/text/16/1455). These elements form the basis of state management, and contain goals and priorities with which proposed activities requiring federal permits must comply under CZMA Section 307. Moreover, CMPs include all enforceable policies within a state’s coastal zone.
Basically all federal activities, or activities that require a federal permit inside or outside the coastal zone, may be reviewed if is reasonably foreseeable that the activity will affect any of the coastal state’s lands, waters, or natural resources. In addition, coastal states may elect to review an activity that is proposed in the waters off a neighboring state (interstate consistency). Anticipated effects may be direct or indirect in time and place. “Reasonably foreseeable” is a factual determination made on a case-by-case basis by the state agency conducting the review.
If a state objects to an activity, it is rare that the activity will proceed. First, if an activity of paramount federal interest, it may fall under a Presidential Exemption (meaning the activity is exempt from CZMA consistency review). Second, the Secretary of Commerce has but seldom uses his/her override discretion to override a coastal state’s objection to a permit. Such an override would be based on one of two grounds: that the proposed activity actually is consistent with the CZMA and CMP, or the activity is necessary due to national security.
Excerpt of Section 307(c)(1) through (3)(A)
(c) Consistency of Federal activities with State management programs; Presidential exemption; certification
(1)(A) Each Federal agency activity within or outside the coastal zone that affects any land or water use or natural resource of the coastal zone shall be carried out in a manner which is consistent to the maximum extent practicable with the enforceable policies of approved State management programs. A Federal agency activity shall be subject to this paragraph unless it is subject to paragraph (2) or (3).
(B) After any final judgment, decree, or order of any Federal court that is appealable under section 1291 or 1292 of Title 28, or under any other applicable provision of Federal law, that a specific Federal agency activity is not in compliance with subparagraph (A), and certification by the Secretary that mediation under subsection (h) of this section is not likely to result in such compliance, the President may, upon written request from the Secretary, exempt from compliance those elements of the Federal agency activity that are found by the Federal court to be inconsistent with an approved State program, if the President determines that the activity is in the paramount interest of the United States. No such exemption shall be granted on the basis of a lack of appropriations unless the President has specifically requested such appropriations as part of the budgetary process, and the Congress has failed to make available the requested appropriations.
(C) Each Federal agency carrying out an activity subject to paragraph (1) shall provide a consistency determination to the relevant State agency designated under section 1455(d)(6) of this title at the earliest practicable time, but in no case later than 90 days before final approval of the Federal activity unless both the Federal agency and the State agency agree to a different schedule.
(2) Any Federal agency which shall undertake any development project in the coastal zone of a state shall insure that the project is, to the maximum extent practicable, consistent with the enforceable policies of approved State management programs.
(3) (A) After final approval by the Secretary of a state’s management program, any applicant for a required Federal license or permit to conduct an activity, in or outside of the coastal zone, affecting any land or water use or natural resource of the coastal zone of that state shall provide in the application to the licensing or permitting agency a certification that the proposed activity complies with the enforceable policies of the state’s approved program and that such activity will be conducted in a manner consistent with the program. At the same time, the applicant shall furnish to the state or its designated agency a copy of the certification, with all necessary information and data. Each coastal state shall establish procedures for public notice in the case of all such certifications and, to the extent it deems appropriate, procedures for public hearings in connection therewith……[end of excerpt]
Two flow charts illustrate the CZMA Section 307 review process.
Figure 9.3 Chart illustrating federal agency activities under CZMA § 307(c)(1) (15 CFR part 930 subpart C) From nrc.gov/docs/ML0732/ML073240025.pdf
Figure 9.4 Chart illustrating flow of review activities for proposals requiring federal license or permit under CZMA § 307(c)(3)(A) (15 CFR 930, subpart D) nrc.gov/docs/ML0732/ML073240025.pdf
The CZMA Nonpoint Source Pollution Provisions
The 1990 CZMA reauthorization amendments (CZARA) initiated a program of grants to help states improve specific aspects of their programs (protection of wetlands, coastal development’s impacts and development in areas prone to hazards, public access, marine debris, resource planning, and energy siting. CZARA also introduced a program to help control nonpoint source pollution in the coastal zone.
Land use managers in the coastal zone have modest tools within the state’s CMP to help tailor where and what kind of development takes place. In this professional area, property rights challenges based on the Fifth Amendment claim of unlawful “taking” of private property in the public interest without just compensation are always a risk; managers working in this area must consult local and state regulations, their attorneys general and legal cases. There are two general guidelines to keep in mind. The first is that any permanent physical invasion of the land through a government action may be considered a taking. The second guideline is that a court of law may find an ordinance or a land-use decision, if it goes too far, a taking; this is often construed in economic terms (the ordinance or decision has severely interfered with the property holder’s “investment backed expectations,” meaning s/he had to have already completed significant steps and expenditures toward project completion, or the ordinance or decision has left the property holder with no marketable use of her/his property. On the other hand, for example, if a state or local government takes action to prevent coastal erosion through otherwise lawful and valid means, that may be well within the scope of a government action that avoids the risk of a takings claim.
Protection of water quality is a required element in CMPs. The 1990 CZMA amendments (CZARA section 6217) established the Coastal Nonpoint Source Pollution Program (CNSPP) that requires participating states to create programs to control coastal nonpoint source pollution as part of the CMPs. The new nonpoint source (NPS) provisions mirror the relevant provisions within the Clean Water Act (section 319) and the two programs are coordinated. Under the CNSPP, NOAA and the EPA jointly review state nonpoint source pollution programs, and approve (or conditionally approve, with steps and a timeline for achievement or completion). The incentives for states to have approved CNSPP plans are powerful. States that fail to do so lose critical federal funding (CZMA and CWA) to support their CMPs.
The Clean Water Act’s Total Maximum Daily Load (TMDL) provisions can be a useful tool in reducing and preventing coastal nonpoint source pollution, as pointed out in Unit 5 with regard to the expansive and complex sources within the Chesapeake Bay watershed. States periodically report the condition of their water bodies based on whether the waters meet water quality standards sufficient to support their designated uses, with the mandatory baseline being “fishable and swimmable” from the CWA. If waters fall short, the state must define and declare the specific impairments (sediment, biological oxygen demand (BOD), pH, fecal coliforms, for example).
The TMDL program implements a “waste load allocation” to collectively reduce contaminants proportionately from contributing point sources with NPDES permits in order to help recover water quality in an impaired water body. However, when application of the waste load allocation to point sources alone is insufficient to restore water quality, the TMDL can flexibly be extended to NPS regardless of source (air pollution, land runoff, for example).
While the developments since CZARA hold promise, the advancement and practicability of the TMDL and the CNSPP programs to reduce or prevent NPS will depend strongly on coastal state capacity and enforcement in terms of adequate funding, data, science and technical personnel in the field.
In addition to expanding efforts to improve water quality in watersheds adjacent to the coastal zone, states are focused on coastal management tools that include low-impact development, coastal setbacks for new development, and outreach and education on emergency preparedness and hazard mitigation.
Notes
Beach diagram by author, adapted from Kalo et al. (2007) Coastal and Ocean Law Cases and Materials, Third ed. (West Publishers) p. 1, which was adapted from Brower, Access to the Nation’s Beaches: Legal and Planning Perspectives 19-20, 60-61 (1978).
Unit 9 Resources contains additional information relevant to coastal management.
Unit 10 will examine tools and possibilities represented by marine restoration.
Unit Study Questions
1. If Professor Fletcher’s observation (quoted above) is accurate, coastal areas may suffer from death by a thousand cuts. Is this a problem of conceptual scale in decision-making? Theorize some tools and methods to support more broadly informed, holistic, and coordinated public decision outcomes for coastal development and coastal management at the local level (municipalities, counties, zoning ordinances).
2. What are potential funding mechanisms to support coastal state efforts to stem NPS contaminants from their shores? At the outset, many development projects include upfront fees for sewer and stormwater hookup in order that counties and cities (thus taxpayers) are not solely burdened with these expenses. Are such fees or taxes, were they to be validly based on empirical water quality data derived before and after construction, one possible solution? What kinds of implications does coastal NPS have in the context of groundwater and drinking water, often scarce resources in coastal areas? Fisheries and shellfish? Public health? Recreation in the coastal zone? Property enjoyment and values (when areas suffer harmful algal blooms or beaches are regularly closed due to bacteria or pathogens such as E.coli?)
Unit Nine Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/09%3A_Coastal_Management_in_the_United_States.txt |
This unit examines nearshore systems’ value and the contemporary mosaic of tools to restore estuary and bay ecosystems, shorelines, fisheries and wildlife, drawing on concepts from the book’s previous units (EBM, MSP, fisheries recovery, ocean impacts, and so forth). Effective solutions require interdisciplinary and collaborative problem-solving skills you will use across your career in a wide range of professional settings
Reasons to understand management aspects of marine restoration are compelling. Nearshore environments are richest in biodiversity, provide irreplaceable functions and services, and are economically valuable. As with the other complex ocean issues presented in this book, in marine restoration planning, proactive and effective policy is key and early outreach to and involvement of communities and stakeholders is crucial.
Figure 10.1 Turtle grass bed, Tampa Bay restoration, Smithsonian Ocean Portal ocean.si.edu/ocean-news/bringing-back-tampa-bay’s-seagrass
Humans are naturally drawn to water. Pressure from expanding human development invariably increases impacts on coastal ecosystems and the resources on which we depend. Seventy-five percent of Americans will live within 50 miles of the coast by 2075, according to Restore America’s Estuaries.
In the United States, counties directly on the shoreline constitute less than 10 percent of the total land area (not including Alaska), but account for 39 percent of the total population. From 1970 to 2010, the population of these counties increased by almost 40% and are projected to increase by an additional 10 million people or 8% by 2020. Coastal areas are substantially more crowded than the U.S. as a whole, and population density in coastal areas will continue to increase in the future. In fact, the population density of coastal shoreline counties is over six times greater than the corresponding inland counties.
NOAA National Ocean Service
While we want to protect our coasts and enjoy the amenities and support services they provide, these resources are under increasing pressures and global climate change. Between 1998 and 2009, for example, the US lost wetlands acreage larger than the state of Rhode Island. These are lands that had helped absorb and retain floodwaters and storm surge, filter drinking water, provide habitat for myriad animals, birds, and insects and nurseries for fish. According to the Center for American Progress, the US loses more than seven football fields of wetlands every hour (CAP Fact Sheet 2014).
The value of nearshore and estuarine ecological functions and ecosystem services can be difficult to accurately account for. Recent economic studies are helping bring these values into focus. The Center for American Progress’ (2014) Report notes:
An analysis of three federally funded projects reveals that investing in well designed coastal restoration can be highly cost effective, returning significantly more than the cost of the restoration project. Averaging the benefit-cost ratios across the three restoration projects studied, each dollar invested by taxpayers returns more than \$15 in net economic benefits.
These benefits include buffering storm surges; safeguarding coastal homes and businesses; sequestering carbon and other pollutants; creating nursery habitat for commercially and recreationally important fish species; and restoring open space and wildlife that support recreation, tourism, and the culture of coastal communities. The benefits are not simply environmental; they are economic and social as well. They are particularly salient in lower-income communities, where individuals frequently rely on fisheries for employment and sustenance and lack the resources to construct costly—and frequently less effective—manmade flood barriers or water treatment facilities. (CAP 2014)
Coastal ecosystems also capture “blue carbon” –these systems (salt marshes, mangroves, seagrass beds, for example) sequester very old carbon at a rate that is ten times greater than other highly valuable planetary systems we normally think of as carbon sinks (forests), and they hold onto it for a very long time (Edwards et al. 2013).
The Restoration Center within NOAA published a report in May 2017, Socioeconomic Benefits of Habitat Restoration (see: ftp://ftp.library.noaa.gov/noaa_docu...NMFS_OHC_1.pdf) . The goals of NOAA’s national restoration projects include fish passage, hydrologic reconnection (for example tidal wetlands), shellfish recovery, coral recovery, erosion prevention and control, stabilized shorelines, and other strategies such as removal of marine debris. A major purpose also includes stimulating economic growth in coastal communities, represented by 2,280 direct and indirect jobs, and subsequent increases in coastal tourism dollars spent.
Figure 10.2 Completed US Restoration Projects, NOAA, from \$167M American Recovery and Reinvestment Act funds (Socioeconomic Benefits of Habitat Restoration, US Department of Commerce)
Congress allotted \$167 million to NOAA from the American Reinvestment and Recovery Act of 2009 (ARRA) for the purpose of coastal restoration. The Congressional appropriation allowed 125 competitive projects to be funded. The results included 25,584 acres of restored habitat, 677 stream miles opened to allow fish to reach spawning grounds, and the removal of 433,397 tons of debris. The projects spent \$154.1 million that, in turn, generated \$260.5 million annually. The result was a value-added of \$143.7 million in “new or expanded economic activity nationwide.” (NOAA 2017)
Figure 10.3 Restored habitat distribution, NOAA 2017
In analyzing a subgroup of NOAA restoration case studies, the Center for American Progress (CAP) found that the average benefit-cost ratio of restoring the coastal ecosystem at three sites was 15.36 (CAP Fact Sheet 2014).
Based on its findings of the results of NOAA’s restorations, the CAP made the following recommendations.
1. Public and private sector entities should increase their investment in coastal restoration projects and fund ongoing monitoring of restored areas.
2. Congress should enact and fund the National Endowment for the Oceans to provide a steady revenue stream for restoration.
3. The state and federal agencies distributing BP oil spill related funds should invest in recovery projects that create employment and support long-term ecosystem recovery.
4. Federal, state, and local coastal planners should give greater weight to natural solutions such as wetland restoration to help protect at-risk developed areas.
5. The Environmental Protection Agency, U.S. Department of the Interior, and NOAA should work with the Economic Development Administration and the U.S. Department of Labor to develop new pathways into crafts, trades, and science, technology, engineering, and mathematics, or STEM, careers related to ecosystem restoration.
6. NOAA and its partners should seek funding to apply the evaluation techniques used in this report to the other AR coastal restoration projects in order to provide a stronger foundation for future coastal land use decisions.
CAP 2014
While Congressional appropriations for coastal restoration ebb and flow across administrations at the national level, on the ground citizens, students, and scientists can help further the work of restoration in their own regions through becoming involved in shaping the future of their beaches, estuaries, and coasts and the plants and animals and other resources that enrich them.
Notes
Edwards PET, Sutton-Grier AE, Coyle GE (2013), Investing in Nature: Restoring Coastal Habitat Blue Infrastructure and Green Job Creation, 38 Marine Policy 65-71.
From NOAA’s Restoration Center, see report from May 2017, Socioeconomic Benefits of Habitat Restoration
ftp://ftp.library.noaa.gov/noaa_docu...NMFS_OHC_1.pdf
Center for American Progress/OXFAM (2014), The Economic Benefits of Restoring Coastal Ecosystems,
https://www.americanprogress.org/issues/green/reports/2014/04/09/87438/the-economic-benefits-of-restoring-coastal-ecosystems/
The Resources for Unit 10 contain additional information relevant to marine restoration.
The final unit, Unit 11, will provide thoughts on the future of ocean management.
Unit Study Questions
1. The idea of an oceans endowment is intriguing and could gain traction. What are some other funding mechanisms that might be practical and popular in the shorter term?
2. A restoration project is often long-term and can offer a “living laboratory” for STEM as well as law/policy and social science. The data that flow from these projects may be used to help inform projects in other regions. What kind of more formal role could education play in coastal restoration programs?
Unit Ten Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/10%3A_Restoring_Marine_Environments_-_The_Roles_of_Innovative_Regulatory%2C_Planning_and_Human_Dimensions_Tools.txt |
How does a technologically advanced nation such as the United States achieve progressive stewardship and governance of its coasts and three million square miles of waters, seabed, and natural resources—not for the present alone but for the future? As the previous ten units’ explorations indicate, the US’ marine policies, laws and basis of scientific knowledge are continually expanding to become more sophisticated, responsive, and nuanced.
In managing our vast ocean wealth as with the country’s terrestrial resources, we seek to make decisions that are sustainable economically, socially, and ecologically (triple-bottom line sustainability) rather than short-sighted and selfish. The stark challenge before our and future generations is for our initial progress to keep pace with growing population and consumer demand, the increased uses of ocean space, and the complex problems we face on a planetary scale as we go about seeking to balance resource exploitation and profit with equitable provision of food, shelter, safety, cultural enrichment, energy, and opportunities for all people to learn and grow to our human potential (see the United Nations Universal Declaration on Human Rights, Unit 11 Resources).
The Trajectory of US Ocean Governance
The timeline encompassing the landmarks of the historic Stratton Commission Report, (Our Nation and the Sea (1964)) through the ambitious and comprehensive ocean commission reports in the early 2000s (PEW, America’s Living Oceans: Charting a Course for Sea Change, June 2003; US Ocean Commission, An Ocean Blueprint for the 21st Century, September 2004) is a single generation. Over the past half century we have taken stock of our enormous ocean wealth, our knowledge, and the achievements and gaps in public policy and the mosaic that is marine law. We have broadened our focus from urgent post-World War II concerns of fishing and food security, industrial development, foreign competition, and military strength to more comprehensively understand broader aspects of marine systems themselves, and the many thousands of benefits they provide, economic and otherwise. We are an ocean nation, as stated frequently, including in the PEW report’s executive summary. The growing awareness of this is, in itself, a powerful movement; we are also an ocean planet and part of an international commons.
Creative solutions in every field including ocean law and policy begin with awareness, connection, and imagination. One of the most important groundbreaking connections is viewing humans as part of the ecosystem, not apart. Law evolution, including in the Magnuson-Stevens Fisheries Act and others presented previously reflect this increased understanding. Another important connection, growing but as yet under-developed, is the realization that wherever we live our everyday choices influence the environment (that both immediately surrounds us, but also far away) including the coastal zone and the oceans. The chapters of this book are replete with examples, from sustainable seafood and other consumer choices, lawn and farm fertilizer practices, transportation and shipping and emissions, single-use plastics and beyond.
It is from the specific place each of us daily finds ourselves that awareness, connection, and imagination emerge to inform our forward movement as individuals, communities and a nation of ocean citizens, regardless of our backgrounds or professions. While problems are complex, immense and pressing, inspiration is available.
Figure 11.1 Participants meeting, West Coast Regional Ocean Planning Body (from
westcoastmarineplanning.org)
On the Horizon
The deeply informative major ocean policy initiatives of the early 2000s led to important and related ongoing projects (among many innovative goals): coordination and connectivity of coastal management to the larger ocean ecosystem. This led us to embrace ecosystem-based management nationally through ocean mapping and marine spatial planning nestled in five US coastal regions: the Northeast and the Mid-Atlantic (which have been developed, see this December 2016 news release and the links to the new regional planning units, nrdc.org/experts/alison-chase/national-ocean-policy-seven) as well as the evolving West Coast, the Caribbean and the Pacific Islands Planning Bodies (see links in resources for Unit Eleven). These bodies are not regulatory. The voluntary planning bodies support transparency and collaboration through sharing of knowledge, communication and coordination of policy needs and initiatives that are intended to support better decision making and decreased duplication and conflict between policies. The transparency and coordination are necessary to addressing the US ocean policy gaps and weaknesses that the two commissions identified.
In effect, the new planning bodies represent a distillation of the two ocean commisions’ multi-year investigations, evaluations, and findings. It is the regions that will advance the final the goals via their respective data portals and an integrated communication and decision-making framework for the members. Participants in the new regional planning bodies include coastal states, Tribes, federal agencies, the eight regional fisheries management councils, and marine stakeholders (including fishing, recreation, energy, transportation and shipping, telecommunications, and many others). While just beginning, the regional bodies’ efforts, to date, have already had success and represent a culmination of fifty years of policy development and finesse, much of which would not have been possible without advances in stakeholder engagement (ocean resource are our resources), leadership capacity development, ecosystem-based management and concomitant advances in science and technology including ocean observing.
Figure 11.2 Fisherman with Rockfish (from California Oceans Program, The Nature Conservancy)
Achieving greater awareness of the consequences of shore-side decisions on the coastal ocean and beyond is a longer-term ambition. An important development used increasingly outside the United States is integrated coastal zone management (ICZM), a logical development in view of the fact that sixty percent of Earth’s population and 21 of 33 coastal mega cities are within the coastal zone (Zacharias 2014). ICZM is also a logical and holistic extension of ecosystem-based management that moves beyond strictly sector-based management to take account of the whole in a systems view of energy inputs, outputs and flows. Tools will evolve to incorporate urban systems, and more importantly their planning for growth, to support science-informed sustainability. (For example, see the Nature Conservancy, Our Oceans Our Future urban planning tool in Unit 11 Resources).
While solid achievements in marine law and policy remain to be accomplished at national and international levels, the hard work and confrontation of uncertainty and risk necessary to take a leadership role in marine management are worth it. The future of this endeavor has never had higher stakes, nor offered greater rewards in terms new discoveries and achievement in innovations in technology, outreach, and engagement between environmental professionals at all levels and ocean citizens from all walks of life.
Inspired by a photo snapped by Voyager 1 (1990) in which the Earth appeared as an infinitely tiny speck of light, astronomer Carl Sagan (1934-1996) saw our watery planet this way; in turn we are inspired:
That’s here. That’s home. That’s us. On it everyone you love, everyone you know, everyone you ever heard of, every human being who ever was, lived out their lives. The aggregate of our joy and suffering, thousands of confident religions, ideologies, and economic doctrines, every hunter and forager, every hero and coward, every creator and destroyer of civilization, every king and peasant, every young couple in love, every mother and father, hopeful child, inventor and explorer, every teacher of morals, every corrupt politician, every “superstar,” every “supreme leader,” every saint and sinner in the history of our species lived there – on a mote of dust suspended in a sunbeam.
Sagan, A Pale Blue Dot: A Vision of the Human in Space (1994)
Figure 11.3 Pale Blue Dot. From NASA
Unit Eleven Appendix | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/11%3A_The_Future_of_Ocean_Management.txt |
UNIT ONE: Our Public Oceans (A Closer Look at Offshore Uses and Players)
Excerpt from State Management Example: Oregon Territorial Sea Plan (1994)
PART ONE: Ocean Management Framework
E. OCEAN MANAGEMENT AGENCIES
NOTE: The following descriptions of agency programs and authorities are limited to those that relate to ocean or coastal resources. These descriptions are necessarily brief and not comprehensive.
a. Oregon Department of Agriculture
The Department of Agriculture has three interests in the territorial sea. One is the leasing and regulatory functions for oysters (none is grown outside estuaries); the second is regulating the use of TBT (tri-butyltin), a chemical in antifouling paints used to retard the growth of marine life on boat hulls; the third is assisting in the marketing of seafood commodities via seafood-commodity commissions.
b. Oregon Department of Environmental Quality (DEQ)
The Department of Environmental Quality has overall authority for protecting water and air quality in the territorial sea. In addition to authority and responsibility to carry out state pollution laws, the DEQ is authorized to carry out federal pollution-control laws such as the Clean Water Act and regulate discharge of pollutants into marine waters under the federal National Pollutant Discharge Elimination System. DEQ has oil spill prevention and response responsibilities and evaluates state-law mandated oil spill contingency plans, manages oil spill response activities, and provides public education and outreach to volunteer responders. DEQ and its oversight body, the Environmental Quality Commission, has divided the state into water quality basins. Five such basins along the Oregon coast include marine and estuarine waters as well as fresh. “Marine waters” are defined by DEQ rules to mean “all oceanic, offshore waters outside the estuaries or bays and within the territorial limits” of the state. DEQ is also involved in reviewing dredge and fill permits for certification of water quality under Section 401 of the Clean Water Act. DEQ and the ODFW are jointly designated as trustee under state and federal law (CERCLA) to assess and recover compensation for environmental damages from oil spills, water pollution, etc.
c. Oregon Department of Fish and Wildlife (ODFW)
The Department of Fish and Wildlife has broad authority to develop protection programs for fish and wildlife and enforce fish and wildlife laws. The Fish and Wildlife Commission, ODFW’s oversight policy body, has adopted harvest regulations for intertidal animals, fish, and shellfish, including sea urchins. ODFW also has responsibilities for protecting marine mammals, including threatened or endangered species, and sea birds. ODFW provides an increasingly important role as the state’s “marine biological consultant” to other agencies and the Governor on ocean-related programs such as kelp leasing, dredge-material disposal, marine mineral exploration, and ocean discharge of wastes. ODFW and the DEQ are jointly designated as trustee under state and federal law (CERCLA) to assess and recover compensation for environmental damages from oil spills, water pollution, etc.
d. Oregon Department of Geology and Mineral Industries (DOGAMI)
The Department of Geology and Mineral Industries has three primary interests in territorial-sea management. One is regulatory authority over such operations as exploring for and extracting oil, gas, or geothermal resources in the territorial sea and coastal zone and hard minerals, such as sand and gravel, on upland sites. Another is advising the Division of State Lands when that agency issues permits for exploratory geological, geophysical, and seismic surveys in the territorial sea. A third is related to understanding and mitigating for geologic hazards and processes. DOGMI undertakes coastal-hazard assessments and studies for both chronic and catastrophic hazards and conducts programs aimed at reducing loss of life and property.
e. Department of Land Conservation and Development (DLCD)
The DLCD is designated by statute as the state’s Coastal Zone Management Agency for federal coastal management purposes, provides staff support to the Ocean Policy Advisory Council, and administers the state’s land-use program, including Statewide Planning Goal 19, Ocean Resources, and the other 18 statewide goals. DLCD has no direct regulatory authority for ocean resources but, through state-agency coordination requirements and through federal consistency requirements, is the coordinator among all coastal resource agencies to make sure their actions and programs are coordinated with each other, local governments, and the Oregon Coastal Management Program.
f. Oregon Parks and Recreation Department (OPRD)
The Oregon Parks and Recreation Department has several management interests in the Territorial Sea. The ocean beach law designates all of Oregon’s “ocean shore” as a state recreation area to be managed by OPRD. OPRD has regulatory authority over improvements such as sea walls, rip-rap, pipeline and cable crossings, and other construction within the area from the statutory vegetation (beach zone) line seaward to Extreme Low Tide. Within this “ocean shore,” PRD has concurrent jurisdiction with the DSL over submerged and submersible lands seaward of Mean High Water (the so-called “wet sands”). OPRD owns and manages many state parks on the upland adjacent to rocky-shore sites that provide access to rocky shores.
g. Oregon Division of State Lands (DSL)
The Division is the administrative arm of the State Land Board (composed of the Governor, Secretary of State, and Treasurer) which manages the assets (land and money) of the Common School fund and which holds in trust for the people of Oregon all lands under tidal and navigable waters, including rocky intertidal areas and submerged rocks and reefs in the state’s Territorial Sea. In these areas the Division has authority over removal and fill; kelp or seaweed harvest; shellfish harvest (except oysters); geological, geophysical, and seismic surveys;, oil, gas, and mineral leasing; and easements or other rights-of-entry for various uses.
h. Oregon State Marine Board
The Marine Board has authority to regulate boating activities in state waters, including the Territorial Sea. The Marine Board, through boater education and publications, can assist in education and awareness of wildlife resources affected by boating activity.
NOTE: The following descriptions of agency programs and authorities are limited to those that relate to ocean or coastal resources. These descriptions are necessarily brief and do not purport to be comprehensive.
a. United States Army Corps of Engineers (USACOE)
The Corps is responsible for building and maintaining coastal navigational projects, including jetties, navigation channels, and navigational structures under the Rivers and Harbors Act (33 USC 401 – 709b and 2201 – 2329). Material dredged from coastal ports is frequently disposed in ocean waters at sites designated by the Environmental Protection Agency (EPA). Placement of dredged materials at these ocean sites is regulated under sections 102 and 103 of the Marine Protection, Research, and Sanctuaries Act (MPRSA) administered by the EPA or the Corps under section 404 of the Clean Water Act (CWA). The Corps also has permit authority over work performed by others in navigable waters under section 10 of the Rivers and Harbors Act, Section 404 of the CWA, and section 103 of the MPRSA.
b. Federal Bureau of Land Management (BLM)
The BLM (within the U.S. Department of the Interior) owns and administers, on behalf of the public, several sites that include or are adjacent to ocean shore areas. These are Yaquina Head Outstanding Natural Area near Newport, the Coos Head (Cape Gregory) Lighthouse Reserve and Squaw Island near Coos Bay, New River Area of Critical Environmental Concern near Langlois, Cape Blanco Lighthouse Reserve, North Sisters Rock south of Port Orford, and Zwagg Island at Brookings.
c. The United States Coast Guard (USCG)
The US Coast Guard has several lines of authority and program activities that relate to Oregon’s territorial sea. The USCG (1) is the lead agency for oil-spill response and cleanup and is the on- scene coordinator for planning and response; (2) maintains search-and-rescue stations, including air stations at Warrenton (Astoria) and North Bend (Coos Bay); (3) has authority over buoys and markers to regulate vessel operations. The USCG has a program of routine Marine Environmental Patrols along the ocean shore to locate and ensure safe removal of any hazardous materials or debris that may be washed ashore.
d. The United States Environmental Protection Agency (USEPA)
The EPA is responsible for protecting marine water quality under several federal laws. The EPA and Oregon Department of Environmental Quality have entered into an agreement whereby the DEQ regulates all point-source (e.g. flowing from a structure such as a pipe) discharges into rivers, estuaries, and marine waters through the National Pollutant Discharge Elimination System (NPDES). EPA is also charged with carrying out the Marine Protection, Research, and Sanctuaries Act of 1972 (also known as the Ocean Dumping Act), the Marine Plastics Pollution Research and Control Act of 1987, and the National Marine Pollution Program. The EPA also administers the Clean Air Act of 1977.
e. U.S. Fish and Wildlife Service (USFWS)
The USFWS (within the U.S. Department of the Interior) administers three National Wildlife Refuges (NWR) in Oregon’s Territorial Sea: the Oregon Islands NWR, Cape Meares NWR, and Three Arch Rocks NWR. USFWS jurisdiction includes approximately 1,400 rocks and islands above state jurisdiction (Mean High Water), the so-called “dry” portion of the rocks and islands. In addition, USFWS co-administers the federal Endangered Species Act and administers several other federal laws related to marine wildlife and seabirds.
f. U.S. Forest Service (USFS)
The Forest Service, an agency of the U.S. Department of Agriculture, operates the Cape Perpetua Visitors Center. Linked to the visitor center are access trails, interpretive facilities, and visitor information programs related to the rocky intertidal areas adjacent to lands of the Siuslaw National Forest.
g. Bureau of Ocean Energy Management (BOEM) formerly the Minerals Management Service (MMS)
The Bureau of Ocean Energy is housed in the Department of the Interior. It has two functions of potential interest in Oregon’s territorial sea. One is locating and mapping the coastal baseline from which the state’s three-mile seaward boundary is drawn for purposes of offshore oil and gas leasing. The other is preparing and carrying out a program of oil and gas lease sales in federal waters of the Outer Continental Shelf and offering leases for marine mineral exploration and development in federal waters.
h. National Marine Fisheries Service (NMFS)
The National Marine Fisheries Service, a branch of the National Oceanic and Atmospheric Administration (NOAA) within the US Department of Commerce, has three interests in Oregon’s Territorial Sea. First, NMFS administers the Marine Mammal Protection Act that protects all seals, sea lions, whales, and other marine mammals that use Oregon’s ocean area. Second, NMFS co-administers the federal Endangered Species Act under which the Steller sea lion, which breeds on the Oregon coast, is protected. Third, NMFS regulates certain ocean fisheries under the Magnuson Marine Fisheries Conservation Act with consequent indirect effect on fishing activity in Oregon’s territorial sea.
i. National Ocean Service, Office of Ocean and Coastal Resources Management (OCRM)
OCRM, a relatively small agency in NOAA, administers the federal Coastal Zone Management Act (CZMA) of 1972, as subsequently amended. OCRM administers essential federal funds to state coastal management programs through both regular grants and special program enhancement grants. Oregon has made use of both grant programs to fund development of the Territorial Sea Management Plan. OCRM has responsibility within NOAA and the Department of Commerce for reviewing and approving state coastal management programs and subsequent amendments under the federal CZMA, and also administers the National Marine Sanctuary Program and National Estuarine Research Reserve Program.
a. Cities Thirteen cities border Oregon’s territorial sea. While coastal cities have very limited jurisdiction or authority over ocean shore resources or areas, they may play a role in protecting and managing rocky shore areas and resources through policies and decisions about land use on adjacent uplands.
b. Counties Seven Oregon counties border the Pacific Ocean: Notwithstanding the fact that county boundaries and jurisdiction extend westward to the limit of state waters, Oregon law [ORS 201.370(2)] specifically delegates the planning function for the Territorial Sea to the Ocean Policy Advisory Council and the Territorial Sea Plan. Like coastal cities, coastal counties can play a part in the management of some rocky shore sites; local land-use plans and ordinances can be used to implement protections.
The Oregon Ocean Policy Advisory Council (OPAC) is required by law to consult with local governments on ocean developments. These mandatory provisions are included in Part Two, Making Resource Use Decisions of the Territorial Sea Plan.
c. Coastal Port Districts Fifteen port districts on the Oregon coast are governmental entities with direct interests in the economy of the coast and, therefore, can play a key role in promoting development of Oregon’s ocean resources that is both economically and environmentally sound. Under Oregon law, the port districts do not directly hold land use planning responsibilities like those of counties or cities.
UNIT TWO: Management of Protected Marine Species
Illustration of ESA listing process, courtesy of USFWS
Endangered Species Act of 1973 (ESA):
NOAA/USFWS Policy Guidance concerning “Significant Portion of its Range” (SPR), June 27, 2014, available at
https://www.federalregister.gov/documents/2014/07/01/2014-15216/final-policy-on-interpretation-of-the-phrase-significant-portion-of-its-range-in-the-endangered
The SPR policy came into effect July 1, 2014 upon publication in the Federal Register (79 FR 37577) https://www.federalregister.gov/documents/2014/07/01/2014-15216/final-policy-on-interpretation-of-the-phrase-significant-portion-of-its-range-in-the-endangered
The revised critical habitat designation rule came into effect February 11, 2016, upon publication in the Federal Register (81 FR 7413)
https://www.federalregister.gov/documents/2016/02/11/2016-02680/listing-endangered-and-threatened-species-and-designating-critical-habitat-implementing-changes-to
Foley C.M., Lynch M.A., Thorne, L.H., Lynch H.J. 2017. Listing Foreign Species Under the Endangered Species Act: A Primer for Conservation Biologists. 67 BioScience 627-673 (doi:10.1093/biosci/bix027)
Marine Mammal Protection Act of 1973 (MMPA):
Marine mammals include cetaceans (whales, dolphins, porpoises) and pinnipeds (seals, sea lions, managed by NOAA/NMFS) as well as walrus, polar bears, otter, manatee, and dugong that are managed by USFWS. NOAA manages 119 species of marine mammals worldwide (not just in the United States alone). The USFWS manages eight species worldwide.
Information on conservation management practices, and the status of specific marine mammal species can be found information about each species, contained in this NOAA location: www.nmfs.noaa.gov/pr/species/mammals/.
The Regulations for the MMPA (50 CFR 216): www.nmfs.noaa.gov/pr/pdfs/laws/mmpa_regs_216.pdf
The site maintained by the USFWS is useful because of the shared administration between the two agencies (USFWS and NOAA):
NOAA Fisheries latest MMPA information (note the tab containing a glossary of terms): https://www.fisheries.noaa.gov/topic/laws-policies#marine-mammal-protection-act
MMPA Incidental Take Authorizations: https://www.fisheries.noaa.gov/node/23111
More on Pritzker case: credit elawreview.org/case-summaries/natural-resources-defense-council-inc-v-pritzker-828-f-3d-1125-9th-cir-2016/
UNIT THREE: Management of Specially Designated Areas
McLeod KL and Leslie HM, “Ways Forward,” in Ecosystem-Based Management for the Oceans, at p. 347 (Island Press, 2009).
For a more in-depth look at EBM in the marine context, browse the resources available at NOAA: http://ecosystems.noaa.gov/EBM101/WhatisEcosystem-BasedManagement.aspx.
Long RD, Charles A, Stephenson RL (2015) Key Principles of Marine Ecosystem-Based Management, 57 Marine Policy, (July 2015) 53-60
https://www.sciencedirect.com/science/article/pii/S0308597X1500024X
NOAA Ecosystem-Based Management, http://ecosystems.noaa.gov/EBM101/WhatisEcosystem-BasedManagement.aspx
NOAA IEA program: Preview EBM Fisheries management through IEA here: https://www.fisheries.noaa.gov/insight/ecosystem-based-fisheries-management
NOAA Fisheries EBM Policy, and EBM Roadmap (document links on right column)
NOAA Office of Science and Technology (highly recommended)
https://www.st.nmfs.noaa.gov/ecosystems/ebfm/creating-an-ebfm-management-policy
(Navigate to site, then scroll down)
https://www.fisheries.noaa.gov/topic/laws-policies#endangered-species-act
NOAA Office of Coastal Management, National Estuarine Research Reserves System,
coast.noaa.gov/nerrs/
More on United States Marine Protected Areas (MPAs)
https://marineprotectedareas.noaa.gov/aboutmpas/
Day JC (2017), Effective Public Participation is Fundamental for Marine Conservation—Lessons from a Large-Scale MPA, 45:6 Coastal Management 470-486, DOI: 10.1080/08920753.2017.1373452.
Green AL, Fernandes L, Almany G, Abesamis R, McLeod E, Aliño, White AT, Salm R, Tanzer J, Ressey RL (2014) Designing Marine Reserves for Fisheries Management, Biodiversity Conservation, and Climate Change Adaptation, 42:2 Coastal Management 143-159, DOI: 10.1080/08920753.2014.877763.
Kelleher, G. 1999. Guidelines for Marine Protected Areas. IUCN, Gland, Switzerland and Cambridge, UK. xxiv +107pp. https://portals.iucn.org/library/sites/library/files/documents/PAG-003.pdf
Fautin D., Dalton P., Incze L.S., Leong J.C., Pautzke C., Rosenberg A., Sandifer P., Sedberry G., Tunnell Jr. J.W., Abbott I., Brainard R.E., Brodeur M., Eldredge L.G., Feldman M., Moretzsohn F., Vroom P.S., Wainstein M., Wolff N. (2010) An Overview of Marine Biodiversity in the United States Waters, 5:8 PLoSOne, August 2010 (Creative Commons License; http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0011914
NOAA, Digital Maps of World Large Marine Ecosystems (LME):
http://lme.edc.uri.edu/index.php/digital-maps
For details on the application of the five LME assessment modules, see NOAA 2018:
http://lme.edc.uri.edu/index.php?option=com_content&view=category&layout=blog&id=15&Itemid=113
Antiquities Act (1906): Authorizes the President to declare by public proclamation historic landmarks, historic and prehistoric structures, and other objects of historic or scientific interest that are situated upon the lands owned or controlled by the Government of the United States to be national monuments, and may reserve as a part thereof parcels of land, the limits of which in all cases shall be confined to the smallest area compatible with proper care and management of the objects to be protected. Also permits for the examination of ruins, the excavation of archaeological sites, and the gathering of objects of antiquity upon the lands under their respective jurisdictions may be granted by the Secretaries of the Interior and Agriculture to institutions which they may deem properly qualified to conduct such examination, excavation, or gathering, subject to such rules and regulation as they may prescribe.
Coastal Zone Management Act (1972): A federal authority that establishes the Coastal Zone Management Program and the National Estuarine Research Reserves System, providing a framework for balanced decision-making.
Endangered Species Act (1973): The National Marine Fisheries Service and U.S. Fish and Wildlife Service decide whether to list species as threatened or endangered. Federal agencies must avoid jeopardy to and aid the recovery of listed species. Similar responsibilities apply to non-federal entities.
Fish And Wildlife Coordination Act (1934): Provides the basic authority for the U.S. Fish and Wildlife Service’s involvement in evaluating impacts to fish and wildlife from proposed water resource development projects. It requires that fish and wildlife resources receive equal consideration to other project features. It also requires that federal agencies that construct, license, or permit water resource development projects must first consult with the Fish and Wildlife Service (and the National Marine Fisheries Service in some instances) and state fish and wildlife agencies regarding the impacts on fish and wildlife resources and measures to mitigate these impacts.
Magnuson-Stevens Fishery Conservation and Management Act (1976; amended 2006): Calls for assessment and consideration of ecological, economic, and social impacts of fishing regulations on fishery participants and fishing communities in marine fishery management plans.
Marine Mammal Protection Act (1972): Established to protect and manage marine mammals and their products (e.g., the use of hides and meat). The primary authority for implementing the act belongs to the U.S. Fish and Wildlife Service and the National Marine Fisheries Service. The Act prohibits the “take” of marine mammals, which is defined as “to harass, hunt, capture or kill, or attempt to harass, hunt, capture or kill any marine mammal.” The term “harassment” is further defined as “any act of pursuit, torment or annoyance which has the potential to injure a marine mammal or marine mammal stock in the wild or has the potential to disturb a marine mammal or marine mammal stock in the wild by causing disruption of behavioral patterns, including, but not limited to, migration, breathing, nursing, breeding, feeding, or sheltering.”
National Marine Sanctuaries Act (1972): Authorizes the Secretary of Commerce to designate and manage areas of the marine environment with special national significance due to their conservation, recreational, ecological, historical, scientific, cultural, archeological, educational, or esthetic qualities as National Marine Sanctuaries. The primary objective of this law is to protect marine resources, such as coral reefs, sunken historical vessels, or unique habitats. The Act also directs the Secretary to facilitate all public and private uses of those resources that are compatible with the primary objective of resource protection. Sanctuaries are managed according to site-specific management plans prepared by the National Oceanic and Atmospheric Administration’s (NOAA) National Marine Sanctuary Program.
National Park Service Organic Act (1916): Established to promote and regulate the use of the federal areas known as national parks, monuments, and reservations hereinafter specified….”to conserve the scenery and the natural and historic objects and the wildlife therein and to provide for the enjoyment for the same in such manner and by such means as will leave them unimpaired for the enjoyment of future generations.”
National Historic Preservation Act (1966): Congress made the federal government a full partner and a leader in historic preservation: to “provide leadership” for preservation, “contribute to” and “give maximum encouragement” to preservation, and “foster conditions under which our modern society and our prehistoric and historic resources can exist in productive harmony.”
National Wildlife Refuge System Administration Act (1966): Provides for the administration and management of the national wildlife refuge system, including wildlife refuges, areas for the protection and conservation of fish and wildlife threatened with extinction, wildlife ranges, game ranges, wildlife management areas and waterfowl production areas.
Wilderness Act (1964): Set aside certain federal lands as wilderness areas. These areas, generally 5,000 acres or larger, are wild lands largely in their natural state. The act says that they are areas “…where the earth and its community of life are untrammeled by man, where man himself is a visitor who does not remain.” Four federal agencies of the United States government administer the National Wilderness Preservation System: the Bureau of Land Management, the U.S. Fish and Wildlife Service, the U.S. Forest Service, and the National Park Service.
Federal legislation relevant to creation of US Marine Protected Areas (note that many coastal states have passed their own ocean bills providing for MPAs and/or engaging in EBM-informed zoning or marine spatial planning in state waters; for example see Massachusetts, Rhode Island, Oregon, Washington, and California). Adapted from NOAA (https://marineprotectedareas.noaa.gov/aboutmpas/programs/federallegislation/
UNIT FOUR: Our Fisheries
NOAA, Fisheries Management in the United States
https://www.fisheries.noaa.gov/insight/fisheries-management-united-states
NOAA 2016 Stock Status Report to Congress, https://www.fisheries.noaa.gov/feature-story/status-stocks-2016
NOAA/NMFS’ resources dedicated to the Magnuson-Stevens Act are located on this site:
https://www.fisheries.noaa.gov/topic/laws-policies
Congressional Reauthorization Developments, Magnuson-Stevens Act https://www.westcoast.fisheries.noaa.gov/whatwedo/msa/magnuson_stevens_act.html (scroll down for recent hearings).
The PEW Charitable Trusts Report (2013), The Law That’s Saving American Fisheries
http://www.pewtrusts.org/en/research-and-analysis/reports/2013/05/06/the-law-thats-saving-american-fisheries-the-magnusonstevens-fishery-conservation-and-management-act
Natural Resources Defense Council Report (2013), Bringing Back the Fish (Sewell et al. 2013)
https://www.nrdc.org/sites/default/files/rebuilding-fisheries-report.pdf
Natural Resources Defense Council Fact Sheet (January 9, 2018), How the Magnuson-Stevens Act is Helping Rebuild US Fisheries (Masterson M and Adams A), https://www.nrdc.org/issues/stop-overfishing-and-restore-fisheries
Warlick A, Steiner E, Guldin M (2018), History of the West Coast Groundfish Trawl Fishery: Tracking Socioeconomic Characteristics Across Different Management Policies in a Multispecies Fishery, 93 Marine Policy 9-21.
NOAA Fisheries provides three regular reports.
Status of Stocks is an annual report to Congress on the status of U.S. fisheries and is required by the Magnuson- Stevens Fishery Conservation and Management Act. This report, which is published each spring, summarizes the number of stocks on the over shed, overfishing, and rebuilt lists for U.S. federally managed sh stocks and stock complexes. The report also shows trends over time, discusses the value and contributions of our partners, and highlights how management actions taken by NOAA Fisheries have improved the status of U.S. federally managed stocks. For example, the 2015 report shows the number of stocks listed as subject to over fishing or over shed remains near an all-time low. https://www.fisheries.noaa.gov/feature-story/status-stocks-2016
Fisheries of the United States, published each fall, has been produced in its various forms for more than 100 years. It is the NOAA Fisheries yearbook of shery statistics for the United States. It provides a snapshot of data, primarily at the national level, on U.S. recreational catch and commercial sheries landings and value. In addition, data are reported on U.S. aquaculture production, the U.S. seafood processing industry, imports and exports of shery-related products, and domestic supply and per capita consumption of shery products. The focus is not on economic analysis, although value of landings, processed products, and foreign trade are included.
https://www.fisheries.noaa.gov/national/commercial-fishing/fisheries-united-states
Fisheries Economics of the United States, published each fall, provides a detailed look at the economic performance of commercial and recreational fisheries and other marine-related sectors on a state, regional, and national basis. The economic impact of commercial and recreational fishing activities in the U.S. is also reported in terms of employment, sales, and value-added impacts. The report provides management highlights for each region that include a summary of stock status, updates on catch share programs, and other selected management issues. Economic performance indicators for catch share programs and non-catch share sheries are reported. https://www.fisheries.noaa.gov/national/commercial-fishing/fisheries-economics-united-states
UNIT FIVE: Regulating Ocean Impacts
Bycatch Resources
Benaka LR, Bullock D, Davis J, Seney EE, Winarsoo H (2016), NOAA Fisheries Report: US National Bycatch Report First Edition Update 2 (February 2016; Covering 2011-2013)
https://www.st.nmfs.noaa.gov/Assets/Observer-Program/bycatch-report-update-2/NBR%20First%20Edition%20Update%202_Final.pdf
Davies RWD, Cripps SJ, Nickson A, Porter G (2009), Defining and Estimating Global Marine Fisheries Bycatch, 33 Marine Policy pp. 661-672
United Nations Food and Agriculture Organization (FAO), Estimates of Global Fishery Bycatch and Discards, http://www.fao.org/docrep/003/t4890e/T4890E02.htm
Pelc RA, Max LM, Norden W, Roberts S, Silverstein R, Wilding SR, 2015. Further Action on Bycatch Could Boost United States Fisheries Performance, 56 Marine Policy pp. 56-60.
Resources on the species and locations of highest concern for bycatch and the efforts of World Wildlife Fund: wwf.panda.org/about_our_earth/blue_planet/problems/bycatch222/bycatch_victims/
Moore JE, Wallace BP, Lewison RL, Zˇydelis R, Cox TM, Crowder LB, 2009. A Review of Marine Mammal, Sea Turtle and Seabird Bycatch in USA Fisheries and the Role of Policy in Shaping Management, 33 Marine Policy pp. 435-451.
Global Fishing Watch, project mapping global fishing effort over time, including illegal fishing over 1.4 billion miles of ocean: https://environment.google/projects/fishing-watch/
Kroodsma DA, Mayorga J, Hochberg T, Miller NA, Boerder K, Ferretti F, Wilson A, Bergman B, White TD, Block BA, Woods P, Sullivan B, Costello C, Worm B, Tracking the Global Footprint of Fisheries, 359:6378 Science, pp. 904-908, 23 February 2018, DOI: 10.1126/science.aao5646
Marine Debris Resources
National Research Council, Committee on the Effectiveness of International and National Measures to Prevent and Reduce Marine Debris and Its Impacts, Ocean Studies Board, Division ofn Earth and Life Studies, Tackling Marine Debris in the 21st Century, 2009, National Academy of Sciences. Available to read online or download at no charge, https://www.nap.edu/catalog/12486/tackling-marine-debris-in-the-21st-century
Benscosme M., Keller M, Ortiz E, NBC News, March 10, 2018, Ghost Gear Clogging World’s Oceans is Having ‘Catastrophic’ Effect, Report Says, https://www.nbcnews.com/science/environment/ghost-gear-clogging-world-s-oceans-having-catastrophic-effect-report-n855321 Citing: World Animal Protection Report, Ghosts Beneath the Waves: Ghost Gear’s Catastrophic Impact on Our Oceans, and the Urgent Action Needed from Industry, https://www.worldanimalprotection.us.org/sites/default/files/us_files/ghosts_beneath_the_waves.pdf,
London, http://www.worldanimalprotection.org, 2018
Willis K, Hardesty BD, Kriwoken L, Wilcox C (2017), Differentiating Littering, Urban Runoff and Marine Transport as Sources of Marine Debris in Coastal and Estuarine Environments, Nature Scientific Reports,
https://www.nature.com/articles/srep44479
Keep an eye on these two citizen-driven, highly original, provocative, and entrepreneurial efforts to raise awareness of plastic pollution, and to actually confront it: The Washed Ashore Project, https://washedashore.org
The Ocean Cleanup Project: https://www.theoceancleanup.com
and its founder, Boylan Slat: https://youtu.be/du5d5PUrH0I
Other Pollution Resources
Resources and Ecosystem Sustainability, Tourist Opportunities, and Revived Economies of the Gulf Coast (RESTORE) Act (established trust fund from 80% of Deepwater Horizon spill to support Gulf restoration). Subtitle F of Public Law 112-141 (2012), available: https://www.treasury.gov/services/restore-act/Pages/home.aspx
In re Oil Spill by the Oil Rig ‘Deepwater Horizon,’ 841 F. Supp. 2d 988, 1003 (E.D. La. 2012),
https://www.leagle.com/decision/infdco20120127i67
Venn-Watson S, Colegrove KM, Litz J, Kinsel M, Terio K, et al. (2015) Adrenal Gland and Lung Lesions in Gulf of Mexico Common Bottlenose Dolphins (Tursiops truncatus) Found Dead following the Deepwater Horizon Oil Spill. PLOS ONE 10(5): e0126538. https://doi.org/10.1371/journal.pone.0126538
See also international provisions with regard to pollution and State responsibilities in the UNCLOS materials in Unit Six Resources.
Ocean Acidification
Kelly RP, Caldwell MR (2013), Ten Ways States Can Combat Ocean Acidification (and Why They Should), 37 Harvard Environmental Law Review 57.
Kelly RP, Cooley SR, Klinger T (2013), Narratives Can Motivate Environmental Action: The Whiskey Creek Ocean Acidification Story, Ambio, Royal Swedish Academy of Sciences, DOI 10.1007/s13280-013-0442-2.
Kelly RP (2017), Ocean Acidification Policy: Applying the Lessons of Washington to California and Beyond, 7 Washington Journal of Environmental Law and Policy 1 (June 2017).
Washington Department of Ecology, Ocean Acidification
https://ecology.wa.gov/About-us/Our-role-in-the-community/Partnerships-committees/Ocean-acidification-Blue-Ribbon-panel
Copeland C (2016), Clean Water Act: A Summary of the Law, Congressional Research Service (CRS) October 18, 2016, fas.org/sgp/crs/misc/RL30030.pdf
Craig RK (2015), Dealing with Ocean Acidification: The Problem, The Clean Water Act, and State and Regional Approaches, 90 Washington Law Review 1583.
1. The Clean Water Act of 1972 (CWA, 33 USC §§ 1251 – 1388)
Mission: to restore and maintain the chemical, physical and biological integrity of our nation’s waters (33 USC §1251(a)); prohibits discharge of any pollutant (33 USC §1311(a)).
Jurisdiction: navigable waters of the United States (historically, “contiguous zone,” zone 3-12 miles offshore, because Congress never amended the Act after creation of 200 mile EEZ;
however, the US asserts federal jurisdiction to control point source pollution throughout its EEZ.
Relevant Section(s) :
§302 Water Quality Based Effluent Standards; applies inland and out to three miles
§303 States set water quality standards for their waters under a Total Maximum Daily Load (TMDL) approach; applies inland and out to three miles
§312 ballast water, sewage from armed forces vessels
§318 Certain types of aquaculture projects
§319 Nonpoint source pollution (inland and out to three miles; managed with NOAA)
§402-403 NPDES; EPA holds permitting authority 3-200 miles in states with delegated National Pollution Discharge Elimination System (NPDES) permit programs that regulate point sources.
NOTE: The EPA allows states and tribal authorities to assume NPDES program permitting authority. States’ jurisdiction stops, however, at three miles offshore.
§404 prohibits diking, draining, dumping without a permit, protects wetlands
(exemptions include normal silviculture and farming activities); §404 applies to state waters (out to three miles)
Vessels and floating platforms are included in the definition of point sources, governed by the National Pollution Discharge Elimination System (NPDES)
See also: NPDES Ocean Discharge Criteria (1980) (33 USC §1343; Regs: 40 CFR §§ 125.120 – 125.124) Useful passages include: c) Guidelines for determining degradation of waters.
See also the BEACH Act (The Beaches Environmental Assessment and Coast Health Act), which provides money to coastal states to monitor their waters for disease bearing organisms.
Responsible: EPA, US Army Corps of Engineers (USACE), NOAA
2. The Oil Pollution Act of 1990 (OPA, 33 USC §§ 2701 – 2762)
Mission: prohibits any discharge of oil (intentional or unintentional) including spills, leaks, pumping, pouring, emitting, emptying or dumping of oil
Jurisdiction: navigable waters of the United States and the territorial sea
Relevant Section(s): §10, often used with §404 CWA
Responsible: Bureau of Ocean Energy Management (BOEM, formerly the Minerals Management Service) within the US Department of the Interior
Available: www.boem.gov/uploadedFiles/BOEM/Oil_and_Gas_Energy_Program/Leasing/Regional_Leasing/Gulf_of_Mexico_Region/OSFR/OPA-90.pdf
And amendments
www.boem.gov/uploadedFiles/BOEM/Oil_and_Gas_Energy_Program/Leasing/Regional_Leasing/Gulf_of_Mexico_Region/OSFR/opa_amd.pdf
3. The Refuse Act/Rivers and Harbors Act of 1899 (33 USC § 403 et seq.)
United States Army Corps of Engineers (USACE)
4. The United Nations Convention on the Law of the Sea of 1982 (UNCLOS)
Mission: international convention on conservation and living and nonliving resource use by nations;
articles listed are relevant to marine debris pollution
Jurisdiction: national and international waters
Relevant Sections: Articles 1, 192, 194, 197, 207, 210, 211, 216, 217, 218.
5. (MDRPRA, 33 USC § 1951 et seq.)
Mission: establishes marine debris prevention and removal program within NOAA, directs US Coast Guard (USCG) to improve MARPOL Annex V implementation, authorizes a national data clearinghouse, and related activities (administrative Act)
–—Numbers 6 and 7 below both implement international treaties, and are coordinated with the United States’ Clean Water Act (CWA).
6. The Marine Protection, Research, and Sanctuaries Act of 1972 (MPRSA, also known as the Ocean Dumping Act, 33 USC Ch. 27 § 1401 – 1445)
[implements The London Convention of 1972, modified by the London Protocol 1996, see: http://www.imo.org/en/OurWork/Environment/LCLP/Pages/default.aspx (also called the Ocean Dumping Act)]
Mission: Prohibits dumping in ocean waters of any material transported from the US or on a US vessel or aircraft, without a permit
Jurisdiction: waters beyond the three mile zone (includes incineration, medical waste; excludes sewage; “material” defined at 33 USC §1402(c)
Relevant Section(s): §1412, Permits; Annex V (1987; regulates garbage pollution generated onboard ships or floating platforms; exceptions include unintended loss of fishing nets)
Responsible: EPA, USACE
7. The Act to Prevent Pollution from Ships, amended by the Marine Plastic Pollution Research and Control Act of 1987 (MPPRCA; 33 USC § 1901 et seq.) [implements MARPOL Annex V];
Mission: to reduce pollution from ships (except dumping of waste)
Jurisdiction: In the US, all US flagged ships in US waters, in US ports or vessel terminals, or in foreign waters
Relevant Section(s): §101(a) requiring permits
Responsible: USEPA, USCG, USACE
UNIT SIX: Introduction to International Fisheries Management
The Pelly Amendment, Section 8 of the Fishermen’s Protective Act,
https://www.fws.gov/international/laws-treaties-agreements/us-conservation-laws/pelly-amendment.html
The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES),
https://www.fws.gov/international/cites/what-is-cites.html
Tsamenyi M, Manarangi-Trott L, Rajkumar S (2003), The International Legal Regime for Fisheries Management
https://unep.ch/etu/Fisheries%20Meeting/submittedPapers/MartinTsamenyiLaraManarangiTrottShilpaRajkumar.pdf
United Nations Atlas of the Oceans, The Food and Agriculture Organization (FAO) Code of Conduct for Responsible Fisheries (1995)
http://www.oceansatlas.org/subtopic/en/c/1415/
PEW Charitable Trusts materials on international fisheries sustainability and global goals,
http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2012/02/23/faq-what-is-a-regional-fishery-management-organization
Regional Fisheries Management Organizations (RFMOs)
https://ec.europa.eu/fisheries/cfp/international/rfmo_en
World Bank and FAO, The Sunken Billions Revisited: The Economic Justification for Fisheries Reform (2017), https://openknowledge.worldbank.org/bitstream/handle/10986/24056/9781464809194.pdf?sequence=8&isAllowed=y
United Nations Annual Report, The State of World Fisheries and Aquaculture
http://www.fao.org/fishery/sofia/en
Guteirrez NL, Defeo O, Bush SR, Butterworth DS, Roheim CA, Punt AE (2016), The Current Situation and Prospects of Fisheries Certification and Ecolabeling, 182 Fisheries Research pp. 1-6.
Relevant Provisions of the United Nations Convention on the Law of the Sea (UNCLOS)
Part V, EEZ Articles 61 – 68
Part VII The High Seas
Conservation and Management Articles 116-120
Environmental Protection including Pollution Articles 207-212
Enforcement Articles 213-222
Excerpts of Part VI, The Exclusive Economic Zone (EEZ) (Articles 61-68)
Article 61 Conservation of the living resources
1. The coastal State shall determine the allowable catch of the living resources in its exclusive economic zone.
2. The coastal State, taking into account the best scientific evidence available to it, shall ensure through proper conservation and management measures that the maintenance of the living resources in the exclusive economic zone is not endangered by over-exploitation. As appropriate, the coastal State and competent international organizations, whether subregional, regional or global, shall cooperate to this end.
3. Such measures shall also be designed to maintain or restore populations of harvested species at levels which can produce the maximum sustainable yield, as qualified by relevant environmental and economic factors, including the economic needs of coastal fishing communities and the special requirements of developing States, and taking into account fishing patterns, the interdependence of stocks and any generally recommended international minimum standards, whether subregional, regional or global.
4. In taking such measures the coastal State shall take into consideration the effects on species associated with or dependent upon harvested species with a view to maintaining or restoring populations of such associated or dependent species above levels at which their reproduction may become seriously threatened.
5. Available scientific information, catch and fishing effort statistics, and other data relevant to the conservation of fish stocks shall be contributed and exchanged on a regular basis through competent international organizations, whether subregional, regional or global, where appropriate and with participation by all States concerned, including States whose nationals are allowed to fish in the exclusive economic zone.
Article 62 Utilization of the living resources
1. The coastal State shall promote the objective of optimum utilization of the living resources in the exclusive economic zone without prejudice to article 61.
2. The coastal State shall determine its capacity to harvest the living resources of the exclusive economic zone. Where the coastal State does not have the capacity to harvest the entire allowable catch, it shall, through agreements or other arrangements and pursuant to the terms, conditions, laws and regulations referred to in paragraph 4, give other States access to the surplus of the allowable catch, having particular regard to the provisions of articles 69 and 70, especially in relation to the developing States mentioned therein.
3. In giving access to other States to its exclusive economic zone under this article, the coastal State shall take into account all relevant factors, including, inter alia, the significance of the living resources of the area to the economy of the coastal State concerned and its other national interests, the provisions of articles 69 and 70, the requirements of developing States in the subregion or region in harvesting part of the surplus and the need to minimize economic dislocation in States whose nationals have habitually fished in the zone or which have made substantial efforts in research and identification of stocks.
4. Nationals of other States fishing in the exclusive economic zone shall comply with the conservation measures and with the other terms and conditions established in the laws and regulations of the coastal State. These laws and regulations shall be consistent with this Convention and may relate, inter alia, to the following:
• (a) licensing of fishermen, fishing vessels and equipment, including payment of fees and other forms of remuneration, which, in the case of developing coastal States, may consist of adequate compensation in the field of financing, equipment and technology relating to the fishing industry;
• (b) determining the species which may be caught, and fixing quotas of catch, whether in relation to particular stocks or groups of stocks or catch per vessel over a period of time or to the catch by nationals of any State during a specified period;
• (c) regulating seasons and areas of fishing, the types, sizes and amount of gear, and the types, sizes and number of fishing vessels that may be used;
• (d) fixing the age and size of fish and other species that may be caught;
• (e) specifying information required of fishing vessels, including catch and effort statistics and vessel position reports;
• (f) requiring, under the authorization and control of the coastal State, the conduct of specified fisheries research programmes and regulating the conduct of such research, including the sampling of catches, disposition of samples and reporting of associated scientific data;
• (g) the placing of observers or trainees on board such vessels by the coastal State;
• (h) the landing of all or any part of the catch by such vessels in the ports of the coastal State;
• (i) terms and conditions relating to joint ventures or other cooperative arrangements;
• (j) requirements for the training of personnel and the transfer of fisheries technology, including enhancement of the coastal State’s capability of undertaking fisheries research;
• (k) enforcement procedures.
5. Coastal States shall give due notice of conservation and management laws and regulations.
Article 63
Stocks occurring within the exclusive economic zones of
two or more coastal States, or both within the exclusive economic zone and in an area beyond and adjacent to it
1. Where the same stock or stocks of associated species occur within the exclusive economic zones of two or more coastal States, these States shall seek, either directly or through appropriate subregional or regional organizations, to agree upon the measures necessary to coordinate and ensure the conservation and development of such stocks without prejudice to the other provisions of this Part.
2. Where the same stock or stocks of associated species occur both within the exclusive economic zone and in an area beyond and adjacent to the zone, the coastal State and the States fishing for such stocks in the adjacent area shall seek, either directly or through appropriate subregional or regional organizations, to agree upon the measures necessary for the conservation of these stocks in the adjacent area.
Article 64 Highly migratory species
1. The coastal State and other States whose nationals fish in the region for the highly migratory species listed in Annex I shall cooperate directly or through appropriate international organizations with a view to ensuring conservation and promoting the objective of optimum utilization of such species throughout the region, both within and beyond the exclusive economic zone. In regions for which no appropriate international organization exists, the coastal State and other States whose nationals harvest these species in the region shall cooperate to establish such an organization and participate in its work.
2. The provisions of paragraph 1 apply in addition to the other provisions of this Part.
Article 65 Marine mammals
Nothing in this Part restricts the right of a coastal State or the competence of an international organization, as appropriate, to prohibit, limit or regulate the exploitation of marine mammals more strictly than provided for in this Part. States shall cooperate with a view to the conservation of marine mammals and in the case of cetaceans shall in particular work through the appropriate international organizations for their conservation, management and study.
Article 66 Anadromous stocks
1. States in whose rivers anadromous stocks originate shall have the primary interest in and responsibility for such stocks.
2. The State of origin of anadromous stocks shall ensure their conservation by the establishment of appropriate regulatory measures for fishing in all waters landward of the outer limits of its exclusive economic zone and for fishing provided for in paragraph 3(b). The State of origin may, after consultations with the other States referred to in paragraphs 3 and 4 fishing these stocks, establish total allowable catches for stocks originating in its rivers.
• (a) Fisheries for anadromous stocks shall be conducted only in waters landward of the outer limits of exclusive economic zones, except in cases where this provision would result in economic dislocation for a State other than the State of origin. With respect to such fishing beyond the outer limits of the exclusive economic zone, States concerned shall maintain consultations with a view to achieving agreement on terms and conditions of such fishing giving due regard to the conservation requirements and the needs of the State of origin in respect of these stocks.
• (b) The State of origin shall cooperate in minimizing economic dislocation in such other States fishing these stocks, taking into account the normal catch and the mode of operations of such States, and all the areas in which such fishing has occurred.
• (c) States referred to in subparagraph (b), participating by agreement with the State of origin in measures to renew
anadromous stocks, particularly by expenditures for that purpose, shall be given special consideration by the State of origin in the harvesting of stocks originating in its rivers.
• (d) Enforcement of regulations regarding anadromous stocks beyond the exclusive economic zone shall be by agreement between the State of origin and the other States concerned.
3. In cases where anadromous stocks migrate into or through the waters landward of the outer limits of the exclusive economic zone of a State other than the State of origin, such State shall cooperate with the State of origin with regard to the conservation and management of such stocks.
4. The State of origin of anadromous stocks and other States fishing these stocks shall make arrangements for the implementation of the provisions of this article, where appropriate, through regional organizations.
Article 67 Catadromous species
1. A coastal State in whose waters catadromous species spend the greater part of their life cycle shall have responsibility for the management of these species and shall ensure the ingress and egress of migrating fish.
2. Harvesting of catadromous species shall be conducted only in waters landward of the outer limits of exclusive economic zones. When conducted in exclusive economic zones, harvesting shall be subject to this article and the other provisions of this Convention concerning fishing in these zones.
3. In cases where catadromous fish migrate through the exclusive economic zone of another State, whether as juvenile or maturing fish, the management, including harvesting, of such fish shall be regulated by agreement between the State mentioned in paragraph 1 and the other State concerned. Such agreement shall ensure the rational management of the species and take into account the responsibilities of the State mentioned in paragraph 1 for the maintenance of these species.
Article 68 Sedentary species
This Part does not apply to sedentary species as defined in article 77, paragraph 4.
Excerpts of Part VII, The High Seas, Section 2. Conservation and Management of The Living Resources of the High Seas (Articles 116-120)
SECTION 2. CONSERVATION AND MANAGEMENT OF THE LIVING RESOURCES OF THE HIGH SEAS
Article 116 Right to fish on the high seas
All States have the right for their nationals to engage in fishing on the high seas subject to:
(a) their treaty obligations;
(b) the rights and duties as well as the interests of coastal States provided for, inter alia, in article 63, paragraph 2, and articles 64 to 67; and
(c) the provisions of this section.
Article 117 Duty of States to adopt with respect to their nationals measures for the conservation of the living resources of the high seas
All States have the duty to take, or to cooperate with other States in taking, such measures for their respective nationals as may be necessary for the conservation of the living resources of the high seas.
Article 118 Cooperation of States in the conservation and management of living resources
States shall cooperate with each other in the conservation and management of living resources in the areas of the high seas. States whose nationals exploit identical living resources, or different living resources in the same area, shall enter into negotiations with a view to taking the measures necessary for the conservation of the living resources concerned. They shall,
Article 114 Breaking or injury by owners of a submarine cable or pipeline of another submarine cable or pipeline as appropriate, cooperate to establish subregional or regional fisheries organizations to this end.
Article 119 Conservation of the living resources of the high seas
1. In determining the allowable catch and establishing other conservation measures for the living resources in the high seas, States shall: (a) take measures which are designed, on the best scientific evidence available to the States concerned, to maintain or restore populations of harvested species at levels which can produce the maximum sustainable yield, as qualified by relevant environmental and economic factors, including the special requirements of developing States, and taking into account fishing patterns, the interdependence of stocks and any generally recommended international minimum standards, whether subregional, regional or global;
(b) take into consideration the effects on species associated with or dependent upon harvested species with a view to maintaining or restoring populations of such associated or dependent species above levels at which their reproduction may become seriously threatened.
2. Available scientific information, catch and fishing effort statistics, and other data relevant to the conservation of fish stocks shall be contributed and exchanged on a regular basis through competent international organizations, whether sub-regional, regional or global, where appropriate and with participation by all States concerned.
3. States concerned shall ensure that conservation measures and their implementation do not discriminate in form or in fact against the fishermen of any State.
Article 120 Marine mammals
Article 65 also applies to the conservation and management of marine mammals in the high seas.
Excerpts of Part XII, Protection and Preservation of the Marine Environment Pollution (Articles 204-212)
SECTION 4. MONITORING AND ENVIRONMENTAL ASSESSMENT
Article 204 Monitoring of the risks or effects of pollution
1. States shall, consistent with the rights of other States, endeavour, as far as practicable, directly or through the competent international organizations, to observe, measure, evaluate and analyse, by recognized scientific methods, the risks or effects of pollution of the marine environment.
2. In particular, States shall keep under surveillance the effects of any activities which they permit or in which they engage in order to determine whether these activities are likely to pollute the marine environment.
Article 205 Publication of reports
States shall publish reports of the results obtained pursuant to article 204 or provide such reports at appropriate intervals to the competent international organizations, which should make them available to all States.
SECTION 3. TECHNICAL ASSISTANCE
Article 202 Scientific and technical assistance to developing States
When States have reasonable grounds for believing that planned activities under their jurisdiction or control may cause substantial pollution of or significant and harmful changes to the marine environment, they shall, as far as practicable, assess the potential effects of such activities on the marine environment and shall communicate reports of the results of such assessments in the manner provided in article 205.
SECTION 5. INTERNATIONAL RULES AND NATIONAL LEGISLATION TO PREVENT, REDUCE AND CONTROL POLLUTION OF THE MARINE ENVIRONMENT
Article 207 Pollution from land-based sources
1. States shall adopt laws and regulations to prevent, reduce and control pollution of the marine environment from land-based sources, including rivers, estuaries, pipelines and outfall structures, taking into account internationally agreed rules, standards and recommended practices and procedures.
2. States shall take other measures as may be necessary to prevent, reduce and control such pollution.
3. States shall endeavour to harmonize their policies in this connection at the appropriate regional level.
4. States, acting especially through competent international organizations or diplomatic conference, shall endeavour to establish global and regional rules, standards and recommended practices and procedures to prevent, reduce and control pollution of the marine environment from land-based sources, taking into account characteristic regional features, the economic capacity of developing States and their need for economic development. Such rules, standards and recommended practices and procedures shall be re-examined from time to time as necessary.
5. Laws, regulations, measures, rules, standards and recommended practices and procedures referred to in paragraphs 1, 2 and 4 shall include those designed to minimize, to the fullest extent possible, the release of toxic, harmful or noxious substances, especially those which are persistent, into the marine environment.
Article 208 Pollution from seabed activities subject to national jurisdiction
1. Coastal States shall adopt laws and regulations to prevent, reduce and control pollution of the marine environment arising from or in connection with seabed activities subject to their jurisdiction and from artificial islands, installations and structures under their jurisdiction, pursuant to articles 60 and 80.
2. States shall take other measures as may be necessary to prevent, reduce and control such pollution.
3. Such laws, regulations and measures shall be no less effective than international rules, standards and recommended practices and procedures.
4. States shall endeavour to harmonize their policies in this connection at the appropriate regional level.
5. States, acting especially through competent international organizations or diplomatic conference, shall establish global and regional rules, standards and recommended practices and procedures to prevent, reduce and control pollution of the marine environment referred to in paragraph l. Such rules, standards and recommended practices and procedures shall be re-examined from time to time as necessary.
1. International rules, regulations and procedures shall be established in accordance with Part XI to prevent, reduce and control pollution of the marine environment from activities in the Area. Such rules, regulations and procedures shall be re-examined from time to time as necessary.
2. Subject to the relevant provisions of this section, States shall adopt laws and regulations to prevent, reduce and control pollution of the marine environment from activities in the Area undertaken by vessels, installations, structures and other devices flying their flag or of their registry or operating under their authority, as the case may be. The requirements of such laws and regulations shall be no less effective than the international rules, regulations and procedures referred to in paragraph 1.
Article 210 Pollution by dumping
1. States shall adopt laws and regulations to prevent, reduce and control pollution of the marine environment by dumping.
2. States shall take other measures as may be necessary to prevent, reduce and control such pollution.
3. Such laws, regulations and measures shall ensure that dumping is not carried out without the permission of the competent authorities of States.
4. States, acting especially through competent international organizations or diplomatic conference, shall endeavour to establish global and regional rules, standards and recommended practices and procedures to prevent, reduce and control such pollution. Such rules, standards and recommended practices and procedures shall be re-examined from time to time as necessary.
5. Dumping within the territorial sea and the exclusive economic zone or onto the continental shelf shall not be carried out without the express prior approval of the coastal State, which has the right to permit, regulate and control such dumping after due consideration of the matter with other States which by reason of their geographical situation may be adversely affected thereby.
6. National laws, regulations and measures shall be no less effective in preventing, reducing and controlling such pollution than the global rules and standards.
Article 211 Pollution from vessels
1. States, acting through the competent international organization or general diplomatic conference, shall establish international rules and standards to prevent, reduce and control pollution of the marine environment from vessels and promote the adoption, in the same manner, wherever appropriate, of routing systems designed to minimize the threat of accidents which might cause pollution of the marine environment, including the coastline, and pollution damage to the related interests of coastal States. Such rules and standards shall, in the same manner, be re-examined from time to time as necessary.
2. States shall adopt laws and regulations for the prevention, reduction and control of pollution of the marine environment from vessels flying their flag or of their registry. Such laws and regulations shall at least have the same effect as that of generally accepted international rules and standards established through the competent international organization or general diplomatic conference.
3. States which establish particular requirements for the prevention, reduction and control of pollution of the marine environment as a condition for the entry of foreign vessels into their ports or internal waters or for a call at their off-shore terminals shall give due publicity to such requirements and shall communicate them to the competent international organization. Whenever such requirements are established in identical form by two or more coastal States in an endeavour to harmonize policy, the communication shall indicate which States are participating in such cooperative arrangements. Every State shall require the master of a vessel flying its flag or of its registry, when navigating within the territorial sea of a State participating in such cooperative arrangements, to furnish, upon the request of that State, information as to whether it is proceeding to a State of the same region participating in such cooperative arrangements and, if so, to indicate whether it complies with the port entry requirements of that State. This article is without prejudice to the continued exercise by a vessel of its right of innocent passage or to the application of article 25, paragraph 2.
4. Coastal States may, in the exercise of their sovereignty within their territorial sea, adopt laws and regulations for the prevention, reduction and control of marine pollution from foreign vessels, including vessels exercising the right of innocent passage. Such laws and regulations shall, in accordance with Part II, section 3, not hamper innocent passage of foreign vessels.
5. Coastal States, for the purpose of enforcement as provided for in section 6, may in respect of their exclusive economic zones adopt laws and regulations for the prevention, reduction and control of pollution from vessels conforming to and giving effect to generally accepted international rules and standards established through the competent international organization or general diplomatic conference.
• (a) Where the international rules and standards referred to in paragraph 1 are inadequate to meet special circumstances and coastal States have reasonable grounds for believing that a particular, clearly defined area of their respective exclusive economic zones is an area where the adoption of special mandatory measures for the prevention of pollution from vessels is required for recognized technical reasons in relation to its oceanographical and ecological conditions, as well as its utilization or the protection of its resources and the particular character of its traffic, the coastal States, after appropriate consultations through the competent international organization with any other States concerned, may, for that area, direct a communication to that organization, submitting scientific and technical evidence in support and information on necessary reception facilities. Within 12 months after receiving such a communication, the organization shall determine whether the conditions in that area correspond to the requirements set out above. If the organization so determines, the coastal States may, for that area, adopt laws and regulations for the prevention, reduction and control of pollution from vessels implementing such international rules and standards or navigational practices as are made applicable, through the organization, for special areas. These laws and regulations shall not become applicable to foreign vessels until 15 months after the submission of the communication to the organization.
• (b) The coastal States shall publish the limits of any such particular, clearly defined area.
• (c) If the coastal States intend to adopt additional laws and regulations for the same area for the prevention, reduction and control of pollution from vessels, they shall, when submitting the aforesaid communication, at the same time notify the organization thereof. Such additional laws and regulations may relate to discharges or navigational practices but shall not require foreign vessels to observe design, construction, manning or equipment standards other than generally accepted international rules and standards; they shall become applicable to foreign vessels 15 months after the submission of the communication to the organization, provided that the organization agrees within 12 months after the submission of the communication.
6. The international rules and standards referred to in this article should include inter alia those relating to prompt notification to coastal States, whose coastline or related interests may be affected by incidents, including maritime casualties, which involve discharges or probability of discharges.
Article 212 Pollution from or through the atmosphere
1. States shall adopt laws and regulations to prevent, reduce and control pollution of the marine environment from or through the atmosphere, applicable to the air space under their sovereignty and to vessels flying their flag or vessels or aircraft of their registry, taking into account internationally agreed rules, standards and recommended practices and procedures and the safety of air navigation.
2. States shall take other measures as may be necessary to prevent, reduce and control such pollution.
3. States, acting especially through competent international organizations or diplomatic conference, shall endeavour to establish global and regional rules, standards and recommended practices and procedures to prevent, reduce and control such pollution.
Excerpts (cont’d) of Part XII, Protection and Preservation of the Marine Environment Enforcement (Articles 213-222)
SECTION 6. ENFORCEMENT
Article 213 Enforcement with respect to pollution from land-based sources
States shall enforce their laws and regulations adopted in accordance with article 207 and shall adopt laws and regulations and take other measures necessary to implement applicable international rules and standards established through competent international organizations or diplomatic conference to prevent, reduce and control pollution of the marine environment from land-based sources. Article 214
Enforcement with respect to pollution from seabed activities States shall enforce their laws and regulations adopted in accordance with article 208 and shall adopt laws and regulations and take other measures necessary to implement applicable international rules and standards established through competent international organizations or diplomatic conference to prevent, reduce and control pollution of the marine environment arising from or in connection with seabed activities subject to their jurisdiction and from artificial islands, installations and structures under their jurisdiction, pursuant to articles 60 and 80.
Article 215 Enforcement with respect to pollution from activities in the Area
Enforcement of international rules, regulations and procedures established in accordance with Part XI to prevent, reduce and control pollution of the marine environment from activities in the Area shall be governed by that Part.
Article 216 Enforcement with respect to pollution by dumping
1. Laws and regulations adopted in accordance with this Convention and applicable international rules and standards established through competent international organizations or diplomatic conference for the prevention, reduction and control of pollution of the marine environment by dumping shall be enforced:
• (a) by the coastal State with regard to dumping within its territorial sea or its exclusive economic zone or onto its continental shelf;
• (b) by the flag State with regard to vessels flying its flag or vessels
or aircraft of its registry;
• (c) by any State with regard to acts of loading of wastes or other
matter occurring within its territory or at its off-shore terminals.
1. No State shall be obliged by virtue of this article to institute proceedings when another State has already instituted proceedings in accordance with this article.
Article 217 Enforcement by flag States
1. States shall ensure compliance by vessels flying their flag or of their registry with applicable international rules and standards, established through the competent international organization or general diplomatic conference, and with their laws and regulations adopted in accordance with this Convention for the prevention, reduction and control of pollution of the marine environment from vessels and shall accordingly adopt laws and regulations and take other measures necessary for their implementation. Flag States shall provide for the effective enforcement of such rules, standards, laws and regulations, irrespective of where a violation occurs.
2. States shall, in particular, take appropriate measures in order to ensure that vessels flying their flag or of their registry are prohibited from sailing, until they can proceed to sea in compliance with the requirements of the international rules and standards referred to in paragraph 1, including requirements in respect of design, construction, equipment and manning of vessels.
3. States shall ensure that vessels flying their flag or of their registry carry on board certificates required by and issued pursuant to international rules and standards referred to in paragraph 1. States shall ensure that vessels flying their flag are periodically inspected in order to verify that such certificates are in conformity with the actual condition of the vessels. These certificates shall be accepted by other States as evidence of the condition of the vessels and shall be regarded as having the same force as certificates issued by them, unless there are clear grounds for believing that the condition of the vessel does not correspond substantially with the particulars of the certificates.
4. If a vessel commits a violation of rules and standards established through the competent international organization or general diplomatic conference, the flag State, without prejudice to articles 218, 220 and 228, shall provide for immediate investigation and where appropriate institute proceedings in respect of the alleged violation irrespective of where the violation occurred or where the pollution caused by such violation has occurred or has been spotted.
5. Flag States conducting an investigation of the violation may request the assis-tance of any other State whose cooperation could be useful in clarifying the circ-umstances of the case. States shall endeavour to meet appropriate requests of flag States.
6. States shall, at the written request of any State, investigate any violation alleged to have been committed by vessels flying their flag. If satisfied that sufficient evidence is available to enable proceedings to be brought in respect of the alleged violation, flag States shall without delay institute such proceedings in accordance with their laws.
7. Flag States shall promptly inform the requesting State and the competent international organization of the action taken and its outcome. Such information shall be available to all States.
8. Penalties provided for by the laws and regulations of States for vessels flying their flag shall be adequate in severity to discourage violations wherever they occur.
Article 218 Enforcement by port States
1. When a vessel is voluntarily within a port or at an off-shore terminal of a State, that State may undertake investigations and, where the evidence so warrants, institute proceedings in respect of any discharge from that vessel outside the internal waters, territorial sea or exclusive economic zone of that State in violation of applicable international rules and standards established through the competent international organization or general diplomatic conference.
2. No proceedings pursuant to paragraph 1 shall be instituted in respect of a discharge violation in the internal waters, territorial sea or exclusive economic zone of another State unless requested by that State, the flag State, or a State damaged or threatened by the discharge violation, or unless the violation has caused or is likely to cause pollution in the internal waters, territorial sea or exclusive economic zone of the State instituting the proceedings.
3. When a vessel is voluntarily within a port or at an off-shore terminal of a State, that State shall, as far as practicable, comply with requests from any State for investigation of a discharge violation referred to in paragraph 1, believed to have occurred in, caused, or threatened damage to the internal waters, territorial sea or exclusive economic zone of the requesting State. It shall likewise, as far as practicable, comply with requests from the flag State for investigation of such a violation, irrespective of where the violation occurred.
4. The records of the investigation carried out by a port State pursuant to this article shall be transmitted upon request to the flag State or to the coastal State. Any proceedings instituted by the port State on the basis of such an investigation may, subject to section 7, be suspended at the request of the coastal State when the violation has occurred within its internal waters, territorial sea or exclusive economic zone. The evidence and records of the case, together with any bond or other financial security posted with the authorities of the port State, shall in that event be transmitted to the coastal State. Such transmittal shall preclude the continuation of proceedings in the port State.
Article 219 Measures relating to seaworthiness of vessels to avoid pollution
Subject to section 7, States which, upon request or on their own initiative, have ascertained that a vessel within one of their ports or at one of their off-shore terminals is in violation of applicable international rules and standards relating to seaworthiness of vessels and thereby threatens damage to the marine environment shall, as far as practicable, take administrative measures to prevent the vessel from sailing. Such States may permit the vessel to proceed only to the nearest appropriate repair yard and, upon removal of the causes of the violation, shall permit the vessel to continue immediately.
Article 220 Enforcement by coastal States
1. When a vessel is voluntarily within a port or at an off-shore terminal of a State, that State may, subject to section 7, institute proceedings in respect of any violation of its laws and regulations adopted in accordance with this Convention or applicable international rules and standards for the prevention, reduction and control of pollution from vessels when the violation has occurred within the territorial sea or the exclusive economic zone of that State.
2. Where there are clear grounds for believing that a vessel navigating in the territorial sea of a State has, during its passage therein, violated laws and regulations of that State adopted in accordance with this Convention or applicable international rules and standards for the prevention, reduction and control of pollution from vessels, that State, without prejudice to the application of the relevant provisions of Part II, section 3, may undertake physical inspection of the vessel relating to the violation and may, where the evidence so warrants, institute proceedings, including detention of the vessel, in accordance with its laws, subject to the provisions of section 7.
3. Where there are clear grounds for believing that a vessel navigating in the exclusive economic zone or the territorial sea of a State has, in the exclusive economic zone, committed a violation of applicable international rules and standards for the prevention, reduction and control of pollution from vessels or laws and regulations of that State conforming and giving effect to such rules and standards, that State may require the vessel to give information regarding its identity and port of registry, its last and its next port of call and other relevant information required to establish whether a violation has occurred.
4. States shall adopt laws and regulations and take other measures so that vessels flying their flag comply with requests for information pursuant to paragraph 3.
5. Where there are clear grounds for believing that a vessel navigating in the exclusive economic zone or the territorial sea of a State has, in the exclusive economic zone, committed a violation referred to in paragraph 3 resulting in a substantial discharge causing or threatening significant pollution of the marine environment, that State may undertake physical inspection of the vessel for matters relating to the violation if the vessel has refused to give information or if the information supplied by the vessel is manifestly at variance with the evident factual situation and if the circumstances of the case justify such inspection.
6. Where there is clear objective evidence that a vessel navigating in the exclusive economic zone or the territorial sea of a State has, in the exclusive economic zone, committed a violation referred to in paragraph 3 resulting in a discharge causing major damage or threat of major damage to the coastline or related interests of the coastal State, or to any resources of its territorial sea or exclusive economic zone, that State may, subject to section 7, provided that the evidence so warrants, institute proceedings, including detention of the vessel, in accordance with its laws.
7. Notwithstanding the provisions of paragraph 6, whenever appropriate procedures have been established, either through the competent international organization or as otherwise agreed, whereby compliance with requirements for bonding or other appropriate financial security has been assured, the coastal State if bound by such procedures shall allow the vessel to proceed.
8. The provisions of paragraphs 3, 4, 5, 6and 7 also apply in respect of national laws and regulations adopted pursuant to article 211, paragraph 6.
Article 221 Measures to avoid pollution arising from maritime casualties
1. Nothing in this Part shall prejudice the right of States, pursuant to international law, both customary and conventional, to take and enforce measures beyond the territorial sea proportionate to the actual or threatened damage to protect their coastline or related interests, including fishing, from pollution or threat of pollution following upon a maritime casualty or acts relating to such a casualty, which may reasonably be expected to result in major harmful consequences.
2. For the purposes of this article, “maritime casualty” means a collision of vessels, stranding or other incident of navigation, or other occurrence on board a vessel or external to it resulting in material damage or imminent threat of material damage to a vessel or cargo.
Article 222 Enforcement with respect to pollution from or through the atmosphere
States shall enforce, within the air space under their sovereignty or with regard to vessels flying their flag or vessels or aircraft of their registry, their laws and regulations adopted in accordance with article 212, paragraph 1, and with other provisions of this Convention and shall adopt laws and regulations and take other measures necessary to implement applicable international rules and standards established through competent international organizations or diplomatic conference to prevent, reduce and control pollution of the marine environment from or through the atmosphere, in conformity with all relevant international rules and standards concerning the safety of air navigation.
ANNEX I. HIGHLY MIGRATORY SPECIES
• Albacore tuna: Thunnus alalunga.
• Bluefin tuna: Thunnus thynnus.
• Bigeye tuna: Thunnus obesus.
• Skipjack tuna: Katsuwonus pelamis.
• Yellowfin tuna: Thunnus albacares.
• Blackfin tuna: Thunnus atlanticus.
• Little tuna: Euthynnus alletteratus; Euthynnus affinis.
• Southern bluefin tuna: Thunnus maccoyii.
• Frigate mackerel: Auxis thazard; Auxis rochei.
• Pomfrets: Family Bramidae.
• Marlins: Tetrapturus angustirostris; Tetrapturus belone;
Tetrapturus pfluegeri; Tetrapturus albidus; Tetrapturus audax; Tetrapturus georgei; Makaira mazara; Makaira indica; Makaira nigricans.
• Sail-fishes: Istiophorus platypterus; Istiophorus albicans.
• Swordfish: Xiphias gladius.
• Sauries: Scomberesox saurus; Cololabis saira; Cololabis adocetus; Scomberesox saurus scombroides.
• Dolphin: Coryphaena hippurus; Coryphaena equiselis.
• Oceanic sharks: Hexanchus griseus; Cetorhinus maximus; Family Alopiidae; Rhincodon typus; Family Carcharhinidae; Family Sphyrnidae; Family Isurida.
• Cetaceans: Family Physeteridae; Family Balaenopteridae; Family Balaenidae; Family Eschrichtiidae; Family Monodontidae; Family Ziphiidae; Family Delphinidae.
UNIT SEVEN: Current Problems in US Ocean Management: Illegal, Unreported, and Unregulated Fishing (IUU Fishing)
Pramod G, Nakamura K, Pitcher TJ, Delagran L (2014), Estimates of Illegal and Unreported fish in Seafood Imports to the USA, 48 Marine Policy, 102-113.
Erceg D (2006), Deterring IUU Fishing Through State Control Over Nationals, 30:2 Marine Policy, 173-179.
Sumaila UR, Keith AH (2006), Global Scope and Economics of Illegal Fishing, 30:6 Marine Policy, 696-703.
UNIT EIGHT: US Management of Offshore Energy
The Submerged Lands Act of 1953 (43 USC §1301 et seq.)
https://www.law.cornell.edu/uscode/text/43/chapter-29/subchapter-II
Short YouTube Video, “How Undersea Cables are Laid,”
https://youtu.be/XQVzU_YQ3IQ. There is a longer documentary on YouTube, The History of the Transatlantic Cable: How to Connect the World Population, at http://www.youtube.com/watch?v=MVw9IEGumVc
The Outer Continental Shelf Lands Act of 1953 (43 USC §1331 et seq.)
https://www.law.cornell.edu/uscode/text/43/chapter-29/subchapter-III
Tabuchi H, Wallace T (2018) Trump Would Open Nearly All US Waters to Drilling. But Will They Drill?
The New York Times, January 23, 2018. Comparing the oil exploration of three presidents, with maps:
https://www.nytimes.com/interactive/2018/01/23/climate/trump-offshore-oil-drilling.html
Bureau of Ocean Energy Management (BOEM), Atlantic Oil and Gas Information,
https://www.boem.gov/Atlantic-Oil-and-Gas-Information/
This site is useful because it provides examples of federal agency data, environmental studies, maps and other information collected in support of programmatic environmental impact statements to support oil and gas exploration, renewables, marine minerals to comply with NEPA, ESA, MMPA and MSA.
Federal Energy Regulatory Commission, Hydrokinetic Energy
www.ferc.gov/industries/hydropower/gen-info/licensing/hydrokinetics.asp
The Federal Power Act of 1935 (16 USC CH. 12)
https://www.law.cornell.edu/uscode/text/16/chapter-12
The Energy Policy Act of 2005 (Public Law 109-58)
https://www.gpo.gov/fdsys/pkg/PLAW-109publ58/content-detail.html
UNIT NINE: US Coastal Management
The Coastal Zone Management Act of 1972, 16 USC § 1451 et seq.
coast.noaa.gov/czm/media/CZMA_10_11_06.pdf
Coastal Zone Management Act Reauthorization Amendments of 1990 (CZARA)
https://coast.noaa.gov/data/Documents/OceanLawSearch/CoastalZoneActReauthorizationAmendmentsof1990.pdf
NOAA Coastal Nonpoint Source Pollution Program
coast.noaa.gov/czm/pollutioncontrol/
EPA Coastal Nonpoint Source Pollution Program (jointly managed)
https://www.epa.gov/nps/coastal-zone-act-reauthorization-amendments-czara-section-6217
CZARA Section 6217 on Nonpoint Source Pollution Control Programs
16 USC § 1455b, coast.noaa.gov/czm/act/sections/#1455b
Fletcher KM (2015), Managing Coastal Development, Chapter Five in Ocean and Coastal Law and Policy, Baur DC, Eichenberg, T, Hancock Snusz G, and Sutton M, eds. (American Bar Association, Section of Environment, Energy, and Resources (Chicago).
NOAA Map of Continental United States Hurricane Strikes 1950-2011
https://www.nhc.noaa.gov/climo/images/conus_hurrStrikes_1950-2011.png
Bremer S, Glavovic B (2013), Mobilizing Knowledge for Coastal Governance: Re-Framing the Science-Policy Interface for Integrated Coastal Management, 41 Coastal Management, 39-56, DOI: 10.1080/08920753.2012.749751
Griggs G (2017), Coasts in Crisis: A Global Challenge, University of California Press,
ISBN: 9780520293625
Landry CE (2011), Coastal Erosion as a Natural Resource Management Problem: An Economic Perspective, 39 Coastal Management 259-281, DOI: 10.1080/08920753.2011.566121
Final Report of the US Commission on Ocean Policy
The Value of US Coasts (Final Report of the US Commission on Ocean Policy 2004
http://govinfo.library.unt.edu/oceancommission/documents/full_color_rpt/welcome.html#final
Appendix 6 of the Report , Review of US Ocean and Coastal Law: The Evolution of Ocean Governance Over Three Decades [Excerpt below]
http://govinfo.library.unt.edu/oceancommission/documents/full_color_rpt/append_6.pdf
Section 307(c)(3)(A) Consistency: Federally Licensed or Permit Activities
Any applicant for a required federal license or permit to conduct an activity, in or outside of the coastal zone, affecting any land or water use or natural resource of the coastal zone of that state shall provide in the application to the licensing or permitting agency a certification that the proposed activity complies with the enforceable policies of the state’s approved program and that such activity will be conducted in a manner consistent with the program (16 USC §1456(c)(3)(A)).
A private individual or business, state or local government agency, or any other type of nonfederal entity, applying to the federal government for a required permit or license or any other type of an approval or authorization, needs to follow the requirements of CZMA Section 307(c)(3)(A). All federal license or permit activities occurring in the coastal zone are deemed to affect coastal uses or resources, if the state coastal management program has listed the particular federal license, permit, or approval in its federally approved program document. For a listed activity occurring in the coastal zone, the applicant shall submit a consistency certification to the approving federal agency and the state. In addition to the certification, the applicant must provide the state with the necessary data and information required by NOAA’s regulations to allow the state to assess the project’s effects (15 CFR §930.54).
Within six months after receiving a copy of the consistency certification, the state is to notify the federal agency concerned that it concurs with or objects to such certification. If the state fails to submit a notification within the six month period, its concurrence is conclusively presumed. The federal agency may not grant the requested license or permit unless the state concurs or is conclusively presumed to concur with the certification (16 USC 1456(c)(3)(A). An aggrieved applicant may appeal the non-concurrence to the Secretary of Commerce and request an override of the state’s decision or the Secretary may initiate his or her own review (16 USC § 1456(c)(3)(A)-(B) and (d)).
If a state wants to review an unlisted activity, it must seek NOAA approval on a case-by-case basis (15 CFR § 930.54). For listed activities outside the coastal zone, the applicant must submit a consistency certification to the state and the federal agency if the activity falls within the geographic location described in the state program document for listed activities outside the coastal zone. For such activities where the state has not described the geographic location, the state must follow the unlisted activity procedure described above, if it wants to review the activity. (Adapted from Appendix 6)
NOAA Office for Coastal Management, links to coastal state management information for the 35 US coastal states and their coastal management plans (CMPs), coast.noaa.gov/czm/mystate/
State Management Example: Oregon Territorial Sea Plan (1994) Relevant to Offshore Siting of Industrial Facilities Such as Renewable Energy, Oregon Enforceable Policies Subject to Federal Consistency. https://www.oregon.gov/lcd/OCMP/Pages/Territorial-Sea-Plan.aspx
Andreen WL (2016), No Virtue Like Necessity: Dealing with Nonpoint Source Pollution and Environmental Flows in the Face of Climate Change, 34 Virginia Environmental Law Journal 255.
Hoornbeek JF, Yalamanchili S (2017), Watershed Based Tools for Reducing Nutrient Flows to Surface Waters: Addressing Nutrient Enrichment and Harmful Algal Blooms in the United States, 29 Fordham Environmental Law Review 50.
2018 Report on National Coastal Flood Vulnerability, NOAA National Ocean Service,
https://oceanservice.noaa.gov/news/mar18/coastal-flood-vulnerability.html
Selected US Supreme Court Cases, Fifth Amendment “Takings” Claims in the Coastal Zone
Lucas v. South Carolina Coastal Council, 505 US 1003 (1992)
Nollan v. California Coastal Commission, 483 US 825 (1987)
Dolan v. City of Tigard, 512 US 374 (1994)
Palazzolo v. Rhode Island, 533 US 606 (2001)
Kelo v. New London Development Corporation, 125 S Ct 2655 (2005)
UNIT TEN: Restoring Marine Environments: The Roles of Innovative Regulatory, Planning and Human Dimensions Tools
Useful Literature
Beck M. (2014) Social-Ecological Marine Restoration: A New Vision for Benefits for Nature – And People. National Geographic Blog, August 21, 2014.
https://blog.nationalgeographic.org/2014/08/21/social-ecological-marine-restoration-a-new-vision-of-benefits-for-nature-and-people/
Blomberg BN, Pollack JB, Montagna PA, Yoskowitz DW (2018), Evaluating the US Estuary Restoration Act to Inform Restoration Policy Implementation: A Case Study Focusing on Oyster Reef Projects, 91 Marine Policy 161-166.
Conathan M, Buchanan J, Polefka S (2014) The Economic Case for Restoring Coastal Ecosystems, The Center for American Progress,
https://cdn.americanprogress.org/wp-content/uploads/2014/04/CoastalRestoration_INTRO.pdf
Edwards PET, Sutton-Grier AE, Coyle GE (2013), Investing in Nature: Restoring Coastal Habitat Blue Infrastructure and Green Job Creation, 38 Marine Policy 65-71.
Greening H, Swann R, St. Pé, Testroet-Bergeron S, Allen R, Alderson M, Hecker J, Bernhardt SP (2018), Local Implementation of a National Program: The National Estuary Program Response Following the Deepwater Horizon Spill in the Gulf of Mexico, 87 Marine Policy 60-64.
Restoring and Protecting Marine Habitat: The Role of Engineering and Technology (1994), Chapter 8, Conclusions and Recommendations, National Academies Press, https://www.nap.edu/read/2213/chapter/10
Guerry AD (2005) Icarus and Daedalus: Conceptual and Tactical Lessons for Marine Ecosystem-Based Management, 3 Frontiers in Ecology and the Environment 202,
www.jstor.org/stable/3868464
Goreau TJ, Trench RK (2012), Innovative Methods of Marine Ecosystem Restoration, CRC Press, Taylor and Francis Group Boca Raton, London, New York, ISBN 9781466557734
Wasson K, Suarez B, Akhavan A, McCarthy E, Kildow J, Johnson KS, Fountain MC, Woolfolk A., Silberstein M., Pendleton L, Feliz D (2015), Lessons Learned from an Ecosystem-Based Management Approach to Restoration of a California Estuary, 58 Marine Policy 60-70.
From NOAA’s Restoration Center, see report from May 2017, Socioeconomic Benefits of Habitat Restoration
ftp://ftp.library.noaa.gov/noaa_docu...NMFS_OHC_1.pdf
Center for American Progress/OXFAM (2014), The Economic Benefits of Restoring Coastal Ecosystems,
https://www.americanprogress.org/issues/green/reports/2014/04/09/87438/the-economic-benefits-of-restoring-coastal-ecosystems/
NOAA, The Estuary Restoration Act, and National Database of Restoration Projects,
https://www.fisheries.noaa.gov/national/habitat-conservation/estuary-restoration-act
Statute: Estuary Restoration, 33 USC 42, https://www.law.cornell.edu/uscode/text/33/chapter-42
Periodic national state-of-the-coast reports
The NOAA 2013 report on National Coastal Population (trends 1970-2020) is available here.
EPA’s Coastal Condition Reports are available here.
This series became known as the National Coastal Condition Assessment.
The most recent EPA report is 2010, published 2016.
For The National Estuarine Research Reserve (NERR) Program see here.
Economics
Here are resources from NOAA Fisheries on the economic value of coastal and estuarine restoration.
While browsing on this site, click on some of the blue live links for fact sheets and a wide array of data summaries.
The Economic and Market Value of Coasts and Estuaries: What’s At Stake? Pendleton LH ed., Restore America’s Estuaries, 2008.
https://americaswetland.com/wp-content/uploads/2018/09/102008_RAEEconReport.pdf
(VIDEO RESOURCE) Habitat Restoration: An Economic Engine.
A 2017 report by NOAA fisheries provides a summary of the economic value of US fisheries.
UNIT ELEVEN: The Future of Ocean Management
The United Nations Universal Declaration on Human Rights (1948)
United Nations, Report of the World Commission on Environment and Development (Brundtland Commission Report), Our Common Future (1992)
The Millennium Ecosystem Report (2005)
The Stratton Commission Report, Our Nation and the Sea (1964)
The PEW Charitable Trusts Report, America’s Living Oceans: Charting a Course for Sea Change (2003) http://www.pewtrusts.org/en/research-and-analysis/reports/2003/06/02/americas-living-oceans-charting-a-course-for-sea-change
The US Ocean Commission Report, An Ocean Blueprint for the 21st Century (2004)
The Final Recommendations of the Interagency Task Force on Ocean Policy (2010)
News Releases (December 2016), First Two Regional Plans in Place,
The Nature Conservancy California Oceans Program
Caribbean Regional Ocean Partnership: https://marineplanning.org/wp-content/uploads/2018/03/PR_USVI_CROP-Outreach-Document_2015.pdf
Pacific Island Regional Planning Body, https://www.regions.noaa.gov/pacific-islands/index.php/highlights/pacific-islands-regional-planning-body/
The Nature Conservancy, Our Oceans, Our Future (and urban planning tool)
https://www.nature.org/ourinitiatives/urgentissues/oceans/index.htm
Film, Ocean Frontiers III: Leaders in Ocean Stewardshiop and the New Blue Economy,
Grier A, Wowk K. (2015), Future of Our Coasts: The Potential for Natural and Hybrid Infrastructure to Enhance the Resilience of Our Coastal Communities, Economies, and Ecosystems, Science Direct 51 (137-148), http://www.sciencedirect.com/science/article/pii/S1462901115000799
Burroughs R (2011), Coastal Governance, Island Press (ISBN-13: 978-1-59726-484-6)
Maser C (2013), Decisionmaking for a Sustainable Environment: A Systemic Approach, CRC Press, Taylor and Francis Group (ISBN 978-1-4665-5216-6)
Zacharias M (2014), Chapter 10, Integrated Approaches to Ocean Management, in Marine Policy: An Introduction to Governance and International Law of the Oceans (Earthscan, Routledge, Taylor and Francis). | textbooks/biz/Civil_Law/Marine_Law_and_Policy_for_Scientists_and_Managers_(Campbell)/12%3A_Appendix_of_Unit_Resources.txt |
Learning Objectives
After reading this chapter, you should be able to understand the nature and sources of law, and the concept of the rule of law and how it affects business and economic prosperity. At the conclusion of this chapter, you should be able to answer the following questions:
• What is the law?
• Where does our law come from?
• What is a rule of law?
• How is the law relevant to business?
• How does the study of the legal environment of business create a foundation for future business courses?
You might be wondering what the law has to do with you. You try to follow the rules. You don’t get into any trouble. You want to engage in honest dealings in business. Besides, you can always hire an attorney if you need legal help.
This may all be true. However, it is imperative for those in the business world to understand the legal environment in which they are operating. While you may have the best intentions and be truly diligent in your efforts to do business fairly, inevitably conflicts will arise in everyday business dealings. For example, what does it mean to do business “fairly”? Fair to whom? Fair to your shareholders? Fair to your employees? Fair to the consumers who will purchase your products? Through which ethical lens will you contemplate these issues? Trade-offs are a part of business. If you want to increase shareholder profits, you may need to reduce labor costs. One way to reduce labor costs is to use cheaper labor. If you pay your employees less, your employees will be less well off, but your shareholders may be happier.
Consider the credit crisis that came to the world’s attention in October 2008 and nearly toppled the U.S. economy into depression. Hundreds of thousands of homes were foreclosed by banks (Figure 1.1.1 "The Credit Crisis"), leading to a vicious cycle of depressed housing prices, shattered consumer confidence, and business retrenchment. You may be thinking that this has little to do with you or with the study of the legal environment of business. Think again. The credit crisis affected everyone. And the nature of the crisis implicated several legal environment issues.
In a nutshell, the U.S. financial system nearly collapsed under the weight of high default rates among mortgagees, the issuance of excessive subprime mortgages to unqualified debtors, collateralized debt obligations (CDOs) that were not being serviced and could not be sold, and a mortgage banking system with flawed incentive structures from the bottom to the top. The mortgage industry created incentives for those who worked in that industry to act in their own self-interest to make a profit, even at the expense of the long-term health of the institutions for which they were working.
Considering this flawed incentive system, the results were not surprising to many economists, who know that people tend to act in their own self-interest, even at the expense of their institutions’ goals. Mortgage brokers had very strong incentives to approve every mortgage applicant, regardless of creditworthiness or ability to service the mortgage. This was because the lenders were pressuring them for more mortgages, so that the lenders themselves could sell those mortgages for a profit. And this pressure for “more” was endemic at every level of the mortgage industry, from the would-be homeowner who wanted more house than he or she could afford to the investment bankers who wanted more CDOs on which they could profit. However, excessive risk was undertaken, and when mortgagees began defaulting on their mortgages, the market became flooded with houses that had been foreclosed. As the supply of houses increased and the demand for them fell, housing prices plummeted, which meant that not only were the investors not receiving income on their investments, but also homeowners were losing the value of their investments, since their house prices were plummeting. The end result was that many homeowners were “upside-down” on their obligations, meaning that they owed more on their houses than what the houses were worth. This created an incentive for mortgagees to abandon their debt obligations. When the investors did not receive income on their investments, they also were not receiving the cash flow to cover their debts, and they could not service their obligations under their CDOs. Parties at every level began clamoring for protection from their creditors from the U.S. bankruptcy courts by filing petitions for bankruptcy.
Hyperlink: Credit Crisis
vimeo.com/3261363
This video explains the credit crisis and will help you begin thinking about the intersection between the legal environment of business and the role of government in regulating business.
After watching the video in "Hyperlink: Credit Crisis", consider the intersection between law and economics. Former Federal Reserve Chairman Alan Greenspan had consistently maintained that private regulation (that is, self-regulation by private industry) was better at containing risk than government regulation. But when the 2008 credit crisis manifested, Greenspan retracted this belief, at least in part. He expressed that he was in “a state of shocked disbelief” concerning the financial institutions’ inabilities to self-regulate. Brian Knowlton and Michael M. Grynbaum, “Greenspan ‘Shocked’ That Free Markets Are Flawed,” New York Times, October 23, 2008, http://www.nytimes.com/2008/10/23/business/worldbusiness/23iht-gspan.4.17206624.html (accessed August 18, 2010). He always believed that the incentive of survival of the institution itself would force banks to self-regulate. However, this “shocked disbelief” underscored a fissure within the discipline of economics—namely, whether the same economic principles that apply to individuals also apply to organizations. While we know from our study of economics that individuals act in their own self-interest, the 2008 credit crisis perhaps illustrated that people continue to act in their own self-interest, even when working within a firm. The firm itself is only a collection of individual people, and so the firm itself does not act in any type of organizational self-interest.
You might be wondering why we are discussing economics. This is because economic principles are intertwined with economic prosperity, and economic prosperity is intertwined with business, as the preceding example illustrates. To understand what happened in the credit crisis and, more importantly, how to prevent something like this from happening in the future, we have to understand economic principles that impel behavior. Additionally, we have to understand how our laws can embody the knowledge that we have from economics to prevent situations like this from happening in the future. Specifically, while a basic principle of economics is that individuals act in their own self-interest, they do so within the rules of the game. That is, they do so within the parameters of the law. Additionally, sometimes individuals weigh the penalties of violating the law against the chances of getting caught to determine how they should behave. In both instances, the law is a restraint on behavior.
Reflect on the credit crisis and how our laws could have entirely averted or seriously mitigated the fallout that resulted from it. For example, if the laws regulated the incentive structures that exist within private industry, the individual incentive to make a profit would not have been allowed to overtake the financial institutions’ need to self-preserve by limiting risk. Likewise, if our banking regulations limited the types of services that banks could offer, perhaps the exotic financial instruments that were created as a precursor to the credit crisis would not have been permitted in the first place. If the size of our financial institutions had been limited by law, the dangerous fallacy that the financial institutions were too large to fail could not have been perpetuated. If compensation packages were legally restricted by limitations on size or severed from linkages to performance, then individual incentives to maximize profit could have been restrained. Additionally, this situation raises several ethics questions. For example, was it ethical to loan money to people who were not able to service those debts?
As you think about these questions and the many other questions that will arise during your study of the legal environment of business, try to set aside any fixed ideas that you have already formulated about law and the legal system. Many students who are new to the study of law find themselves sharply swayed by a particular type of fiction that has grown around the legal system. Specifically, many students find that they harbor a sense of repugnance to law, because they have heard that it is filled with frivolous lawsuits brought by a litigious public waiting to pounce at the smallest slight, along with money-grubbing attorneys waiting to cash in. We ask that you set aside those and any other preconceived notions that you may harbor about the law and the legal system. The law is a dynamic, sophisticated field. Frivolous lawsuits are not permitted to advance in our legal system, and most attorneys are committed to justice and fairness. They work hard to protect their clients’ legal interests and simply do not have the desire or the time to pursue frivolous claims. Indeed, there is no incentive for them to pursue such claims, because our legal system does not reward such behavior.
Most people want to conduct themselves and their business dealings within the parameters of the law. Even if we are very cynical, barring any other compunction to behave well, we can see that it makes the most economic sense to do so. Following the rules of the game saves us money, time, and aggravation, and it preserves our individual and professional reputations. So if most people recognize that they have an incentive not to run afoul of the law, why are there so many legal disputes? There are many reasons for this, such as the fact that many of our laws are ambiguous, and reasonable people may disagree about what is “right.” Additionally, legal injuries happen even under the best of conditions, and the aggrieved parties need a method to press their claims to be compensated for their damages.
A common theme in the study of the legal environment is responsibility. Much of our legal wrangling seeks to answer the questions, “Who is responsible, and what should be done about this injury?” Additionally, and perhaps more importantly for business, is the concern of how to limit liability exposure in the first place. A solid understanding of the legal environment of business should help limit the risk of liability and thus avoid legal disputes. Moreover, it should help you recognize when you need to contact your attorney for assistance in defining the contours of the law, which are the rules of the game. The law provides continuity and a reasonable expectation of how things will be, based on how they have been in the past. It provides predictability and stability.
This book does not teach you how to practice law or to conduct legal research. That is the work of attorneys. Legal research is a sophisticated method of research that seeks to determine the current state of the law regarding narrowly defined legal issues. Legal research helps guide our behavior to help us comply with the rules of the game. When you need an answer regarding a specific legal issue, you will contact your attorney, who will research the issue, inform you of the results of that research, and advise you of the decisions you must make with respect to that issue.
The goals of this book are practical. Try to conceptualize your study of the legal environment of business as a map by which you must navigate your business dealings. We want to teach you how to read this map so that you are able to understand the law and how it affects your business and your life. Besides limiting legal liability proactively, an understanding of the law can also help you avoid serious missteps. After all, ignorance of the law is no defense for violating the law.
This chapter provides an overview of the legal system. We begin with a discussion of what the law is, and then we turn our attention to the sources of law, the rule of law, the reasons why rule of law is important to business, and how law affects business disciplines such as management, marketing, finance, and accounting. The chapter concludes with a discussion of the link between rule of law and economic prosperity.
Key Takeaways
Law is a dynamic and ever-changing field that affects everyone, both in their individual capacities as people and in their business interactions. Studying the legal environment of business helps us understand how to reduce liability risks, identify legal problems that require an attorney’s assistance, and identify the links between business and the law. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/01%3A_Introduction_to_Law/1.01%3A_Chapter_Introduction.txt |
Learning Objectives
• Understand the meaning of jurisprudence and how its study can lead to greater understanding of our laws and legal system.
• Distinguish among law as power, legal positivism, legal realism, and natural law.
• Examine strengths and criticisms of several theories of jurisprudence.
• Explore examples of several theories of jurisprudence.
If you were asked to define “the law,” what would you say? Is “you should eat five fruits and vegetables a day” a law? What distinguishes law from mere suggestions or good advice? The key difference is obviously enforcement and consequence. If you don’t eat five fruits and vegetables a day, you are not going to be imprisoned or fined. If you steal or embezzle, however, you may be prosecuted and face stiff financial penalties and imprisonment. Law, therefore, is a set of rules that are enforced by a government authority.
Now consider the nature of law. Would you say that the law includes only the actual words that are written, or does it also include reading between the lines to discern the spirit of the law? Would you follow a law that you disagreed with, or would you ignore such a law? Do you believe that what the law actually is matters as much as who enforces it? Do you think that morality is a part of legality, or do you think that morality is wholly separate from the law?
Based on the particular system of jurisprudence to which one ascribes, these questions will generate different answers. Not only will the answers to these questions differ, but the potential outcomes of legal disputes can also vary widely, depending on one’s conception of what the law is. These differences highlight fundamental disagreements over the nature of law.
Jurisprudence is the philosophy of law. The nature of law has been debated for centuries, giving rise to a general coalescence of ideas to create particular schools of thought. Several different theories of jurisprudence are explored in the paragraphs that follow.
At a most basic interpretation, some believe that law is simply power. That is, the law is followed because the sovereign issues orders that are backed by threats. Consider tyrannical rulers who create arbitrary laws or bad laws. If the sovereign has the power to enforce those “laws,” then regardless of the “badness” of the law, it is still law. The Nazis executed six million Jews pursuant to German law during World War II. Saddam Hussein routinely tortured and executed political opponents and minority Sunni Muslims in Iraq under Iraqi law. The military in Myanmar (known euphemistically as the State Peace and Development Council) imprisoned the democratically elected and Nobel Peace Prize–winning prime minister of the country, Aung San Suu Kyi (Figure 1.2.1 "Aung San Suu Kyi"), under color of authority. (Actions taken under the law are said to be under the color of authority.) Those who ascribe to the idea that law is power often argue that coercion is an essential and necessary feature of law.
Let’s explore whether the law is nothing more than power. If an armed person robs your store, you will very likely hand over whatever it is that he or she wants. The robber has exercised power over you but has not exercised the law. This is because, as you might point out, an armed robber is not the sovereign power. But compare this to a sovereign who exercises power over you. For instance, imagine a government that institutes compulsory military service (the draft) under threat of imprisonment for failing to comply. The sovereign would have the power to deprive us of our liberty if we did not follow the rules; such a law certainly has the force of power behind it.
Many have criticized the understanding of law as nothing more than power backed by threats. For example, some point out that if law is nothing more than power, then the subjects of the law are simply at the mercy of whoever is in power. If we look at the U.S. system of government, however, citizens generally do not feel that they are “at the mercy” of the government. This is because people also have power. People can elect their government officials, and they can vote “out” government officials who aren’t doing a good job. In this way, those in power are accountable to the people. Other criticisms include the more piercing observation that not all law requires the exercise or threat of overt power. For instance, many of our laws rely on economic incentives, rather than force of power, to encourage compliance. Though penalty provisions may exist for violating those laws, those penalties may not be driving compliance itself.
A competing view is that of legal positivism, whose proponents disagree that law is simply power. Legal positivists believe that the law is what the law says. The laws are written, human-made rules. The law is not drawn from any source higher than man. Legal positivists do not try to read between the lines. They may disagree with the law as it is written, but they will acquiesce to the sovereign power and follow the law as it is written. They reject any belief that they have an individual right to disobey a law that they happen to oppose, providing that the law is from a legitimate source. Positivists believe that law is wholly separate from any consideration of ethics. Moreover, they do not believe that people have intrinsic human rights other than those created by the law. This is very different from a natural rights perspective, which is discussed in the following paragraphs.
Positivists differ from the view that law is simply power, because they believe that valid law must be created pursuant to the existing rules that allow the sovereign to create law. Under this way of thinking, an arbitrary declaration of law by a sovereign who did not follow the rules for creating the law would not be viewed as valid law. Additionally, positivists would not consider any rule or “law” created by an illegitimate ruler as valid law. Consequently, a legal positivist would feel no need to obey an illegitimately created “law.”
Consider the example of the draft again. Some people have a strong moral objection to engaging in armed conflict with other human beings. However, a legal positivist would most certainly comply with a law that required compulsory conscription, though he or she might use other legal channels to try to change the law.
A common criticism of legal positivism is that it prohibits individuals from remaining true to their own consciences when their consciences conflict with the laws of the sovereign. However, for a positivist, the desirability of enacting a law that might be viewed as “good” or “bad” is not relevant for determining what the law is.
Some critics point out that legal positivism is too limited in its conception of law. For instance, at least some laws seem to reflect a moral stance. The prohibition against insider trading (using nonpublic information to buy or sell a stock to make money) might be said to encompass the idea of fairness, which is a moral consideration. Likewise, due process (fundamental fairness and decency in government actions) might be said to encompass the ideas of both fairness and a moral position against cruelty. Moreover, not all law is the result of a sovereign-issued, written rule. For example, international customary law has developed through customary practices. It is valid law, but it is not a set of rules handed down from a sovereign ruler.
A different viewpoint is legal realism, which is the belief that the law itself is far less important than the consideration of who is in the position to enforce the law. Like positivists, legal realists believe that law is the product of human making. However, unlike positivists, they believe that the outcome of any issue that arises under law is dependent on the person, such as a judge, who is in the position to exercise power under the mantle of the law. Additionally, realists believe that social and economic considerations should be brought to bear in legal disputes, which may very well be “extra” considerations that are not captured by the written law itself.
If a realist brought a dispute before a particular judge who was known to be unsympathetic to that particular type of dispute, the realist would believe that the judge’s decision would reflect that leaning. For example, if a dispute arose under the Clean Water Act, and the defendant was a legal realist who believed that the judge was unduly harsh with environmental offenders, the legal realist would not look to the actual words of the Clean Water Act itself to determine a likely outcome. Instead, the defendant would view the judge’s personal and professional beliefs about water pollution as determinative factors. Moreover, if the plaintiff in the same case were a realist who did not believe that the Clean Water Act was very strong, that plaintiff might hope that the judge would consider the social importance of clean water to human health, natural environment, and nonhuman animals.
Critics of legal realism point out that those who are in the position to exercise the power of the law over others should not circumscribe the checks and balances of our system of government by considering factors outside of legitimate sources of law when making decisions. For instance, they argue that judges should not use any factors other than the written law when rendering decisions. Legal realists, however, point out that judicial interpretation not only is necessary but also was contemplated by our Founding Fathers as a built-in check and balance to our other branches of government.
Natural law is the idea that humans possess certain inalienable rights that are not the products of human-made law. Therefore, we can say that natural law differs from both positivism and realism in this important respect. Humans are able to reason, and therefore they are able to discover moral truths on their own. They are not automatons who require a sovereign power to tell them right from wrong. Natural law adherents do not reject human-made law. However, they recognize that human-made law is subordinate to natural law if the two types of law conflict.
Civil rights activists often rely on natural law arguments to advance their platforms. This is true today as well as historically. For example, a civil rights advocate might point out that regardless of what the law “says,” discrimination based on race is simply wrong. If the written law allowed racial discrimination, natural law adherents would not recognize the law as valid.
Each theory of jurisprudence can inform our understanding of legal issues by allowing us to see the same thing from many different perspectives. Moreover, depending on philosophical perspective, there may be several possible outcomes to the same legal dispute that are equally supportable. This understanding can help us identify common ground among disputants as well as points of departure in their reasoning.
Key Takeaways
Different theories of jurisprudence inform our understanding of what the law is. Examining legal issues through the lenses of different theories of jurisprudence allows us to see how different outcomes can be defended.
Exercise \(1\)
1. Read “The Case of the Speluncean Explorers” at www.nullapoena.de/stud/explorers.html. Identity the justice’s opinion with which you most closely agree. Name the different theories of jurisprudence used by each justice in reaching his or her opinion.
2. What are some examples of natural law in our legal system or system of governance?
3. Is it more important for you to follow the letter of the law or to follow the spirit of the law? In what circumstance would you believe the opposite to be true?
4. Can you think of any examples of law in which the threat of force or power is not needed?
5. Do you believe that morals are a part of our law, or do you believe that morality and law are separate concepts? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/01%3A_Introduction_to_Law/1.02%3A_What_is_Law%3F.txt |
Learning Objectives
• Differentiate between social customs and law.
• Become familiar with primary sources of law in the United States.
• Understand the difference between public law and private law.
• Understand the relationship between state and federal systems of government.
Hyperlink: Supreme Court Friezes
http://www.supremecourt.gov/about/north&southwalls.pdf
Along the north and south walls of the Great Hall at the U.S. Supreme Court, friezes representing the great lawgivers in history are carved in marble. Among them are Hammurabi, Moses, Solomon, Draco, Confucius, Muhammad, Napoleon, and one American. Click the link to find out who he is.
Where does the law come from? How do you know right from wrong? Certainly, your caretakers taught you right from wrong when you were a child. Your teachers, community elders, and other people who were in the position to help shape your ideas about appropriate manners of behavior also influenced your understanding of which behaviors are acceptable and which are not. Additionally, employers often have very firm ideas about how their employees should comport themselves. Those ideas may be conveyed through employers’ codes of ethics, employee handbooks, or organizational cultures.
Of course, actions that are considered “wrong” and inappropriate behavior are not violations of the law. They simply may represent social norms. For example, it is generally not acceptable to ask strangers about their income. It is not illegal to do such a thing, but it is considered impolite. Imagine that you are interviewing for a position that you really want. Can you imagine yourself asking your potential employer how much money he or she makes? It would not be illegal for the employer to refuse to hire you based on your lack of social skills. However, it would be illegal for the employer not to hire you based solely on your race.
So what is the difference? One type of “right from wrong” is based on societal norms and cultural expectations. The other type of “right from wrong” is based on a source recognized as a holding legitimate authority to make, and enforce, law within our society. These are two types of rules in our society—social norms and laws.
A Question of Ethics
In January 2010, Haiti, the poorest country in the Western Hemisphere, was struck by a massive earthquake that killed tens of thousands—maybe even hundreds of thousands—of people. Rescue workers rushed to remove survivors from the rubble, but in the days following the earthquake, thousands of people wandered the streets without food or shelter. Some instances of looting and violence occurred as survivors grew desperate for sustenance.
In the meantime, Royal Caribbean operated a cruise line that made a regular stop at Haiti, at a private beach where it had previously spent millions of dollars in improvements to ensure that the vacationers on its cruise ships would enjoy themselves during their overnight stops. Within a week of the disaster, Royal Caribbean was seeking to assure its customers that the stop in Haiti was not unethical. It pointed out that bringing tourist dollars to Haiti was actually an ethical thing to do, despite the thousands of dying and injured just a short distance away.
If you were scheduled to begin a vacation on a Royal Caribbean cruise ship that docked at its private beach during the week following the earthquake, would you go? If you decided to go, how would your friends and family react to your choice? If Royal Caribbean was not legally required to issue refunds for non-refundable tickets, should it be willing to issue refunds anyhow?
Social customs may be violated on pain of embarrassment or ostracism. Someone may choose to ignore social customs, but there are usually negative social or professional consequences to doing so. A person who violates social customs may be said to be a boor, or people may try to avoid that person because his or her actions and comments make others uncomfortable. However, no legal repercussions follow violating social customs.
Violations of law are different. Violating the law carries penalties, such as liability or loss of liberty, depending on the type of violation. While we may generally decide whether or not to conform to social customs, we are compelled to obey the law under threat of penalty.
Law can generally be classified as public law or private law. Public law applies to everyone. It is law that has been created by some legitimate authority with the power to create law, and it has been “handed down” to the people within its jurisdiction. In the United States, the lawmaking authority itself is also subject to those laws, because no one is “above” the law. If the law is violated, penalties can be levied against the violator. These penalties are also “handed down” from some recognized source of authority, like the judiciary. Of course, people in the United States may participate in many law-creating activities. For instance, they may vote in elections for legislators, who, in turn, create legislation. Likewise, if people have a legal claim, their case may be heard by the judiciary.
It’s important to note, however, that not all law is public law. Private law is typically understood to be law that is binding on specific parties. For instance, parties to a contract are involved in a private law agreement. The terms of the contract apply to the parties of the contract but not to anyone else. If the parties have a contract dispute, they will be able to use dispute-resolution methods to resolve it. This is because both parties of the contract recognize the judiciary as a legitimate authority that can resolve the contract dispute. However, regardless of the resolution, the terms of the contract and the remedy for breach will apply only to the parties of the contract and not to everyone else.
Additionally, some law is procedural and some law is substantive. Procedural law describes the legal rules that must be followed. In other words, it details the process or rules that are legally required. For instance, the U.S. government must generally obtain a warrant before searching someone’s private home. If the process of obtaining the warrant is ignored or performed illegally, then procedural law has been violated. Substantive law refers to the actual substance of the law or the merits of the claim, case, or action. Substantive law embodies the ideas of legal rights and duties and is captured by our different sources of law, like statutes, the Constitution, or common law.
Sources of Law
In the United States, our laws come primarily from the U.S. Constitution and the state constitutions; from statutory law from Congress, the state legislatures, and local legislative bodies; from common law; and from administrative rules and regulations. Executive orders and treaties are also important sources of law. These are all primary sources of law. As is true in any democracy, U.S. law reflects the will of the people who vote for representatives to make the law. In this way, U.S. law is also a reflection of public policy.
Secondary sources of law include restatements of the law, law review and journal articles, uniform codes, and treatises. These sources are created by legal scholars rather than by a recognized, legitimate law-creating authority. However, these sources are read by and often influence those who are in the position to create law. Members of the judiciary, for example, may consult a restatement of law or law-review articles when making decisions. Likewise, state legislatures often adopt whole or parts of uniform acts, such as the Uniform Commercial Code (UCC). When a body of secondary law is formally adopted by a legitimate lawmaking authority, then it becomes primary law. In this example, adoption of the UCC by a state legislature transforms the UCC from a secondary source of law (a model code) to a primary source of law in that state—namely, a statute.
Hyperlink: The U.S. Constitution
http://www.archives.gov/exhibits/charters/constitution_transcript.html
Read the U.S. Constitution at this link.
The U.S. Constitution created the structure of our federal government. Among other things, it sets forth the three branches—the legislative, executive, and judicial branches.
It provides organizational and procedural requirements, defines the boundaries of each branch’s jurisdiction, and creates “checks” on each branch by the other branches. For example, look at "Hyperlink: The U.S. Constitution". As you can see, in Article II, Section 2 the president is the commander in chief of the several armed forces, but he does not have the power to declare war. That duty falls to Congress.
The first ten amendments to the U.S. Constitution are known as the Bill of Rights. Some of the Founding Fathers did not believe that a Bill of Rights was necessary because the power granted to the federal government created by the U.S. Constitution was expressly limited. Any powers not expressly granted to the federal government by the U.S. Constitution are reserved to the states. This means that if the U.S. Constitution does not state that one of the federal branches of government has jurisdiction over a particular area, then that area falls to the states to regulate.
Despite the limited power granted to the federal government by the U.S. Constitution, as a condition of ratification, many states insisted on a written Bill of Rights that preserved certain individual civil rights and liberties. Today, business entities that are treated as legal persons under the law, such as corporations, enjoy many of these rights and liberties, just as if they were natural human beings.
Each state also has its own constitution, and those constitutions serve essentially the same function for each individual state government as the U.S. Constitution serves for the federal government. Specifically, they establish the limits of government power, create protections for fundamental rights, and establish the organization and duties of the different branches of government at the state level.
This dual system of government present in the United States is called federalism, which is a governance structure whereby the federal government and the state governments coexist through a shared power scheme. State laws may not conflict with federal laws, including the U.S. Constitution. This is because the U.S. Constitution is the supreme law of the land.
Statutory law is law created by a legislative body. Congress is the legislative body at the federal level. The states also have legislative bodies, most of which are bicameral, like our federal system. The state legislatures’ names vary by state. For instance, in Indiana, the legislature is known as the General Assembly. In North Dakota, it is the Legislative Assembly. In New York, it is called the Legislature. Nevertheless, their purposes are the same. They are the legislative branches of their respective state governments.
Congress is composed of a Senate, with 100 members, and a House of Representatives, with 435 members. The forefathers who wrote the Constitution deliberated and argued over how to compose the legislature, and the result is a deliberative body that doesn’t always respond quickly to the will of the majority. Since population numbers from the census taken every ten years determine how many House seats a state receives, smaller states are sometimes disproportionately represented in the Senate. Alaska and Delaware, for example, have only one representative in the House, but each has two senators. Senators serve six-year terms, and members of the House of Representatives serve two-year terms. There are no term limits for either senators or members of the House. One benefit of having no term limits is that institutional knowledge and wisdom can be carried forward in perpetuity. One drawback is that elected officials may hedge their votes on important issues in a calculated way, to ensure reelection. If term limits were imposed, then vote pandering would not be a problem, but the Congress would be forever laboring with many inexperienced lawmakers.
As you can see from "Hyperlink: How a Bill Becomes a Law", a bill may be introduced in Congress through the Senate or through the House of Representatives. Both the House of Representatives and the Senate have many committees, and these are related to all areas under the purview of Congress to legislate. After a bill is introduced, it is sent to an appropriate committee in the chamber of the Congress where the bill originated. If the committee moves forward with the bill, it modifies the bill as it sees fit to do, and then it sends the bill to the house of origination (either the Senate or the House of Representatives) for a vote. If the bill passes, then it is sent to the other house (again, either the Senate or the House of Representatives), where it undergoes the same process. If the other house votes to approve the bill, then the bill goes to the joint committee, which is composed of members of both the House of Representatives and the Senate, where final work is completed. After that, the bill is sent to Congress for a full vote. If the bill passes, it is sent to the president. If the president signs the bill, then it becomes a statute.
The president may veto a bill. A presidential veto is an executive “check” on the legislative body. However, if the president vetoes a bill, the legislature can override the veto by a supermajority vote. A congressional override is a legislative “check” on the executive branch. These checks are built into our U.S. Constitution.
Hyperlink: How a Bill Becomes a Law
http://www.lexisnexis.com/help/CU/The_Legislative_Process/How_a_Bill_Becomes_Law.htm
Check out the interactive flowchart for how a bill becomes law. Be sure to click on the different boxes for additional information about each step.
Importantly, Congress may not act outside of its enumerated powers. Many people wrongfully believe that Congress can do anything. That is simply not true. Look at Article I, Section 8, accessible through "Hyperlink: The U.S. Constitution", for the enumerated powers of Congress. Remember that any power not granted to the federal government by the U.S. Constitution is reserved to the states. This means that if Congress passed a law in an area that was actually reserved to the states to regulate, Congress would have acted outside the scope of its powers. If challenged, the law would be struck down as unconstitutional.
As a practical matter, this means that many U.S. states have state laws that are very different from each other. For instance, in Oregon, certain terminally ill patients may legally commit suicide under the state’s Death with Dignity Act. However, in many other states, such an act would be illegal.
Common law is judge-made law. Common law is a feature of most countries previously colonized by Great Britain, where it originated. In continental Europe, an alternative system called civil law developed, where judges do not have the power to create law through interpretation. In civil-law jurisdictions, only the legislature may create law. A jurisdiction is an area where power may be exercised.
In a common-law system, when an appellate court hears cases and writes opinions, rules of law are created, formed, and shaped. After a particular legal issue has been decided in a jurisdiction, there is a high probability that subsequent cases that present the same legal issue will use the same rule of law generated from already-decided cases regarding the same legal issue. This policy is known as stare decisis, or “let the decision stand.” This is how a precedent is formed, though precedents may shift or change over time. Precedents also may be entirely overturned, though that is rare. Precedents and stare decisis allow us to anticipate the behavior of others and to gauge the legality of our own actions.
Legal reasoning is used by attorneys to argue for a particular outcome in a case and by judges when rendering decisions. At its most basic form, legal reasoning involves first identifying the legal question, which is the issue in dispute. Then, the rule of law that applies to that issue is identified. The rule of law may be drawn from precedent, for example. The facts of the case are analyzed against the rule of law to reach a supportable conclusion. This method of legal reasoning is referred to as the IRAC method, which is an acronym for issue, rule, analysis, and conclusion.
Common law is an important source of law in those many areas that are reserved to the states to regulate. A state may exercise its police powers to regulate the safety, health, and welfare of its citizens, for example. The laws implemented in these areas may give rise to laws in divergent areas, such as property law (e.g., zoning regulations), so-called vice laws (e.g., restrictions on vice business activities in certain areas or during certain days), and domestic relations (e.g., laws relating to marriage and adoption). It’s also important to note that precedents vary among different jurisdictions because precedents created by one jurisdiction are not binding in other jurisdictions.
Most administrative agencies are created by the legislature. At the federal level, they are created by Congress, and at the state level, they are created through the state legislative bodies. Administrative agencies may be thought of as a delegation of congressional authority to area experts in particular fields, so that those experts can engage in limited lawmaking, adjudicative procedures, and investigations within their particular purviews. Laws made by administrative agencies are called rules or regulations. Administrative agencies are created by enabling legislation, which sets forth the agencies’ jurisdictional boundaries, rule-making procedures, and other information relating to agencies’ scopes of power.
Key Takeaways
The legal system in the United States is composed of multiple jurisdictions at the local and state levels and one federal jurisdiction. Local and state laws may not conflict with federal laws. Primary sources of law in the United States include constitutional law, statutory law, common law, and administrative law.
Exercise \(1\)
1. Identify an action that would violate social norms but would not violate any laws. Can you identify any violations of law that would not violate any social norms?
2. What are three specific powers of Congress? What are three specific powers of the executive branch? Do you think that the powers of the judicial branch are well defined? Why or why not?
3. What areas of law have been reserved to the states to regulate? How do you know?
4. Identify a bill in either the House of Representatives or the U.S. Senate. What stage(s) of the bill process has it passed through? To be passed into law, what stages must it still pass through?
5. Which three federal administrative agencies affect you or your family the most? Why? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/01%3A_Introduction_to_Law/1.03%3A_Sources_of_Law.txt |
Learning Objectives
• Understand what a rule of law system is.
• Explore the U.S. rule of law system.
When you hear the term “rule of law,” what comes to mind? It may seem like an ambiguous term, but it is used frequently in legal and governance circles. Rule of law is a system of laws under which the people and the government are bound, which allows predictability and restraint of government action.
A rule of law legitimizes the law. It establishes clear rules of behavior, establishes (or captures) precedent, and seriously undermines any defense of ignorance of the law. Moreover, it holds people to the same standards, though in many ancient rules of law, the standards differed depending on the person’s classification. For instance, men often had different rights than women. Slaves were a different legal class than those who were free, and indentured servants were often a different classification altogether. When people are held to the same standards, we can see systems of fairness (that is, equal justice under the law) emerging, at least for those within the same class.
The Founding Fathers of the United States did not create our rule of law system out of thin air. Many rule of law systems existed prior to the founding of the United States. The U.S. rule of law system has many similarities with prior rule of law systems from which our Founding Fathers drew their ideas. We can trace elements of our legal genealogy back to ancient Babylon. For example, who has the right to govern, the legitimate sources of law, the organization of government, substantive and procedural legal responsibilities, processes for dispute resolution, and consequences for legal transgressions are all common foci for rule of law systems.
Can you imagine if we had no way to determine these things? Imagine that we did not know who had the legitimate right to govern or that we did not know which sources of law were legitimate. If we did not have a rule of law system that specified and legitimized these and other foundational issues, chaos would rule. There would likely be competing claims of authority between different factions of power if our U.S. Constitution and our state constitutions did not create our systems of government. Likewise, there would be competing sources of law—such as those based on religious texts, or others created by modern human beings—if our constitutions did not legitimize the manner in which laws were to be created. Also, there would be different methods of dispute resolution. Perhaps some people would favor a vigilante system, while others would prefer a procedural system. This type of unpredictability would result in a very unstable society. We should not take the American rule of law system for granted. It provides predictability and stability to our lives.
Rule of law systems establish authority, create expectations for behavior, and establish redress for grievances and penalties for deviance. Governance of conflict and the attainment of peace among the governed are primary goals of rule of law systems. For example, securing peace is a goal within the U.S. rule of law system. The U.S. Constitution’s preamble states, “We the People…in Order to…insure domestic Tranquility.” We see this same notion in the English Bill of Rights of 1689, though the words used are somewhat different.
According to many rule of law systems, the attainment of peace relies on the establishment of a hierarchical authority structure. This recognition of the right to govern provides legitimacy. For instance, in the Code of Hammurabi and the Magna Carta, these rights are derived from religious authority. In the U.S. Constitution and the English Bill of Rights of 1689, the power is derived from the people.
Note the difference between power and authority. Power is the ability to make someone behave in a predictable manner. Authority draws its strength from legitimacy. Imagine that your friend told you that his mother granted him the right to govern others. Would you believe him? Probably not. Why? Because it is unlikely that you would recognize your friend’s mother as having a legitimate authority to bestow the right to govern on anyone, including your friend. Imagine, instead, the governor of your state. You probably recognize the authority of the governor to govern, because you recognize that the people, through representative government, have the authority to elect the governor to do so.
The rule of law of the federal government in the United States is composed of many different sources of law, including constitutional law, statutory law, rules and regulations promulgated by administrative agencies, federal common law, and treaties. Additionally, within the United States, several state and local jurisdictions exist, each having its own rule of law systems. Moreover, the U.S. system of governance is one of federalism, which allows different rule of law systems to operate side by side. In the United States, these systems are the federal government and the state governments.
Organizational structures for government—including who has the right to govern—are also set out in rule of law systems. For instance, the Code of Hammurabi identified a ruler: Hammurabi himself. The English Bill of Rights of 1689 required representative bodies. The U.S. Constitution organized the U.S. government by creating the legislative, executive, and judicial branches. These models minimally provide order and, in some cases, provide opportunities for the governed to participate in government, both of which create role expectations of the governed.
Notably, even though our Founding Fathers relied on prior rule of law systems when creating our Constitution, they were unable to resolve all challenges that exist when people live together. Today, for instance, one unresolved challenge is reflected in the tension between personal liberty and responsibility to state. We have many individual rights and personal liberties, but as some argue, we do not have many responsibilities to the state. We could have a system that requires greater duties—such as the legal duty to vote, to serve in public office or in the military, or to maintain public lands. Unresolved challenges highlight the fact that rule of law systems are not perfect systems of governance. Nevertheless, these systems create expectations for conduct, without which governance of conflict could not reasonably exist and peace could not be attained.
The U.S. Constitution is the foundation on which the U.S. federal rule of law system rests. It asserts the supremacy of law. “We the people” is a very important part of the preamble, because it confers power on the people as well as on the states. Notably, unlike the Magna Carta and the English Bill of Rights of 1689, it does not focus on individual rights. Of course, the Bill of Rights does focus on individual rights, but those amendments were passed after the Constitution was written. (That is why they are called amendments to the constitution.) The U.S. Constitution implemented the supremacy of law using structure and processes. The Founding Fathers were particularly concerned about giving the government the power to do its job without encouraging tyranny. They built in processes to ensure the supremacy of law. Indeed, ours is “a government of laws and not of men,” John Adams wrote in the Massachusetts Constitution. Thomas Paine noted the same sentiment in Common Sense, when he wrote, “the law is king.”
Key Takeaways
Rule of law is a system of published laws under which the people and the government are bound, which allows predictability and restraint of government action. A rule of law system allows people to understand what is expected of them. It provides a system that allows many people with different beliefs and cultures to live together in peace, by providing methods by which conflicts can be resolved. The U.S. rule of law system contains many elements of prior rule of law systems.
Exercise \(1\)
1. View the Code of Hammurabi at http://avalon.law.yale.edu/ancient/hamframe.asp. Scroll down slightly until you see the subheading “Code of Laws.” Find three laws that you believe are similar to laws that we have in the United States.
2. Given the long history of rule of law systems, why hasn’t any rule of law system been developed that resolves all problems? Name three social problems that our rule of law system does not address, or does not address adequately.
3. Are the Ten Commandments a rule of law system? How many of the Ten Commandments are illegal in your state today?
4. What problems would exist without a rule of law?
5. How does the rule of law affect business? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/01%3A_Introduction_to_Law/1.04%3A_The_Rule_of_Law.txt |
Learning Objectives
• Determine why the rule of law is important to business.
• Identify several areas of law that are especially relevant to business and the importance of the rule of law to those areas.
• Identify how the rule of law limits government.
• Identify how the rule of law protects people from harmful business practices.
As you may have guessed by now, the rule of law is important to business. Can you imagine trying to do business without being able to have any reasonable expectations of other people’s behavior? Would you be willing to conduct business if you had no legal means by which to protect your property interests? And in the case of a dispute, without a rule of law system, there would be no established way of resolving it. Without the rule of law, business would be chaotic. This section provides some overarching examples of why the rule of law is important to business.
Before getting to those examples, imagine this: What if you did not know how to play chess, but you tried to play anyhow? You would probably become frustrated very quickly, because you would see no logic in the movement of your opponent’s pieces, and you would not be permitted to move some pieces like you might wish to. Sometimes you would see your opponent move his or her knight two spaces in one direction and then one space in another. Other times, you would see your opponent move his or her bishop diagonally. Moreover, you would not understand what you were and were not permitted to do. You would also not know how to penalize an opponent who moved his or her pieces incorrectly to gain advantage or to take something of yours. This is analogous to what it’s like to do business without understanding the rules of the game.
The rule of law establishes rules that people—and businesses—must follow to avoid being penalized. The rule of law not only allows people to understand what is expected of them in their personal capacities but also sets forth rules for businesses so that they, too, know what is expected of them in their dealings and transactions. In addition, it restrains government and others from infringing on property rights. Should disputes arise, the rule of law provides a peaceful and predictable means by which those disputes can be resolved.
The rule of law provides guidance and direction in every area of business. For example, it provides a means to bring a complaint against another party to a neutral decision-maker so that a decision can be made regarding the dispute. Because of our rule of law system, we know that we are permitted to file a complaint in the proper court to commence litigation. Or we can try an alternative method of dispute resolution if we do not wish to engage in litigation. We know that we are permitted to do these things because our rule of law system allows us to do them. Moreover, we can expect some sort of resolution when we institute such a proceeding. This expectation is reasonable only because we have a rule of law.
Additionally, in the United States, the rule of law provides a sophisticated system of federalism, where state and federal laws coexist. This allows people and businesses to determine which system of government pertains to them and which jurisdiction they belong to. Imagine that you sell firearms in a retail capacity. You would be subject to both state and federal laws. You would be required to carry a federal permit from the federal administrative agency known as the Bureau of Alcohol, Tobacco, Firearms, and Explosives. You would be forbidden from engaging in illegal arms trading. According to state laws, you would likely have to ensure that each purchaser of a firearm held a valid permit for a firearm. You would be required to check identification, enforce waiting periods, and refuse to sell guns to people who were not permitted to carry them according to your state’s laws. If we did not have a rule of law system, you might be uncertain how to conduct your business, and you would be subject to arbitrary enforcement of unstated or ex post facto (retroactive) laws that affected your business.
The rule of law also governs contracts between people and between merchants. Under the common law system, certain elements of a contract must exist for the contract to be enforceable. Under the Uniform Commercial Code (UCC), merchants are governed by a separate set of rules that anticipate and allow for flexibility in contractual terms, to facilitate business needs. In the event that terms conflict in an offer and acceptance between merchants, the UCC allows “gap fillers” to complete the terms of the contract without need for the contract to be rewritten or for formal dispute resolution. Moreover, businesses rely on the rule of law to help them enforce contracts against contractors who fail to perform.
Additionally, because we have a rule of law system, employers know the rules of the game regarding their relationship to employees, and employees know the rules with respect to their obligations to employers. Likewise, business partners, members of boards of corporations, and members of limited liability companies all know what is expected of them in their roles vis-à-vis the business and other people within their organizations. When someone does something that is not permitted, there is legal recourse.
The rule of law also provides protection for property. Imagine if we did not have protection for nontangible property, such as intellectual property like trade secrets, trademarks, or copyrights. It would be very difficult to protect this type of property if we did not know the rules of the game. People would not have the incentive to create or share new intellectual property if they had no reasonable expectation of being able to protect it or of being rewarded for their creations. Likewise, the rule of law allows us to protect tangible property without having to go to extraordinary measures. For instance, if we had no rule of law system to convey and maintain legal ownership to us for our real or personal property, we might be forced to hire expensive private security forces to guard our property when we could not be there to physically protect it ourselves.
Businesses also rely on the rule of law to govern their debtor and creditor relationships. And, if financial matters do not go as anticipated, our legal system allows businesses to ask the court for protection from creditors under our bankruptcy law. This allows businesses to protect their property from creditor repossessions or foreclosures while they get back on track financially.
The rule of law also protects people from businesses. For example, Congress has enacted antitrust legislation that prevents certain anticompetitive practices, such as colluding and price-fixing. Additionally, businesses are prohibited from using deceptive advertising and are held responsible when they manufacture or sell defective products that cause injury.
The rule of law also protects businesses from government. Since everyone is subject to the rule of law, this means that government itself may not overextend its reach when regulating or investigating businesses. Government must play by the rules, too. For example, imagine that our government could do anything, without any limits or jurisdictional restraints. A business operating in such a climate might find itself subject to government closure on a whim, or excessive taxes, or requirements to pay bribes to gain permits to do business. Our rule of law system prevents such abuses.
Without a rule of law system, people would have to exact satisfaction for the wrongs committed against them on their own. They would have to physically protect their own property. This would lead to a breakdown in social structure, and it would result in vigilante justice and physical strength playing primary roles in dispute resolution.
Key Takeaways
The rule of law system in the United States sets the rules of the game for doing business. It creates a stable environment where plans can be made, property can be protected, expectations can exist, complaints can be made, and rights can be protected. Violation of the law can result in penalties. The rule of law protects business, protects consumers from harmful business practices, and limits government from engaging in abusive practices against businesses.
Exercise \(1\)
1. Have you ever played a game in which you did not know all the rules? Have you ever tried to speak a language in which you weren’t fluent? What was the outcome?
2. What incentive or motivation would exist to work for your employer if you were not certain that you would be paid for your efforts and your time? What incentive would you have to invent something new, create a work of art, or write a book if you had no legal expectation that you would be able to protect your creation?
3. Imagine that you are an entrepreneur. What type of business would you open? Would you know what types of permits were required to conduct your business and which government entities had jurisdiction over your business? If not, how could you find out?
4. What would business be like in a land without any rule of law system? Be specific. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/01%3A_Introduction_to_Law/1.05%3A_Importance_of_Rule_of_Law_to_Business.txt |
Learning Objectives
• Identify the relevance of law to business disciplines.
• Understand the relevance of law to the study of business.
• Identify how the rule of law protects people from harmful business practices.
Foundational courses taken by undergraduate business students usually include accounting, finance, management, and marketing. An understanding of the legal environment of business is relevant—indeed, essential—to functioning well within each of those disciplines. Additionally, a solid understanding of the legal environment can help avoid liability or at least minimize risk. In business, it is not enough to comport yourself and your business ethically. You must also ensure that you understand the legal environment in which you are working. Therefore, it is important to you, to your employer, and to all the other people who may be relying on your business expertise—such as your employees and your family—to understand the legal environment. Such an understanding will help you avoid or lessen the likelihood of liability exposure, enabling you to manage your business affairs successfully, unhampered by unmanaged legal liability risks. This section provides some examples of how law affects specific business disciplines.
During the last several years, accountants have been in the limelight due to culpable behavior of some members of the profession during well-known business scandals, such as Enron. Largely as a result of the fallout from the Enron case, Congress passed the Sarbanes-Oxley Act (SOX) of 2002, which imposed stringent oversight requirements on accounting and auditing firms. The requirements seek to ensure competence, compliance with security laws, and conduct consistent with generally accepted accounting principles.
Of course, the Enron scandal and SOX were both fairly dramatic examples of how law can affect accounting. Other ways in which law affects this discipline are through regulation. For example, the U.S. Securities and Exchange Commission’s (SEC) mission is to protect investors and to maintain a fair market, among other things. Accordingly, the SEC enforces accounting and auditing policies to allow investors to make decisions based on accurate information. The SEC pursues charges of accounting fraud and oversees private regulation of the accounting profession.
The law also affects finance. Like accounting professionals, many who work in finance are also regulated by the SEC. The SEC is concerned that investors receive accurate information to make investment decisions. Moreover, the SEC enforces prohibitions against insider trading and pursues claims of other types of securities fraud, such as Ponzi schemes.
Similarly, several statutes protect consumers in financial transactions. For example, the Truth in Lending Act (TILA) requires lenders to accurately provide information concerning the costs involved in offers of credit. TILA and its corresponding Regulation Z are administered by federal banking agencies.
Law also affects those in management. For instance, knowledge of employment law is essential to those in human resources. Title VII of the Civil Rights Act prohibits discrimination related to protected characteristics in hiring and employment practices. Those in management also must be aware of the potential liability that demands on employees might create. For example, in Oregon, McDonald’s was found to be liable for injuries resulting when an off-duty, off-premises worker fell asleep while driving.Faverty v. McDonald’s, 892 P.2d 703 (Or. Ct. App. 1995). The employee had worked three shifts during a twenty-four-hour period. The court held that employers have a duty to avoid conduct that creates a foreseeable risk of harm to others.
If your field is marketing, the law also relates to your work. Marketers must be particularly attuned to tort law, consumer protection law, and intellectual property law. For example, to avoid charges of libel, those in advertising need to take care not to defame another person, business, or product. It might be tempting to do so, especially if you were engaged in serious competition with another company that sold a similar product. Likewise, marketers must take great care not to engage in deceptive advertising practices, lest their employer run afoul of the Federal Trade Commission’s (FTC) policies or the FTC Act. Additionally, marketers must be aware of other people’s intellectual property to avoid copyright or trademark infringement in their own work product.
These are a few examples of how the law relates to specific business disciplines. Of course, this is just an overview. It is incumbent on each business professional to become familiar with the legal environment in his or her profession. Employers may provide training regarding legal environment issues, such as anti-sexual harassment training or anti–insider trading training, but ultimately, becoming familiar with the legal environment is each person’s individual responsibility. Remember that a defense of “I didn’t know the law!” is no defense at all.
Key Takeaways
The law is relevant to every business discipline. Minimizing liability exposure is a primary concern of business, and an understanding of the legal environment relevant to each disciplinary perspective helps business practitioners minimize their risk of incurring liability to themselves or to their employers.
Exercise \(1\)
1. Which business discipline is your favorite? Find a newspaper article that illustrates a legal problem pertaining to that discipline that could have been avoided with a better understanding of the legal environment of business.
2. How can employers use knowledge of the legal environment of business to minimize liability exposure? Identify three concrete ideas.
3. How can employers stay current with the legal environment of business? For example, how would other employers in Oregon find out about the case of the off-duty, off-premises worker mentioned in this section? If you were an employer in Oregon, how might this case change your business practices?
4. Do you think that if employers train their employees how to behave on the job, those employers should be absolved from legal liability resulting from employees’ actions? For example, imagine that an employer provides training to its employees regarding how to avoid sexual harassment in the workplace, but an employee ignores the training and sexually harasses a colleague. Should the employer bear liability in that situation? Why or why not?
1.07: Concluding Thoughts
This chapter provides an introduction to the legal environment of business. Knowledge of the legal environment of business is essential to successful business practices. This involves understanding what the law is, where it comes from, and specifically how it relates to business. Moreover, different philosophies of law exist. Approaching a problem from different perspectives allows for multiple outcomes to be explored. Additionally, when people approach the same problem from different legal philosophies, reasonable minds can disagree on the outcome. Familiarity with government structure and an understanding of rule of law are essential to successful business operations. Ultimately, businesspeople should be able to recognize legal situations, minimize liability exposure, and know when to consult an attorney.
As you embark on your study of the legal environment, try to remain oriented. Ask yourself questions like “Where does this piece of law fit in the business world?” and “Why is it important for me to know this?” Studying the law can, at times, seem like studying pieces of a very large jigsaw puzzle. You may not immediately see how individual pieces fit together, but with protracted study of law, it will become clear. Often, with that understanding, the depth of law becomes apparent.
Additionally, it is very helpful if you try to find contemporary examples of the concepts that are discussed in this book. When surfing the Internet, watching movies, or reviewing current events, try to “issue spot.” In other words, try to identify the legal issue raised by the particular problem presented. Try to figure out which jurisdiction would have authority over the issue. State government? Federal government? Both? Try to determine which type of law would control or be determinative of the outcome. Is it a statutory issue? A constitutional issue? A regulatory issue?
Also, try to ask yourself why the dispute was raised. Will the parties involved be able to work it out on their own? If not, why not? Has the issue entered into litigation? How could the issue have been avoided with better planning and greater familiarity with the legal environment?
This little game can give you practice in orienting yourself as you gain footing in the study of law and the legal environment of business. We wish you every success in your course! | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/01%3A_Introduction_to_Law/1.06%3A_How_Law_Affects_Business_Disciplines.txt |
Learning Objectives
After reading this chapter, you should have a thorough understanding of the U.S. court system and how it affects the conduct of businesses and individuals. Specifically, you should be able to answer the following questions:
• What role does each of the three branches of government play?
• How do the other two branches of government balance the judiciary?
• How are the state and federal courts structured?
• What are the primary differences between trial and appellate courts?
• How does the Supreme Court do its work?
As you now know, laws are meaningless if they are not enforced. Companies have to make a barrage of decisions daily, from product development to marketing to strategies to maintain growth, but most of these are based on sound business acumen rather than legal requirements. If a company does violate a law, however, it must be held accountable. Typically, that accountability comes in the form of a lawsuit heard in court. Whether a suit is brought by a supplier, customer, employee, shareholder, or other stakeholder, litigation is a fact of life for companies. As future business professionals, being familiar with our court system will lay the foundation for your understanding of the litigation process.
2.02: The Third Branch
Learning Objectives
• Understand the constitutional basis for the judicial branch.
• Explore the differences among the three branches of government.
• Learn about the chief justice’s role in judicial administration.
• Explore the concept of judicial review.
• Become familiar with how the other two branches check and control the judiciary.
Under the federal Constitution, power is separated among three branches of government. Article I of the Constitution allocates the legislative power to Congress, which is composed of the House of Representatives and the Senate. Congress makes laws and represents the will of the people in doing so. Article II of the Constitution creates the executive power in the president and makes the president responsible for enforcing the laws passed by Congress. Article III of the Constitution establishes a separate and independent judiciary, which is in charge of applying and interpreting the meaning of the law. The U.S. Supreme Court sits at the top of the federal judiciary as the supreme court of the land. There are nine judges on the Supreme Court. (See Figure 2.2.1 "The U.S. Supreme Court in 2009".)
The Constitution is remarkably short in describing the judicial branch. The president, under Article II, has the power to nominate judges with the advice and consent of the Senate. Article III also provides the following: “The judicial power of the United States, shall be vested in one Supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish. The judges, both of the supreme and inferior courts, shall hold their offices during good behaviour, and shall, at stated times, receive for their services, a compensation, which shall not be diminished during their continuance in office.” Under the Constitution, therefore, there are only two requirements to becoming a federal judge: nomination by the president and confirmation by the Senate. There are no age, citizenship, or qualification requirements. If the president wanted to, he could nominate any reader of this book as a federal judge. Additionally, the Constitution guarantees that judges are relatively free from political interference by providing them with lifetime tenure and a salary that cannot be reduced.
It is commonly accepted that the three branches of government are coequal, but in reality they are very different. The judiciary is the only unelected branch of government and is therefore the most mysterious. Although many Americans know who the president is, and many are familiar with their representatives in Congress, very few know the names of the judges who sit on the Supreme Court or any lower court. When politicians run for Congress or president, they spend months campaigning, begging voters to look into their eyes and trust them enough to cast their votes. Since judges are not elected, the vast majority of Americans cannot associate them with a face. Indeed, many visitors to the Supreme Court building in Washington, DC, routinely come face-to-face with a justice and don’t realize it.
The three branches also consume vastly different resources in serving the public, with the entire federal court system consuming less than two-tenths of 1 percent of the federal budget. The political branches capture the public imagination with monuments and landmarks (Air Force One, the White House, the Capitol), while the federal judiciary works in relative anonymity. (All federal judges, for example, travel commercially and do not have access to government-owned planes.) Finally, the judiciary is designed to be the most remote branch from the people. In addition to being unelected, federal judges have life tenure and can be removed from office only through impeachment. They also tend to be in public office far longer than politicians. While the United States has had forty-four presidents and more than two thousand members of Congress, Chief Justice John Roberts is only the seventeenth chief justice. Roberts was only fifty years old when he became chief justice and will likely be chief justice for many decades to come, certainly long after his nominating president, George W. Bush, has faded from public life.
When we speak of the “federal judiciary,” we are referring to a very small entity compared to other federal bureaucracies. The Supreme Court (the building, justices, and staff) is one part of the federal judiciary. The district and appellate courts (described later in this chapter) are another part, and they also comprise judges and staff (although these courts do not own their own buildings; rather, all courts other than the Supreme Court are rented from other branches of the government). The Administrative Office of the United States Courts runs the day-to-day issues for all the courts, such as payroll and rent. A second component of the judiciary is the Federal Judicial Center, an agency dedicated to conducting research on judicial administration and providing judicial education. A third component is the United States Sentencing Commission (USSC), established by Congress to make recommendations on how to establish uniformity in federal criminal sentencing. In addition to his responsibilities in hearing cases and writing opinions, the chief justice oversees the overall operation of the federal courts and represents the courts to the other branches of government. When it comes to hearing and deciding cases, however, the chief justice is “first among equals”: he has no more power than any of the other justices, known as associate justices.
In that capacity, the chief justice traditionally releases an annual report on the judiciary. Since becoming chief justice in 2005, Chief Justice Roberts (Figure 2.2.2 "Chief Justice John G. Roberts") has focused his annual reports on judicial pay. Although judicial salaries cannot be reduced, years have passed since Congress approved a cost-of-living increase for judges. District court judges are currently paid \$169,300 (the same salary as members of Congress), while circuit court judges are paid \$179,500. Supreme Court justices earn \$208,100, and the chief justice earns \$217,400. While this may seem like a lot of money, it’s important to keep in mind that the integrity of the judicial system depends on attracting the very best lawyers to join the bench. Lawyers of that caliber are also in high demand in private law firms, where they can earn many times more than what judges earn. As a result, high-quality lawyers who otherwise may serve the country by becoming judges never even consider joining the bench. As you can see from "Hyperlink: Excerpt from 2008 Year-End Report to Congress", there is a risk, the chief justice believes, that the pool of judicial talent may be limited to less-than-the-best lawyers or those who are independently wealthy.
Hyperlink: Excerpt from 2008 Year-End Report to Congress
http://www.supremecourt.gov/publicinfo/year-end/2008year-endreport.pdf
I suspect many are tired of hearing it, and I know I am tired of saying it, but I must make this plea again—Congress must provide judicial compensation that keeps pace with inflation. Judges knew what the pay was when they answered the call of public service. But they did not know that Congress would steadily erode that pay in real terms by repeatedly failing over the years to provide even cost-of-living increases.
Last year, Congress fell just short of enacting legislation, reported out of both House and Senate Committees on the Judiciary, that would have restored cost-of-living salary adjustments that judges have been denied in past years. One year later, Congress has still failed to complete action on that crucial remedial legislation, despite strong bipartisan support and an aggregate cost that is miniscule in relation to the national budget and the importance of the Judiciary’s role. To make a bad situation worse, Congress failed, once again, to provide federal judges an annual cost-of-living increase this year, even though it provided one to every other federal employee, including every Member of Congress. Congress’s inaction this year vividly illustrates why judges’ salaries have declined in real terms over the past twenty years.
Our Judiciary remains strong, even in the face of Congress’s inaction, because of the willingness of those in public service to make sacrifices for the greater good. The Judiciary is resilient and can weather the occasional neglect that is often the fate of those who quietly do their work. But the Judiciary’s needs cannot be postponed indefinitely without damaging its fabric. Given the Judiciary’s small cost, and its absolutely critical role in protecting the Constitution and rights we enjoy, I must renew the Judiciary’s modest petition: Simply provide cost-of-living increases that have been unfairly denied! We have done our part—it is long past time for Congress to do its.
The Supreme Court is a well-known institution today, but it wasn’t always that way. When the Court first met, many of the justices (then appointed by George Washington) couldn’t travel in time for the Court’s opening day, so the session was dismissed. For the first three years of its existence, the Court heard no cases of any importance. John Jay, the first chief justice, traveled to Europe while he was chief justice to negotiate the Jay Treaty with Great Britain. While there, he won election as governor of New York. He was reappointed as chief justice by President Washington and confirmed by the Senate but declined to return to the Court, citing the Court’s lack of energy, weight, and dignity as part of his reasoning. It wasn’t until John Marshall became the fourth chief justice (a position he held for a record thirty-four years) that the Supreme Court firmly established itself as a separate and coequal branch of government. The Supreme Court did not even get its own building until 1932, years after the nation’s capital was established in Washington, DC. Before then, it met in the basement of the old Senate building to hear cases. When William Taft (the only president who also served as a Supreme Court justice) became chief justice, he persuaded Congress to appropriate funds, and the Court finally got its own building in Washington, DC.
Hyperlink: Supreme Court Virtual Tour
http://supremecourt.c-span.org/VirtualTour.aspx
The Supreme Court building, located at 1 First Street, is an impressive marble building that sits at the northern border of Washington, DC’s, famous plaza. It is open year-round and is free to visit. If you have not been there, you can use the link to take a virtual tour of the entire building, inside and out, courtesy of C-Span.
The Supreme Court’s early malaise can partially be attributed to the problem that no one really had a good idea of what the Supreme Court was supposed to do. There were few cases of tremendous national importance in the new republic, and a quirky tradition known as “riding circuit” meant that the Supreme Court justices also acted as lower appellate court judges, thus making their work at the Supreme Court somewhat duplicitous. The Constitution simply states that the judicial power of the United States is vested in the Supreme Court, without expounding what that means. It wasn’t until 1803 that the modern role of the Supreme Court began to emerge.
In 1800, the presidential election between John Adams and Thomas Jefferson nearly tore the country apart. The election was bitter, partisan, and divisive. Jefferson won but wasn’t declared the winner until early in 1801. In the meantime, Adams and other Federalists in Congress attempted to leave their mark on government by creating a slate of new life-tenured judgeships and appointing Federalists to those positions. For the judgeships to become effective, certain paperwork (known as commissions) had to be delivered in person to the new judges. At the time power transitioned from Adams to Jefferson, several commissions had not been delivered, and Jefferson ordered his acting secretary of state to stop delivering them. When Jefferson came to power, there was not a single judge from his Democratic-Republican Party sitting on the bench, and he wasn’t keen on expanding the Federalist influence on the bench any further. One Federalist judge, William Marbury, sued the secretary of state, James Madison, to deliver his commission. The case was filed in the Supreme Court, led by Chief Justice John Marshall (Figure 2.2.3 "Chief Justice John Marshall"). Marshall himself was a Federalist and had served as Adams’s secretary of state, so he understood how political the case was and how he stood to be accused of bias if he ruled the wrong way. In a shrewd and calculated move, he ultimately ruled against Marbury but at the same time declared that it was the Supreme Court’s role to decide the meaning of the Constitution. This is called judicial review, and it makes the U.S. Supreme Court the most powerful judicial body in the world. The following is from Marbury v. Madison: “It is emphatically the province and duty of the Judicial Department to say what the law is. Those who apply the rule to particular cases must, of necessity, expound and interpret that rule. If two laws conflict with each other, the Courts must decide on the operation of each.”Marbury v. Madison, 5 U.S. 137 (1803).
Chief Justice Marshall did not invent judicial review; it is a feature of most common-law countries and as a concept goes back centuries. He did, however, institutionalize judicial review at the U.S. Supreme Court at a time when there was great uncertainty about the Court’s future role in government. While all three branches are bound to uphold the Constitution, on all matters relating to the meaning of the Constitution, the Supreme Court has the final say.
After Marbury v. Madison, it took the Supreme Court nearly sixty years to again use the power of judicial review to strike down legislation. The case was Dred Scott v. Sanford, Dred Scott v. Sanford, 60 U.S. 393 (1857). and it involved a slave who traveled with his owner, a doctor in the army, to many states including free states (Figure 2.2.4 "Dred Scott"). Dred Scott filed suit for his freedom, and the case ended up before the Supreme Court. In what many commentators call the Supreme Court’s “self-inflicted injury,” the Court, in an opinion written by Chief Justice Roger Taney, used judicial review to overturn the Missouri Compromise and held that Dred Scott was not a person under the Constitution and therefore could not file suit. The decision hastened the country into Civil War, and it took years for the Supreme Court to recover its standing with the public.
Judicial review means that any federal court can hold any act of the president or the Congress to be unconstitutional. It is a power that rests with each of the more than eight hundred federal judges, from the trial courts through the appellate courts. It is an extraordinary power in a democracy, as an unelected life-tenured person or group of persons overturns the acts of a popularly elected branch of government. Rather than give rise to judicial tyranny, however, our system of checks and balances ensures that the other two branches also play a critical role in “checking” the judiciary.
Take, for example, the executive branch. The president can control the judiciary by making careful judicial selections. The power of the president to name federal judges is absolute—he is not required to consult with any other individual in making his choice. As a matter of custom, presidents have traditionally looked to senators to provide names of judicial candidates for consideration, and some presidents are more willing than others to defer to the advice of aides and advisors. For much of the nation’s history, the Senate routinely confirmed the president’s choices. President Reagan’s nomination of Robert Bork in 1987 changed that tradition forever. Alarmed Democrats grilled Bork in confirmation hearings and ultimately declined to confirm him, setting the stage for a new breed of confirmation hearings where senators try to ascertain not just the nominee’s character but also how he or she will judge certain issues. Judicial nominees, especially to the Supreme Court, are under so much scrutiny now that sometimes even the president’s own party will turn against a nominee. This happened to President George W. Bush when he named his close friend Harriet Miers to fill a vacancy left by Justice Sandra Day O’Connor’s retirement. Alarmed at her lack of judicial experience and record on conservative judicial issues, Republicans urged the president to reconsider his choice, and Ms. Miers eventually withdrew as a nominee.
Presidents hope, and believe, that their selections reflect their own ideologies and beliefs. Federal judges are notoriously independent, however, and many demonstrate little hesitance to overrule their nominating president if they believe it necessary to do so. Several presidents have been disappointed in their nominee as they watched the judge move away from his or her earlier political roots. For example, President Eisenhower, a Republican, nominated Earl Warren as chief justice. Warren would later transform the civil rights landscape with a series of decisions, leading Eisenhower to describe nominating Warren as “the biggest damned fool mistake I ever made.”John Fox, “Biographies of the Robes: Earl Warren,” PBS, December 2006, http://www.pbs.org/wnet/supremecourt/democracy/robes_warren.html (accessed August 22, 2010). President Nixon, a Republican, placed Harry Blackmun on the Supreme Court, only to see Blackmun later move to the left and author Roe v. Wade,Roe v. Wade, 410 U.S. 113 (1973). the principal decision legalizing access to abortion services. More recently, President George H. W. Bush nominated David Souter to the Court on the belief that Souter would be a reliable conservative. Souter quickly aligned himself with the liberal wing of the Court.
In addition to nominating judges, the president serves as a check on the judiciary by being the primary means of enforcing judicial decisions. Federal judges do not control any police force and as such are unable to ensure their decisions are carried out. That responsibility falls on the executive branch. No matter how much a president may disagree with a judicial decision, it is a testament to our republican form of government, and the rule of law, that the president nonetheless faithfully executes a federal court’s decision.
Hyperlink: The Little Rock Nine
http://www.npr.org/templates/story/story.php?storyId=14091050
After the Supreme Court handed down its seminal decision in Brown v. Board of Education, Brown v. Board of Education, 347 U.S. 483 (1954). many Southern states continued to resist desegregation. In Little Rock, Arkansas, the local NAACP chapter enrolled nine students in Little Rock High School to begin with the fall term in September 1957. Several segregationist groups protested, and Arkansas governor Orval Faubus deployed Arkansas National Guard troops to stop the students from entering the school. President Eisenhower reluctantly ordered the 101st Airborne Division of the U.S. Army to Little Rock to ensure the students could enroll and attend class. Click the link to listen to a story about one of the students, Elizabeth Eckford (Figure 2.2.5 "Elizabeth Eckford"), who tried to enroll in Little Rock High School that day.
The Congress can also play an important role in “checking” the judiciary. The most obvious role is in confirming judicial selections. In the last few years, judicial confirmations have become a political battlefield, as activists on both the left and right seek to block judicial nominees they view as being too radical. It’s not unusual for some judicial candidates to wait years for their confirmation hearings. President George W. Bush, for example, initially appointed Chief Justice Roberts to a court of appeals judgeship in 2001, but he wasn’t confirmed until 2003, after Republicans regained control of Congress in midterm elections. Similarly, the newest member of the Supreme Court, Elena Kagan, was nominated for a federal appellate judgeship in 1999 by President Bill Clinton but was never confirmed due to Republican objections to her nomination.
In addition to confirmation, Congress also controls the judiciary through its annual budgetary process. Although the Constitution protects judicial salaries from any reductions, Congress is not obligated to grant any raises. For several years, judges have worked without cost-of-living raises. Although no one has seriously suggested that Congress is withholding money from the courts in retaliation for judicial decisions, some have observed that Congress would like to see the judicial branch yield on some high-profile issues such as televising Supreme Court proceedings in turn for pay raise consideration.
Finally, Congress can control the judiciary by determining how the courts are organized and what kind of cases the courts can hear. After the 1800 presidential election, for example, the newly elected Congress canceled the Supreme Court’s term for the entire year while they reorganized the judiciary. More recently, several conservative members of Congress have suggested splitting up the liberal-leaning Ninth Circuit Court of Appeals on the West Coast, to reduce its influence. The Constitution also gives Congress the authority to determine the courts’ jurisdiction. Congress has used this authority in the past to take away controversial cases from judicial consideration. During Civil War Reconstruction, for example, Congress passed a law taking away the Supreme Court’s jurisdiction to hear an appeal from a newspaper publisher jailed for publishing articles opposing Reconstruction. Ex parte McCardle, 74 U.S. 506 (1869). Recently, Congress did the same thing, removing federal court jurisdiction from hearing appeals involving detainees held at the military prison in Guantanamo Bay. In the recent past, members of Congress have also introduced legislation prohibiting federal courts from hearing cases about the public display of religion and flag burning or from using any foreign law as support for their decisions.
Key Takeaways
The third branch (judicial branch) is the only unelected branch of government. As such, it can sometimes appear remote or detached from the American public. The judiciary is composed of federal courts, the Administrative Office, the Federal Judicial Center, and the U.S. Sentencing Commission. The chief justice has administrative responsibilities over these agencies in addition to his adjudicatory duties. The judiciary comprises less than two-tenths of 1 percent of the federal budget. In spite of this, judicial pay is very low compared to pay in the private sector and is a source of tension between the judiciary and the other branches of government. Marbury v. Madison established the doctrine of judicial review, which allows courts to determine the final validity of laws as well as the meaning of the Constitution. Judicial review is an awesome power, and it is used sparingly. The president can check the judiciary through appointments and the enforcement of judicial decisions. The Congress can check the judiciary through funding, administrative control of court calendars and funds, and jurisdiction-stripping legislation.
Exercise \(1\)
1. Do you believe that judicial review is a good thing for American democracy? Why or why not?
2. How does the Constitution guarantee judicial independence? Do you think judges have enough independence? Too much?
3. How much money do you think federal judges should be paid?
4. Do you believe that Congress should have the ability to remove cases from federal courts? If so, what types of cases are appropriate for removal?
5. What options does a president have if he disagrees with a federal court’s opinion?
6. Should a federal court force desegregation on a community that is overwhelmingly against it? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/02%3A_The_Court_System/2.01%3A_Introduction.txt |
Learning Objectives
• Explore the strict constructionist, or originalist, judicial philosophy.
• Explore the judicial activist philosophy.
• Learn about the modern origin of the divide between these two philosophies.
• Examine the evolution of the right to privacy and how it affects judicial philosophy.
• Explore the biographies of the current Supreme Court justices.
In the early years of the republic, judges tended to be much more political than they are today. Many were former statesmen or diplomats and considered being a judge to be a mere extension of their political activities. Consider, for example, the presidential election of 1800 between John Adams and Thomas Jefferson. Even by today’s heated standards of presidential politics, the 1800 election was bitter and partisan. When Jefferson won, he was in a position of being president at a time when not a single federal judge in the country came from his political party. Jefferson was extremely wary of judges, and when the Supreme Court handed down the Marbury v. Madison decision in 1803 declaring the Supreme Court the ultimate interpreter of the Constitution’s meaning, Jefferson wrote that “to consider the judges as the ultimate arbiters of all constitutional questions is a very dangerous doctrine indeed, and one which would place us under the despotism of an oligarchy.”Thomas Jefferson to William C. Jarvis, 1820, in The Writings of Thomas Jefferson, ed. Andrew A. Lipscomb and Albert Ellery Bergh, Memorial Edition (Washington, DC: Thomas Jefferson Memorial Association of the United States, 1903–4), 15:277, quoted in Eyler Robert Coates Sr., “18. Judicial Review,” Thomas Jefferson on Politics & Government: Quotations from the Writings of Thomas Jefferson, 1999, http://etext.virginia.edu/jefferson/quotations/jeff1030.htm (accessed September 24, 2010). A few years later, the first justice to be impeached, Samuel Chase, was accused of being overly political. His impeachment (and subsequent acquittal) started a trend toward nonpartisanship and political impartiality among judges. Today, judges continue this tradition by exercising impartiality in cases before them. Nonetheless, charges of political bias continue to be levied against judges at all levels.
In truth, the majority of a judge’s work has nothing to do with politics. Even at the Supreme Court level, most of the cases heard involve conflicts among circuit courts of appeals or statutory interpretation. In a small minority of cases, however, federal judges are called on to interpret a case involving religion, race, or civil rights. In these cases, judges are guided sometimes by nothing more than their own interpretation of case law and their own conscience. This has led some activists to claim that judges are using their positions to advance their own political agendas.
In general terms, judges are thought to fall into one of two ideological camps. On the politically conservative right, judges are described as either strict constructionists or originalists. Judges who adhere to this philosophy believe that social change is best left to the politically elected branches of government. The role of judges is therefore to strictly interpret the Constitution, and nothing more. Strict constructionists also believe that the Constitution contains the complete list of rights that Americans enjoy and that any right not listed in the Constitution does not exist and must be earned legislatively or through constitutional amendment. Judges do not have the power to “invent” a new right that does not exist in the Constitution. These judges believe in original meaning, which means interpreting the Constitution as it was meant when it was written, as opposed to how society would interpret the Constitution today. Strict constructionists believe that interpreting new rights into the Constitution is a dangerous exercise because there is nothing to guide the development of new rights other than a judge’s individual conscience. Justice Antonin Scalia, appointed by Ronald Reagan to the Supreme Court in 1984, embodies the modern strict constructionist.
Hyperlink: Justice Antonin Scalia
www.cbsnews.com/stories/2008/04/24/60minutes/main4040290.shtml
In 2008, Justice Antonin Scalia (Figure 2.3.1 "Justice Antonin Scalia") sat down with 60 Minutes to discuss a new book he wrote and his originalist judicial philosophy. Click the link to watch a portion of this fascinating interview with one of the most powerful judges in the country.
On the politically liberal left are judges who are described as activist. Judicial activists believe that judges have a role in shaping a “more perfect union” as described in the Constitution and that therefore judges have the obligation to seek justice whenever possible. They believe that the Constitution is a “living document” and should be interpreted in light of society’s needs, rather than its historical meaning. Judicial activists believe that sometimes the political process is flawed and that majority rule can lead to the baser instincts of humanity becoming the rule of law. They believe their role is to safeguard the voice of the minority and the oppressed and to deliver the promise of liberty in the Constitution to all Americans. Judicial activists believe in a broad reading of the Constitution, preferring to look at the motivation, intent, and implications of the Constitution’s safeguards rather than merely its words. Judicial activism at the Supreme Court was at its peak in the 1960s, when Chief Justice Earl Warren led the Court in breaking new ground on civil rights protections. Although a Republican, and nominated by Republican President Eisenhower, Earl Warren became a far more activist judge than anyone anticipated once on the Supreme Court. Chief Justice Warren led the Court in the desegregation cases in the 1950s, including the one affecting the Little Rock Nine. The “Miranda” Miranda v. Arizona, 384 U.S. 436 (1969). warnings—familiar to nearly every American who has ever seen a police show or movie—come from Chief Justice Warren, as does the fact that anyone who cannot afford an attorney has the right to publicly funded counsel in most criminal cases.
The modern characterization of judges as politically motivated can be traced to the Great Depression. Against cataclysmic economic upheaval, Americans voted for Franklin D. Roosevelt (Figure 2.3.2 "President Franklin Roosevelt") in record numbers, and they delivered commanding majorities in both the Senate and House of Representatives to his Democratic Party. President Roosevelt vowed to alter the relationship between the people and their government to prevent the sort of destruction and despair wreaked by the Depression. The centerpiece of his action plan was the New Deal, a legislative package that rewrote the role of government, vastly increasing its size and its role in private commercial activity. The New Deal brought maximum working hours, the minimum wage, mortgage assistance, economic stimulus, and social safety nets such as Social Security and insured bank deposits. Although the White House and the Congress were in near-complete agreement on the New Deal, the Supreme Court was controlled by a slim majority known as the “Four Horsemen of the Apocalypse” because of their dire warnings of the consequences of economic regulation. Three justices known as the “Three Musketeers”—Justice Brandeis, Justice Cardozo, and Justice Stone—opposed the Four Horsemen. In the middle sat two swing votes. The Four Horsemen initially prevailed, and one by one, pieces of President Roosevelt’s New Deal were struck down as unconstitutional reaches of power by the federal government. Frustrated, President Roosevelt devised a plan to alter the makeup of the Supreme Court by increasing the number of judges and appointing new justices. The “court-packing plan” was never implemented due to the public’s reaction, but nonetheless, the swing votes on the Supreme Court switched their votes and began upholding New Deal legislation, leading some historians to label their move the “switch in time that saved Nine.” During the public debate over the Supreme Court’s decisions on the New Deal, the justices came under constant attack for being politically motivated. The loudest criticism came from the White House.
Hyperlink: Fireside Chats
millercenter.org/scripps/archive/speeches/detail/3309
One of the hallmarks of FDR’s presidency was his use of the radio to reach millions of Americans across the country. He regularly broadcast his “fireside chats” to inform and lobby the public. In this link, President Roosevelt complains bitterly about the Supreme Court, claiming that “the Court has been acting not as a judicial body, but as a policy-making body.” Do modern politicians make the same accusation?
The abortion debate is a good example of the politically charged atmosphere surrounding modern judicial politics. Strict constructionists decry Roe v. Wade as an extremely activist decision and bemoan the fact that in a democracy, no one has ever had the chance to vote on one of the most socially controversial and divisive issues of our time. Roe held that a woman has a right to privacy and that her right to privacy must be balanced against the government’s interest in preserving human life. Within the first trimester of her pregnancy, her right to privacy outweighs governmental intrusion. Since there is no right to privacy mentioned in the Constitution, strict constructionists believe that Roe has no constitutional foundations to stand on.
Roe did not, however, declare that a right to privacy exists in the Constitution. A string of cases before Roe established that right. In 1965 the Supreme Court overturned a Connecticut law prohibiting unmarried couples from purchasing any form of birth control or contraceptive. Griswold v. Connecticut, 381 U.S. 479 (1965). The Court reasoned that the First Amendment has a “penumbra of privacy” that must include the right for couples to choose if and when they want to have children. Two years later, the Supreme Court found a right to privacy in the due process clause when it declared laws prohibiting mixed-race marriages to be unconstitutional. Loving v. Virginia, 388 U.S. 1 (1967). As a result of these decisions and others like them, the phrase “right to privacy” today is widely accepted as a form of litmus test for whether a judge (or judicial candidate) is a strict constructionist or activist.
Video Clip: A Question of Ethics: The Right to Privacy and Confirmation Hearings
(click to see video)
Since federal judges are appointed for lifetime, the turnover rate for federal judgeships is low. Recently, the Supreme Court went through an eleven-year period without any changes in membership. In the last five years, however, four new justices have joined the Court. First, John Roberts was nominated by George W. Bush in 2005 to replace retiring Justice Sandra Day O’Connor. President Bush did not have the opportunity to nominate anyone to the Supreme Court during his first term as president, and John Roberts’s nomination was viewed widely as a smart move to place on the Court a young, smart, and popular judge with solid Republican credentials. (Roberts began his legal career as an attorney with the Reagan administration.) Before the Senate could confirm Roberts, however, Chief Justice Rehnquist died of thyroid cancer while still in office. President Bush withdrew his nomination and renominated John Roberts as chief justice, which the Senate confirmed. President Bush then began looking for a nominee to replace Justice O’Connor. His first nominee was a close personal friend, Harriet Miers. Selecting Miers allowed him to replace a woman with a woman, something important to First Lady Laura Bush. More importantly, the president felt that Miers, a born-again Christian, would comfortably establish herself as a solid judicial conservative. Others in the Republican Party, however, were nervous about her nomination given her lack of judicial experience. (Miers had never been a judge.) Keen to avoid another situation in which a conservative president nominated a judge who turned out liberal, as was the case with President George H. W. Bush’s nomination of David Souter, key lawmakers put enough pressure on Miers that she withdrew her nomination. For his second nominee, President George W. Bush selected Samuel Alito, a safe decision given Alito’s prior judicial record. Although he has been on the Court for only a few years, most legal observers believe Alito’s nomination is critical in moving the Court to the political right, as Alito has demonstrated himself to be more ideological in his opinions than the pragmatic O’Connor. In his first term as president, President Barack Obama has had the opportunity to name two justices to the Supreme Court: Sonia Sotomayor in 2009 to replace David Souter and Elena Kagan in 2010 to replace John Stevens. Both nominations are widely regarded as not moving the Court too much in either direction in terms of activism or originalism. There are now three women on the Supreme Court, a historical record.
Hyperlink: Biographies of the Current Supreme Court Justices
www.supremecourt.gov/about/biographiescurrent.pdf
The Supreme Court today is more diverse than it ever has been throughout its history. The hardworking men and women of the Court command respect from the legal community both in the United States and abroad. Click the link to explore their biographies.
Key Takeaways
Judicial conservatives, also known as originalists or strict constructionists, believe that the Constitution should be interpreted strictly, in light of its original meaning when it was written. They believe that societal change, especially the creation of new civil rights, should come from the political process rather than the judicial process. Judicial liberals, also known as judicial activists, believe that judges have a role to play in shaping a more perfect union. They believe that the outcome of a case is paramount over other considerations, including past precedent. Judicial activists are more likely to find new civil rights in the Constitution, which they believe should be broadly interpreted in light of modern society’s needs. The modern fight over judicial conservatives and judicial liberals began with FDR’s New Deal and his court-packing plan and continues to this day. The right to privacy is a good example of the difference between judicial conservatives and judicial liberals, and it is seen as a test to determine what philosophy a judge subscribes to. After a long period of stability, membership in the Supreme Court has changed substantially in the last three years with three new members. The Court remains closely divided between judicial conservatives and judicial liberals, with conservatives poised to control the Court’s direction. Justice Anthony Kennedy, a moderate conservative, remains the key swing vote on the Supreme Court.
Exercise \(1\)
1. Read Justice Stewart’s dissent in the Griswold case here: http://www4.law.cornell.edu/supct/html/historics/USSC_CR_0381_0479_ZD1.html. Although he believes Connecticut’s law is “uncommonly silly,” he nonetheless believes that it’s not unconstitutional. Do you think that judges have an obligation to overturn “uncommonly silly” laws?
2. Modern judicial confirmation hearings have been described as an intricate dance between nominees and Senators, with the nominees giving broad scripted answers that reveal little about their actual judicial philosophy. Do you agree with this characterization? Do you think any changes should be made to the confirmation process?
3. If you were president, what characteristics would you look for in nominating federal judges?
4. If an elected legislature refuses to grant citizens a right to privacy, do you believe it is appropriate for the courts to do so? Why or why not?
5. If a president believes that the Court has reached the wrong result, should the president be able to change the Court by increasing its numbers or forcing early retirement? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/02%3A_The_Court_System/2.03%3A_Activists_and_Strict_Constructionists.txt |
Learning Objectives
• Learn the differences between the state and federal constitutions.
• Understand subject matter jurisdiction.
• Explore the state and federal court systems.
• Distinguish the work of trial and appellate courts.
In many American cities, you can find both a state and a federal courthouse. These courts hear different types of cases, involving different laws, different law enforcement agencies, and different judicial systems. The rules governing the procedures used in these courts are known as civil procedure or criminal procedure and are sometimes so hard to understand they confound experienced attorneys and judges. Nonetheless, as future business professionals, it’s important for you to understand the general boundaries between state and federal courts.
Most people forget that there are actually fifty-one separate legal systems in the United States: one federal and fifty in the states. Within each legal system is a complex interplay among executive, legislative, and judicial branches of government. The foundation of each of these systems of government is a constitution. Some state constitutions are actually older than the federal Constitution, while others are relatively new. The Massachusetts Constitution, for example, was ratified in 1780, seven years before the federal Constitution. The Montana Constitution, on the other hand, was adopted in 1972. In some states, state constitutions remain vibrant and provide civil protections beyond the federal Constitution. Several state Supreme Courts, for example, have interpreted their various state constitutions as prohibiting treating gays and lesbians differently when it comes to marriage under their “equal protection” provisions. Other state supreme courts have interpreted their state constitutions to grant citizens the right to choose the time and manner of their own death. Since these decisions are by state supreme courts interpreting their own state constitutions, they are beyond the reach or review of the federal Congress or federal courts. This dynamic power-sharing between state and federal governments is known as federalism and is a key feature of our republican form of government.
To determine which court a case belongs in, lawyers look first to what the case is about. The rules of subject matter jurisdiction dictate whether a case is heard in federal or state court. Lawsuits involving state laws are generally heard in state courts. Most criminal laws, for example, are state laws. There may be wide differences among the states about what behavior constitutes criminal behavior. Speed limits, for example, are different from state to state. Even serious crimes such as murder or manslaughter, and possible defenses to those crimes, are defined differently by the states. Domestic issues such as divorce and family law are also handled at the state level. Some states make it very easy to marry (Nevada provides an obvious example), while others define marriage differently. Some states permit same-sex marriage, but most do not. Child custody and adoption laws are state-based. Property and probate laws are also based on state law. Laws related to the transfer of property (including real estate), vehicle or watercraft ownership registration, and the disposition of property after death are different depending on what state you live in. The laws surrounding contracts are also passed at the state level (although most are based on a common law called the Uniform Commercial Code [UCC]). Finally, the law of torts is state-based. Torts are any civil wrong other than a breach of contract and can cover a vast array of situations in which people and businesses suffer legal injury. Some states are far friendlier toward torts than others, and the resulting patchwork of tort laws means that companies that do business across the country need to bear in mind the different standards they are held to, based on what state their customers live in.
Given the wide array of subject areas regulated by state law, it’s not surprising that for most individuals and businesses, their experience with courts is with state courts. Nonetheless, cases do sometimes end up in federal court as well. Federal court subject matter jurisdiction is generally limited to cases involving a federal question—either the federal Constitution or a federal law. Cases involving the interpretation of treaties to which the United States is a party are also subject to federal court jurisdiction. In fact, any case involving the United States as a party is properly litigated in federal court. Finally, in original jurisdiction cases (so called because the Constitution specifically grants this jurisdiction), lawsuits between states can be filed directly with the U.S. Supreme Court. Ongoing disputes between Wyoming and Montana over the use of the Tongue and Powder rivers, for example, were litigated in the Supreme Court in 2005.
Sometimes it’s possible for a federal court to hear a case involving a state law. These cases are called diversity jurisdiction cases, and they arise when all plaintiffs in a civil case are from different states than all defendants and the amount claimed by the plaintiffs exceeds seventy-five thousand dollars. Diversity jurisdiction cases allow one party who feels it may not receive a fair trial where its opponent has a “home court” advantage to seek a more neutral forum to hear its case, a process called removal.
Within both the federal court and the state court system, there is a hierarchy of higher and lower courts. The diagram in Figure 2.4.1 "State and Federal Court Systems" demonstrates this hierarchy. The U.S. Supreme Court is the highest court in the country, and all courts are bound to follow precedent established by the U.S. Supreme Court through the doctrine of stare decisis. Keep in mind, though, that if an issue is exclusively a state matter (such as a state court interpreting its own state’s Constitution), then the U.S. Supreme Court has no jurisdiction on that matter, leaving the state supreme court as the highest court on that particular issue.
On the left-hand side of the diagram is the federal court system. Cases are filed in a U.S. District Court, the trial court in the federal system. Under the court administration system, there are ninety-four judicial districts in the country. Some states with low population have only one judicial district, while more populous states have multiple judicial districts. The districts are named for their geographical location—the federal court in Manhattan, for example, is the U.S. District Court for the Southern District of New York. The U.S. Department of Justice, which acts as the prosecutor representing the federal government in both civil and criminal cases, divides its attorneys among the ninety-four judicial districts, with each district led by a U.S. attorney appointed by the president without any Senate confirmation.
As a trial court, the U.S. district courts hear civil and criminal trials. The trials may be bench trials (heard only by the judge), or they may be jury trials. At the trial, witnesses are called and their testimonies are recorded, word for word, into a trial record (transcript of what was said in the courtroom along with supporting documentation). At the conclusion of the trial, if the losing side is unhappy with the outcome, it is entitled as a matter of right to appeal its case to the U.S. Circuit Court of Appeals. There are thirteen circuit courts of appeals in the United States, also spread geographically through the states. A party losing an appeal at the circuit court level can appeal one more time to the U.S. Supreme Court for review, but given the extremely small odds of that appeal being granted, most federal litigation ends at the U.S. circuit court level.
On the right side of the diagram is the state court system. In all fifty states, a trial court of general jurisdiction accepts most types of civil and criminal cases. These courts are called various names such as superior court, circuit court, or district court. Confusingly, trial courts in New York State are called supreme courts. There may be other courts of limited jurisdiction at the state level, such as traffic court, juvenile court, family court, or small claims court. Increasingly, states are also experimenting with specialized drug courts to treat drug abuse (not distribution or trafficking) as a health problem rather than a criminal problem. State judges may be either appointed by the governor or elected by the public. Like their federal counterparts, state trial courts hold trials, and most preserve a trial record for review by an appellate court. In thirty-nine states, a party that loses at trial can file an appeal with an intermediate court of appeals. The remaining states are smaller and therefore don’t maintain this level of appeal, in which case appeals are filed directly with the state supreme court. In states with an intermediate court of appeals, the party losing the appeal can typically file one more time with the state supreme court, although state supreme court rules vary on whether appeals are a matter of right or discretion. Finally, in certain cases that involve a federal constitutional right, a party that loses at the state supreme court level can appeal to the U.S. Supreme Court for review. These cases are typically criminal and involve the application of the Constitution to criminal procedure, evidence collection, or punishment.
Whenever an appeal is filed, the trial record is forwarded to the appellate court for review. Appellate courts do not conduct new trials and are unable to recall witnesses or call new witnesses. The trial court’s duty is to figure out the facts of the case—who did what, when, why, or how. This process of fact-finding is an important part of the judicial process, and a great deal of deference is placed on the judgment of the fact finder (trier of fact). The trier of fact is typically the jury, or the judge in the case of a bench trial. On appeal, the appellate judge cannot substitute his or her interpretation of the facts for that of the trier of fact, even if the appellate judge believes the trier of fact was wrong. The issues on appeal are therefore limited to questions of law or legal errors. For example, the appellate court may disagree with the trial judge’s interpretation of the meaning of a law, or it may disagree with a ruling the trial judge made about what evidence should be admitted or excluded to the trier of fact.
The deference to the trier of fact (trial court) means that, as a practical matter, appeals are rarely won. Even if a litigant is successful in persuading a court of appeals that legal error has taken place, it doesn’t automatically win the case. In most cases, the best remedy a litigant can hope for is for the court of appeals to send the case back to a trial court (a process called remand) for reconsideration or perhaps a new trial.
Key Takeaways
There are fifty-one separate legal systems in the United States, each with its own executive, legislative, and judicial functions. State constitutions remain a vibrant source of civil rights protections for many citizens because state constitutions are permitted to grant more civil rights (but not less) than the federal Constitution. Subject matter jurisdiction is the authority of a court to hear a case based on its subject matter. State law claims are generally heard in state courts, while federal question cases are generally heard in federal court. Federal courts sometimes hear state law claims under diversity jurisdiction. Federal cases are filed in a U.S. district court and appealed to a U.S. circuit court of appeals. State cases are typically filed in a trial court and appealed to an intermediate court of appeals. The U.S. Supreme Court is the highest court in the country, and all other courts must follow the precedent in Supreme Court opinions. Trial courts are the triers of fact, and their judgment is not questioned by appellate courts. Appellate court review is limited to legal errors.
Exercise \(1\)
1. Do you think that the “home court advantage” that justifies diversity jurisdiction still exists? Why or why not?
2. Should states retain the ability to grant more civil rights than the federal Constitution? Can you think of historical examples of this happening? What implications does this have for the future?
3. Stare decisis requires courts to respect and follow established precedent. Why do you think stare decisis is important in our common-law system? What do you think would happen if courts were not bound to stare decisis?
4. Under what circumstances do you think the Supreme Court should feel comfortable abandoning a prior precedent? Do you think the answer differs depending on whether you believe in judicial originalism or activism? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/02%3A_The_Court_System/2.04%3A_Trial_and_Appellate_Courts.txt |
Learning Objectives
• Understand the Supreme Court’s jurisdiction, including what kinds of cases are selected for review.
• Explore what happens when lower courts of appeal disagree with each other.
• Learn about the Supreme Court’s process in hearing and deciding a case.
Video Clip: The U.S. Supreme Court
(click to see video)
The Supreme Court’s jurisdiction is discretionary, not mandatory. This means the justices themselves decide which cases they want to hear. For the justices to hear a case, the losing party from the appeal below must file a petition for a writ of certiorari. During the 2008 term (a term begins in October and ends the following June), the Supreme Court received approximately 7,700 petitions. Of these, about 6,100 were in forma pauperis, leaving only approximately 1,600 paid petitions. In forma pauperis petitions are filed by indigent litigants who cannot afford to hire a lawyer to write and file a petition for them. Supreme Court rules permit these petitions to be filed, sometimes handwritten, without any filing fees. These petitions are typically filed by prisoners protesting a condition of their detention or a defect in their conviction and are quickly dismissed by the Supreme Court. Not all in forma pauperis petitions are meritless, however. In the case of Gideon v. Wainwright, Gideon v. Wainwright, 372 U.S. 335 (1963). a poor defendant convicted of burglary without being represented by a lawyer filed a handwritten in forma pauperis writ of certiorari with the Supreme Court. The Court granted the writ, heard the case, and ruled that Gideon was entitled to have a lawyer represent him and that if he could not afford one, then the government had to pay for one. Gideon was retried with a lawyer’s assistance, and he was acquitted and released.
Of the 7,700 petitions filed in the 2008 term, 87 cases were eventually argued. With such a large number of petitions filed, and a less than 1 percent acceptance rate, what kind of cases do the justices typically grant? Remember, the Supreme Court is a court of discretionary jurisdiction. It does not exist as a court to right every legal wrong, or to correct every social injustice. Typically, the cases fall into one of three categories. The first category is a case of tremendous national importance, such as the Bush v. GoreBush v. Gore, 531 U.S. 98 (2000). case to decide the outcome of the 2000 presidential election. These cases are rare, but they dominate headlines on the Supreme Court. Second, the justices typically take on a case when they believe that a lower court has misapplied or misinterpreted a prior Supreme Court precedent. This category is also fairly infrequent. By far, the majority of cases granted by the Supreme Court fall into the third category, the circuit split.
Recall that there are thirteen circuit courts of appeals in the United States (see Figure 2.5.1 "Geography of U.S. Federal Courts"). Eleven are divided geographically among the several states and hear cases coming from district courts within their jurisdiction. Thus, for example, someone who loses a case in federal district court in Pennsylvania will appeal his or her case to the Third Circuit Court of Appeals, while a litigant who loses in Florida will appeal his or her case to the Eleventh Circuit Court of Appeals. In addition to the eleven numbered circuit courts, there are two additional specialized courts of appeals. They are both seated in the District of Columbia. The U.S. Court of Appeals for the Federal Circuit is a specialized court that mainly hears appeals involving intellectual property cases, such as those involving patent law. Decisions by this court on patent law are binding on all district courts throughout the country, unless overruled by the Supreme Court. The second specialized court is the U.S. Court of Appeals for the District of Columbia Circuit. Although this appellate court has the smallest geographical area of any court of appeal, it is a very important court as it hears cases against the federal government and the myriad federal agencies in Washington, DC. Chief Justice Roberts, as well as Justices Scalia, Ginsburg, and Thomas, served on this important court before being appointed to the Supreme Court.
A circuit split arises when the circuit courts of appeals disagree with each other on the meaning of federal law. Let’s assume that two similar cases are being decided in federal district court at the same time, one in California and the other in South Carolina. The cases present similar facts and involve the same federal law passed by Congress. Both cases are appealed—the California case to the Ninth Circuit and the South Carolina case to the Fourth Circuit. On appeal, it’s possible that the two appellate courts may come to opposite conclusions on what the law means, especially if Congress has recently passed the law. Since the circuit court of appeal decision is binding for that circuit, the state and meaning of federal law is different based on where a citizen lives. The Supreme Court is therefore very likely to grant certiorari in this case to resolve the split and decide the meaning of the law for the entire country.
When a petition for writ of certiorari is filed with the Supreme Court, the party that won the case in the appeal below (called the respondent) files an opposition. Together, these two documents are considered by the justices during one of their weekly conferences to decide whether or not the case should be granted. As previously discussed, cases that fall into one of three categories are generally granted, while others are dismissed. The conference works on the rule of four—only four justices (a minority) need to agree to hear a case for the petition to be granted. The vast majority of cases are dismissed, which means the decision of the lower court stands.
Each Supreme Court justice is permitted to hire up to four law clerks every term to assist with his or her work. These law clerks are typically new attorneys from the nation’s best law schools. Being selected as a clerk is obviously very prestigious, and the job is reserved for the brightest young legal minds. Many justices rely on their clerks to read the thousands of filed petitions and to make recommendations on whether or not to grant the case. This arrangement, called a cert pool (the clerk assigned to the case writes a memo that is circulated to all the justices), has been criticized as giving too much power to inexperienced lawyers. Participation in the cert pool is voluntary and not all the justices participate. Justice Alito, for example, does not participate, and his clerks read all the incoming petitions independently. Until his retirement, Justice Stevens also did not participate in the cert pool process.
If a petition is granted, the parties are then instructed to file written briefs with the Court, laying out arguments of why their side should win. At this point, the Court also allows nonparties to file briefs to inform and persuade the justices. This type of brief, known as an amicus brief, is an important tool for the justices. Many cases before the Supreme Court are of tremendous importance to a broad array of citizens and organizations beyond the petitioner and respondent, and the amicus brief procedure allows all who are interested to have their voice heard. For example, in the 2003 affirmative action cases from the University of Michigan, more than sixty-five amicus briefs were filed in support of the university’s policies, from diverse parties such as MTV, General Motors, and retired military leaders.
Hyperlink: Amicus Briefs
www.vpcomm.umich.edu/admissions/legal/gru_amicus-ussc/um.html
The University of Michigan affirmative action cases drew national attention to the practice of colleges and universities using race as a factor in deciding whether or not to admit a college applicant. The Supreme Court ultimately held that race may be used as a factor but not as a strict numerical quota. The Court was aided in its decision by numerous amicus briefs urging it to find in favor of the university, including briefs filed by many corporations. Click the link to read some of these briefs and to understand why these companies are strong supporters of affirmative action.
After the justices have read the briefs in the case, they hear oral arguments from both sides. Oral arguments are scheduled for one hour, in the main courtroom of the Supreme Court building. They are open to the public but not televised. Members of the press are given special access on one side of the courtroom, where they are permitted to take handwritten notes; no other electronic aids are permitted. During the oral arguments, the justices are interested not in the attorneys repeating the facts in the briefs but rather in probing the weaknesses of their arguments and the implications should their side win. The justices typically hear two or three cases a day while the Court is in session. Before each day’s session, the marshall of the court begins with the invocation in "Hyperlink: Oyez.org".
Hyperlink: Oyez.org
http://www.oyez.org/media/oyezoyezoyez
After the oral arguments, the justices once again meet in conference to decide the outcome of the case. Unlike the other branches of government, the justices work alone. No aides or clerks are permitted into their conferences. Once they decide which side should win, they begin the task of drafting their legal opinions. The opinions are the only way that justices communicate with the public and the legal community, so a great deal of thought and care is given to opinion drafting. If the chief justice is with the winning side, he or she decides which justice writes the majority opinion, which becomes the opinion of the Court. The chief justice can use this assignment power wisely by assigning the opinion to a swing or wavering member of the Court to ensure that justice’s vote doesn’t change. If the chief justice is in the minority, then the most senior of the justices in the majority decides who writes the majority opinion. Dissenting justices are entitled to write their own dissenting opinions, which they do in hopes that one day their view will become the law. Occasionally, a justice may agree with the outcome of the case but disagree with the majority’s reasoning, in which case he or she may write a concurring opinion. After all the opinions are drafted, the Court hands down the decision to the public. Except in very rare instances, all cases heard in a term are decided in the same term, as the Court maintains no backlog.
Key Takeaways
The Supreme Court has discretionary jurisdiction to hear any case it wishes to hear. Every year, the chance of having the Supreme Court hear a particular case is less than 1 percent. The Supreme Court is more likely to hear a case if it involves an issue of national importance, if the Court believes a lower court has misinterpreted precedent, or if the case involves a split in the appellate circuits. A circuit split occurs when two or more federal circuit courts of appeals disagree on the meaning of a federal law, resulting in the law being different depending on where citizens live. Although it takes a majority of justices to vote together to win a case, only a minority decides the Court’s docket under the rule of four. The Supreme Court decides cases every term by reading briefs and amicus briefs and by hearing oral arguments. In any case, the Court may issue a majority opinion, dissenting opinions, and concurring opinions.
Exercise \(1\)
1. Do you believe that Supreme Court oral arguments should be televised, as government proceedings are on C-Span? Why or why not?
2. Do you think the Supreme Court should act more as a court of last resort, especially in serious cases such as capital crimes, or should the Supreme Court continue to accept only a very small number of cases?
2.06: Concluding Thoughts
As the smallest branch of government, and with the shortest founding text in the Constitution among the three branches, the U.S. judiciary faced uncertainty and political interference in its early days. In recent decades, however, the judiciary has matured into an independent and transparent institution, remarkably resilient to political turbulence and attack. It’s also a relative bargain for taxpayers, considering its role as the primary interpreter and defender of the Constitution.
None of this has prevented political attacks on the judiciary, which continue to this day. You may recall the Florida case involving Terri Schiavo, a patient in a permanent vegetative state, and what happened when her husband won judicial relief to stop medical measures to keep her alive. Prominent pro-life politicians launched vitriolic attacks on the judges involved. Attacks on the judiciary for politically unpopular decisions have become so toxic that former Supreme Court Justice Sandra Day O’Connor has made it part of her post-Court retirement to stop these attacks and inject more civility into political treatment of judges. While citizen frustration with government is not new, dangerous threats against the judiciary are on the rise and represent a worrying trend.
You may spend your entire life without ever meeting a single judge. If you do have experiences with a judge, you will likely find him or her to be surprisingly human, honest, and above all, fair. The judiciary lacks a natural constituency, so the burden of ensuring the continued success of this American institution falls on all of us, citizens and corporations alike. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/02%3A_The_Court_System/2.05%3A_The_Certiorari_Process.txt |
Learning Objectives
In this chapter, you will explore our litigation system in detail. Litigation provides an opportunity for each side in a dispute, whether criminal or civil, to lay their side of the story to an impartial jury or judge and ask that jury or judge to decide who wins and loses, and how much the loser should pay or how much time the defendant should spend in jail. After reading this chapter, you should have a deeper understanding of how litigation is conducted in the United States. Specifically, you should be able to answer the following questions:
• Who are the parties involved in litigation?
• What is standing and how does it impact litigation?
• How does a court obtain personal jurisdiction over a defendant?
• How does a trial progress from beginning to end?
• How does a losing side appeal a case?
Even if you’ve never stepped foot in a courtroom before, you can probably describe what a courtroom looks like. It’s a large, imposing room with tall ceilings, flags on stands, and wood paneling on the walls. The majority of the floor space is taken up with seating for the public. The front of the courtroom is dominated by the bench, behind which the judge sits, above everyone else in the room. Next to the bench is a solitary chair with a microphone in front of it, where a witness sits. Along one side of the wall is a separated area with two rows of seats, where the jury sits. Facing the bench, and always closest to the jury, is one table for the party that is carrying the burden of proof in the case: the prosecution in a criminal trial and the plaintiff in a civil trial. Across the aisle, there is another impressive table for the opposite side, the defense. When court is in session, a hush settles into the room so that everyone can hear the judge, commanding in presence, or the witness, captivating in detail.
Many of us have such clear imagery of a courtroom because our experiences are drawn from popular culture. Whether in movies (A Civil Action, To Kill a Mockingbird, Erin Brockovich), on television shows (Law & Order, L.A. Law, Boston Legal), or in fictional books (The Firm, Twelve Angry Men), courtroom scenes capture our imagination and fire our sense of righteousness and justice as good always prevails over evil. In our collective courtrooms the truth always comes out, our ideals are always upheld, and the bad guys always lose. Who could forget, for example, the psychological breakdown on the witness stand in the movie A Few Good Men, as Jack Nicholson plays it out?
Video Clip: You Can’t Handle the Truth
(click to see video)
Scenes like these, while providing wonderful imagery, are pure fiction. In a real courtroom, there is no back-and-forth argument between counsel and witness as examinations proceed through questioning alone. In a real courtroom, the truth doesn’t always emerge. In a real courtroom, there are many shades of gray between good and evil. And finally, in a real courtroom, the bad guys don’t always lose, and the good guys don’t always win.
As future business professionals, your responsibility to your company, to your company’s stakeholders, and to yourself is to avoid ever seeing the inside of a courtroom. Acting ethically and legally, and identifying the legal pitfalls that you may encounter by mastering the elements of this course, will help you achieve this goal. Agreeing to arbitration for parties that you have a preexisting relationship with, such as your customers, suppliers, or employees, will also help you stay away from a courtroom. In spite of this planning, however, many companies still find that litigation is sometimes unavoidable. Whether litigation is initiated against parties you don’t have a contract with (such as another company that steals your intellectual property rights) or by parties you don’t have a contract with (such as a customer who is injured by your product or an employee harassed by another employee), litigation may be the only dispute-resolution mechanism available.
In this chapter, we’ll explore the process of litigation from the beginning to the end. You’ll learn about the parties involved and about preliminary matters such as standing and personal jurisdiction and then explore the trial and appeal. We’ll also discuss the role of lawyers and juries in our litigation system. By the end of the chapter, you’ll have an appreciation that while our litigation system is cherished for its ability to resolve disputes peacefully and establishes a hallmark for public accessibility, for businesses it is often a far from satisfactory forum for dispute resolution.
Key Takeaways
Litigation is an inevitable part of a business’s activities. Lawsuits, trials, and appeals can be ruinously expensive for some companies, especially small- and medium-sized enterprises. Learning about our litigation system will give you the skills and comfort you need should your company find itself in litigation. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/03%3A_Litigation/3.01%3A_Introduction.txt |
Learning Objectives
• Identify the parties involved in litigation.
• Explore the role of lawyers in our adversarial system.
• Understand the roles and obligations of jurors.
The litigation system relies on parties bringing forth and defending their respective claims. As in the game of chess, each move can take place only if a player makes a decision to move in a particular direction; the game does not play itself. Courts, jurors, and witnesses are similarly moribund: it is up to the players, in this case called litigants, to act decisively. Occasionally, a court may act sua sponte, without a direct request from a party. A judge may decide, for example, to fine a party for bad or unethical behavior. These actions are fairly rare. More commonly, judges act on a motion filed by either party asking the judge to make a particular decision.
The party that begins the lawsuit is called the plaintiff in a civil case. The plaintiff is a victim that has presumably suffered some sort of legal wrong that the law recognizes. The plaintiff brings suit against the defendant—the alleged wrongdoer or perpetrator. Note that in a criminal trial, the party that initiates litigation is the prosecution, representing the people of a state or, in federal cases, representing the people of the United States. In a criminal trial the alleged wrongdoer is also called the defendant.
Many cases involve multiple plaintiffs and multiple defendants. Civil procedure encourages, and makes it easy for, parties to air all their grievances against each other at once. All parties, and every possible claim (each claim is a separate violation of law) arising out of a single incident or series of related incidents, should be identified and named in a lawsuit. For example, if you go to an off-campus party one night and witness a friend being harassed, you might feel the need to step in to defend your friend. The harasser may then turn his attention toward you, perhaps taking a swing at you. Let’s assume that the harasser is drunk and misses, but in return you take a swing and hit him, knocking him to the ground. The harasser may file a lawsuit against you, alleging assault and battery. The harasser is the plaintiff, and you are the defendant. The lawsuit filed in court would be captioned Harasser v. You. You might decide in return to file a claim against the harasser, alleging that the harasser started the fight and that you acted in self-defense. This is called a counterclaim, and you are now the counterplaintiff, making the harasser the counterdefendant. In return, the harasser may allege that he wasn’t really harassing your friend but trying to defend himself from your friend’s unwanted advances. The harasser may sue your friend as a third-party defendant through a process called joinder.
Except in some small-claims courts, parties hire attorneys to litigate most cases. Sometimes individuals feel like they have a sufficient grasp on the law to proceed in litigation without a lawyer or that they have sufficient legal training (or even a law degree) that hiring a lawyer would be a waste of money. Individuals who represent themselves are called pro se litigants and can only proceed pro se if the judge overseeing the case allows it. Abraham Lincoln once famously said, “He who represents himself has a fool for a client.” The complexities of litigation require a cool and detached mind to thread a route to success, and if you are representing yourself it is all too easy to allow passion to cloud your judgment.
Attorneys are sometimes called members of the bar. The U.S. legal profession is unique in several respects. In most countries, legal education is an undergraduate program followed by a period of apprenticeship before an individual is allowed to practice law. Many countries also make a distinction between attorneys who litigate in court and those who do not. In the United Kingdom, for example, solicitors are lawyers who deal with ordinary legal matters outside of court, while Queen’s Counsel (QC) are specially trained lawyers who are permitted to argue in court. In the United States, lawyers undertake three years of graduate study resulting in the award of the Juris Doctorate degree, or JD. Every year, more than thirty thousand students graduate from U.S. law schools with their JD. They then sit for the bar exam in the state where they wish to practice. Since the practice of law in the United States varies widely by different jurisdictions, lawyers are only permitted to practice in jurisdictions where they are licensed. Some states permit lawyers from out of state, after a few years of being in practice, to apply for bar admission without taking the exam through a process called reciprocity. Other states, notably California and Florida, require attorneys to take the bar exam no matter how long they have been in practice. If a lawyer is dealing with an issue or matter that takes him or her out of state to litigate a case, he or she can ask to be admitted temporarily by a court in that foreign state through a motion called pro hac vice. Once the lawyer passes the state’s bar exam or is otherwise admitted, he or she is permitted to practice all aspects of law in that state, from drafting wills and contracts to arguing a case before the U.S. Supreme Court.
Attorneys in the United States are broadly divided into civil and criminal attorneys; few lawyers excel in both areas. Civil attorneys generally work in two different categories: in law firms, where they may represent multiple clients, and as in-house counsel, where they represent only one client, their employer. Most large corporations have an in-house legal department to control legal costs but may still hire outside counsel for representation and advice in complex matters.
With the possible exception of politicians, no other profession is subject to more morbid jokes than lawyering. William Shakespeare famously wrote in Henry VI, through a character speaking of a utopian world, “The first thing we do, let’s kill all the lawyers.” In spite of this public animosity toward lawyers, however, if there comes a time when someone needs a lawyer, it’s not uncommon to hear them wish they had the most aggressive lawyer money can buy.
Perhaps part of the reason the public has a low opinion of lawyers can be traced to the ethical and legal obligations of attorneys. Lawyers may be the most regulated of all the professional industries, and they are required to comply with complex and sometimes rigid rules of professional conduct. Unlike rules for other professions, the rules of professional conduct for lawyers are largely drafted and enforced by the bar itself (other lawyers and judges) and almost never involve external enforcement mechanisms. These rules govern virtually every aspect of the practice of law, and a violation of these rules can result in disciplinary action from the state bar or supreme court of the state in which the lawyer practices, up to lifetime disbarment. When President Bill Clinton, for example, lied under oath about certain aspects of his extramarital affairs, he was suspended from practicing law for five years in Arkansas and ordered to pay a \$25,000 fine. These rules of professional responsibility require attorneys to represent their clients with zealous advocacy. Ordinarily, we associate the word “zealot” with extremists, but that is the standard by which lawyers must represent their clients. This might clarify why some lawyers act the way they do.
One of the most sacrosanct rules of professional responsibility is the obligation to keep a client’s secrets. The communications between a client and his or her attorney are absolutely confidential under the attorney-client privilege doctrine. There are many privileges under the law, such as the spousal privilege, doctor-patient privilege, and priest-penitent privilege. The attorney-client privilege, however, is arguably the strongest of these privileges. The privilege belongs to the client, and the attorney is not permitted to reveal any of these communications without the client’s consent. A narrow exception exists for clients who tell their lawyers they intend to harm others or themselves, but attorneys must tread very carefully to avoid violating the privilege. Many members of the public feel that the privilege may be open to abuse and can’t understand, for example, why an attorney can’t reveal a client’s confession to a heinous crime. Ultimately, the privilege exists for the client’s benefit. Someone who cannot communicate with his or her attorney freely is unable to help the attorney prepare the best possible case for litigation. You should note that in-house attorneys represent the corporations they work for and not individual employees. If you communicate with an in-house attorney for the company where you work, for example, that communication may not be automatically protected by the attorney-client privilege.
Hyperlink: The Lynne Stewart Case
http://www.lynnestewart.org
Lynne Stewart, a human rights attorney, was assigned to represent Sheik Omar Abdel-Rahman, the blind Egyptian cleric convicted of conspiracy in the 1993 World Trade Center bombing in New York City. As part of her representation, she agreed to abide by certain conditions when communicating with her client, including not speaking to the media. Ms. Stewart broke those promises and inadvertently passed on a communication from her client to his followers around the world. She was indicted and convicted of conspiracy and providing material support to terrorists. She was sentenced to a twenty-eight-month prison term. Click the link to read more about her case, including the legal documents involved. A very controversial aspect of the case involved the use of secret cameras and recorders to listen in on her conversations with her client while he was in prison.
In spite of an attorney’s professional obligations to his or her client, it’s important to remember that ultimately a lawyer’s first duty is to the administration of justice. The rules of professional conduct are written with this goal in mind. The requirements for lawyers on civility, honesty, and fairness are all written to ensure that lawyers represent the very best aspects of our judicial system. Let’s say, for example, a client admits to his lawyer that he is guilty or liable in a case. The client then wants to testify under oath that he is innocent. Although a lawyer cannot tell anyone what her client has told her, the lawyer is also prohibited from knowingly suborning perjury. The attorney must either convince the client to not testify, or withdraw from the case.
In the case in "Hyperlink: A Question of Ethics", an attorney goes a little too far in her representation and draws a heavy fine from a judge as a result.
Hyperlink: A Question of Ethics
The Case of the Birther Attorney
Order Hon. Clay D. Land, U.S. District Judge, District Court for the Middle District of Georgia, Case No. 4:09-CV-106, Rhodes v. MacDonald, at http://www.scribd.com/doc/20996403/Gov-uscourts-gamd-77605-28-0.
Throughout the presidential election campaign in 2008, persistent rumors swirled around whether Barack Obama was born in the United States, a requirement under the Constitution to serve as president. After the election, California attorney Orly Taitz launched a campaign to prove that the president was not, in fact, born in Hawaii. Her bizarre tirades against the media and the courts earned her this unusual reprimand from a federal judge. Click the link to read the entire order. Do you believe that in their “zealous” representation of their clients, attorneys have the ethical duty to pursue claims such as these?
Order
Introduction
Commenting on the special privilege granted to lawyers and the corresponding duty imposed on them, Justice Cardozo once observed, “Membership in the bar is a privilege burdened with conditions. [A lawyer is] received into that ancient fellowship for something more than private gain. He [becomes] an officer of the court, and, like the court itself, an instrument or agency to advance the ends of justice.” Competent and ethical lawyers “are essential to the primary governmental function of administering justice.” For justice to be administered efficiently and justly, lawyers must understand the conditions that govern their privilege to practice law. Lawyers who do not understand those conditions are at best woefully unprepared to practice the profession and at worst a menace to it.
When a lawyer files complaints and motions without a reasonable basis for believing that they are supported by existing law or a modification or extension of existing law, that lawyer abuses her privilege to practice law. When a lawyer uses the courts as a platform for a political agenda disconnected from any legitimate legal cause of action, that lawyer abuses her privilege to practice law. When a lawyer personally attacks opposing parties and disrespects the integrity of the judiciary, that lawyer abuses her privilege to practice law. When a lawyer recklessly accuses a judge of violating the Judicial Code of Conduct with no supporting evidence beyond her dissatisfaction with the judge’s rulings, that lawyer abuses her privilege to practice law. When a lawyer abuses her privilege to practice law, that lawyer ceases to advance her cause or the ends of justice.
It is irrefutable that a lawyer owes her client zealous advocacy, but her zeal must be constrained within the bounds placed on her as an officer of the Court and under the Court’s rules. Specifically, Rule 11 of the Federal Rules of Civil Procedure expressly sets forth the outer boundaries of acceptable attorney conduct. That rule prohibits a lawyer from asserting claims or legal positions that are not well-founded under existing law or through the modification, extension, or expansion of existing law. Rule 11 also prohibits an attorney from using the courts for a purpose unrelated to the resolution of a legitimate legal cause of action.
Regrettably, the conduct of counsel Orly Taitz has crossed these lines, and Ms. Taitz must be sanctioned for her misconduct. After a full review of the sanctionable conduct, counsel’s conduct leading up to that conduct, and counsel’s response to the Court’s show cause order, the Court finds that a monetary penalty of \$20,000.00 shall be imposed upon counsel Orly Taitz as punishment for her misconduct, as a deterrent to prevent future misconduct, and to protect the integrity of the Court. Payment shall be made to the United States, through the Middle District of Georgia Clerk’s Office, within thirty days of today’s Order. If counsel fails to pay the sanction due, the U.S. Attorney will be authorized to commence collection proceedings. The Court does not take this action lightly, and in fact, cannot recall having previously imposed monetary sanctions upon an attorney sua sponte.
As the Orly Taitz case demonstrates, attorneys must take care to respect a court’s authority at all times and conduct themselves in a civil manner. Most attorneys have no problem discharging this obligation to the judge, but it is to the jury that they focus their attention the most. In our legal system, the jury has a very special role to play in ensuring citizen participation in the administration of justice. As the trier of fact, the jury has the duty of determining the truth in any given situation: who said and did what, why, and when?
Do you know when someone is lying to you? Have you ever been lied to so well that you didn’t find out about the lie until much later? Have your roommates or friends who were involved in a dispute ever asked you to decide who should win? In essence, being a juror relies on those same human skills. In every legal proceeding, each of two adversarial sides, absolutely opposed to each other, claims that it is right and the other side is wrong. Our litigation system is a process by which each side gets to present its case to a group of stranger citizens, and then ask them to decide who is lying and who is telling the truth.
There are two types of juries. A grand jury is a group of citizens convened by the prosecution in serious criminal cases to simply determine whether there is probable cause to believe that a crime has occurred and whether it’s more likely than not that the defendant in question committed the crime. The grand jury serves as a procedural step to prevent prosecutors from abusing their powers of arrest and indictment, a sort of “sanity check” on the awesome power of government to accuse citizens of crime. The grand jury requirement exists at the federal level and in some, but not all, states. A grand jury typically meets for an extended period of time and can hear several different cases in one day.
The grand jury does not determine guilt or innocence. A petit jury does that. This jury is impaneled for a specific trial. During the trial, members of the jury listen to the evidence presented and then deliberate as a group on what they believe the facts of the case are. They then apply the law, as instructed by the judge, to the facts. There are typically twelve members in a petit jury in criminal trials and from six to twelve members in civil trials, and generally speaking they must arrive at a unanimous verdict.
The jury system is a jewel in our litigation system for it involves ordinary citizens in adjudicating all sorts of disputes, from domestic family issues to complex business and insurance litigation to heart-wrenching criminal cases. There are problems with administering this system, however.
Both grand and petit juries are drawn from citizen voter and driver license rolls. In high-profile cases, it may be difficult to find citizens who have not heard about the case or who can be impartial about the case, in spite of their promises to be open-minded. When Enron collapsed in 2001, for example, defense attorneys for former CEO Jeff Skilling argued strenuously that the trial should not be held in Houston, where almost every citizen was affected in some way by the energy giant’s collapse or knew someone affected. The question of juror bias was so serious that the U.S. Supreme Court agreed to hear Skilling’s appeal based partially on this argument. Although the Court eventually found that Skilling’s jury was adequately impartial, Justice Sotomayor noted in a dissenting opinion that the “deep-seated animosity that pervaded the community at large” caused her great concern. Skilling v. United States, 561 U.S. ___ (2010), http://www.supremecourt.gov/opinions/09pdf/08-1394.pdf (accessed October 2, 2010).
Another problem arises from the burdens placed on jurors’ personal lives through their service. While most states have laws that prevent an employer from firing a worker or taking any negative work action, such as demotion, against the worker for being on jury duty, there is no legal requirement that an employer continue to pay a worker on jury duty. The court system does not pay juries for their services either (although some court systems pay a small amount, typically less than twenty dollars per day, to cover food and transportation costs). Some citizens, such as those who are self-employed, are therefore at great risk for losing personal income by serving on juries. Imagine being on the O. J. Simpson criminal trial jury, for example—that trial lasted ten months. The effects of jury service on a juror’s personal life can be staggering.
Another potential problem arises in the makeup of the jury itself. To provide a fair jury, courts attempt to draw from a cross-section of society to reflect the diversity of the surrounding community. Local court rules typically allow judges to excuse potential jurors for hardship or extreme inconvenience. If these rules are too generous, then the only citizens left may be those without full-time employment, such as students or retirees. Such a narrow cross-section of society would tend to skew the reliability and trust of the jury system, and judges across the country are becoming increasingly intolerant of attempts to evade jury service. The only professions that automatically exempt citizens from jury duty are active-duty soldiers, police officers and firefighters, and public officers.
In spite of these administrative problems, our jury system remains a cornerstone of litigation and is often openly admired. In South Korea, for example, attempts to create a more open and responsive democracy resulted in a novel and wholesale revision to the country’s court system: the adoption of citizen juries.
Hyperlink: Korea Adopts Jury System
www.nytimes.com/2008/07/07/world/asia/07iht-jury.2.14299454.html
In 2007, with little public debate or preparation, South Korea adopted a jury system in certain criminal and civil trials. For now, the jury’s decision is only advisory, and the court is free to reject it. The result has been some confusion about the role of citizens in the legal system, some concern about the methodology employed to implement the jury system, and an increase in transparency and greater citizen participation in government affairs.
Key Takeaways
The federal rules of civil procedure make it easy for parties in a lawsuit to identify and join other relevant parties and to make legal claims against each other. The goal of civil litigation is to find the truth. Litigants typically rely on lawyers to assist them in litigation. An attorney’s highest duty is to the administration of justice. Lawyers are ethically bound to represent their clients with zealous advocacy. A grand jury acts as a body of citizens to prevent abuse of discretion by prosecutors. A petit jury sits in trials as the trier of fact to ascertain the truth through their observations of the presented evidence.
Exercise \(1\)
1. Can you think of a situation where an in-house attorney may advise you to retain your own counsel?
2. Most rules of legal professional conduct are drafted and enforced by the bar itself, but the Sarbanes-Oxley Act (passed in reaction to the Enron accounting scandal) imposed a legal duty on lawyers to report acts of misconduct in publicly traded corporations. Do you believe that the bar does an effective job of policing itself, or do you think external government agencies should be more involved?
3. Read the legal documents available for the Lynne Stewart case at "Hyperlink: The Lynne Stewart Case". Do you think that the U.S. government should be able to curb the attorney-client privilege when the client is a convicted terrorist? Or a suspected terrorist?
4. How aggressive should a lawyer be in representing his or her client “zealously”? Read the rest of Judge Land’s order in "Hyperlink: A Question of Ethics". Do you think Orly Taitz’s conduct warranted a twenty-thousand-dollar fine?
5. Do you think that juries can be trusted to always arrive at the truth? Why or why not?
6. Do you think the U.S. jury system should be adopted by other countries? What factors do you think should affect a country’s decision to adopt a jury system? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/03%3A_Litigation/3.02%3A_The_Parties_Involved.txt |
Learning Objectives
• Explore the standing requirement.
• Understand how a court obtains personal jurisdiction over the parties.
Before a case can be litigated, parties have to demonstrate that they meet two pretrial requirements: standing and personal jurisdiction.
Standing is a constitutional requirement. Article III of the Constitution grants the judiciary the power to hear “cases” and “controversies.” This means actual cases and controversies, not merely hypothetical ones. Unlike some other jurisdictions, the standing requirement means that courts are unable to give advisory opinions. Let’s say, for example, Congress is considering whether or not to pass a law and would like to know whether the law is constitutional. Standing prevents this question from being litigated, because it’s not yet an actual case or controversy. Standing, therefore, is a doctrine that limits judicial overreach by circumscribing the types of cases that are litigated in our courts.
To demonstrate standing, a party has to prove first that it has an actual case to proceed. This is a procedural matter, and it requires the case to be brought at the right time. If a case is brought too early, it’s not yet ripe. If it’s brought too late, then the case is moot. For example, assume that a state is debating whether or not to pass a law that would require thirty hours of financial management classes before anyone is allowed to form his or her own company. If an entrepreneur who wishes to form her own company but doesn’t want to take the thirty hours of classes sues the state for an unconstitutional law, that lawsuit would be dismissed for being brought too early—it is not ripe since the law hasn’t been passed yet. Now let’s assume that the law has been passed, and the entrepreneur, who has abandoned her plans and is now working for someone else, sues the state anyway. That lawsuit would also be dismissed since it is now moot. Even if the entrepreneur won the case and the law was overturned, the remedy would be meaningless to her since she does not plan to take the class anyway.
In addition to being brought at the right time, the case has to be brought by the right person. To show standing, a plaintiff has to demonstrate that he has an actual stake in the litigation, or something of value that would be lost if he loses the case. Of course, if a plaintiff has lost money in a contract dispute or has been injured in a tort case, that is sufficient legal injury. Let’s say, for example, that your roommate is the victim of Internet fraud when she does not receive the goods that she paid for online. She would rather move on and forget the whole episode, but you are outraged and decide to sue the perpetrator in court. Even if the perpetrator admitted that it committed fraud, you would still lose the case because you’re not the right plaintiff here; your roommate is.
Cases that don’t involve monetary damages are sometimes more difficult to call. For example, what if a constitutional right is at stake? What standing does a citizen have to prove to file a lawsuit? Courts have generally held that merely being a taxpayer does not give standing to challenge government expenditures. So, for example, a citizen cannot sue the government to stop the war in Afghanistan just because he pays his taxes. If taxpayers don’t have standing to challenge government action, then who does?
In 2007 Massachusetts, along with eleven other states, sued the Environmental Protection Agency (EPA) to force the agency to regulate carbon dioxide as a pollutant. For years, the EPA had argued that carbon dioxide is not a pollutant and therefore could not be regulated. In response to the suit, the EPA argued that the states lacked standing since they couldn’t prove they had been harmed by excess carbon dioxide in the air. In a major decision,Massachusetts v. EPA, 549 U.S. 497 (2007). the Supreme Court ruled that the states had standing because they had suffered environmental degradation as a result of global warming brought about by excess carbon dioxide and that therefore the EPA has jurisdiction over carbon dioxide as a pollutant. This decision, along with the election of President Obama, led to a major policy reversal at the EPA, which is now aggressively pursuing the regulation of carbon pollution to combat global warming.
Another high-profile case on standing involves the Pledge of Allegiance. In 2000 a California attorney and physician sued the government because his daughter attended a school where the Pledge of Allegiance was recited every morning. The plaintiff, Michael Newdow, claimed that the pledge is unconstitutional under the First Amendment because it contains the words “under God.” In 2002 the Ninth Circuit Court of Appeals agreed with Newdow, ruling that the pledge is indeed unconstitutional. On appeal to the Supreme Court, the Court ducked the question of whether the pledge is unconstitutional.Elk Grove Unified School District v. Newdow, 542 U.S. 1 (2004). Instead, the Court held that Newdow lacked standing to bring the lawsuit in the first place since he is a noncustodial parent. Only his wife, who had custody of the daughter, could bring the lawsuit.
It’s important to note that standing doesn’t have anything to do with the merits of the case. Being able to prove standing doesn’t mean that you can win the case at hand. It only means that you’ve been able to clear a procedural bar toward proceeding with litigation.
Another procedural bar before a plaintiff can proceed is personal jurisdiction. Personal jurisdiction is different from subject matter jurisdiction, which is the power of a court to hear a case. Personal jurisdiction is the power of a court over specific litigants, and it requires litigants to have some form of minimum contacts with the state where the case is filed. Personal jurisdiction seeks to avoid inconvenient litigation, even if the case has actual merit. If you’ve never been to Nebraska, for example, and don’t have any connections to Nebraska, then you might be very surprised to find that you’re being sued in a Nebraska state court. In addition to that, you’d have to go to Nebraska to answer the lawsuit, hire local lawyers to assist you, and spend a lot of time and money in a state you have nothing to do with.
A court obtains personal jurisdiction over the plaintiff when the plaintiff files its lawsuit. Obtaining personal jurisdiction over the defendant can be a little trickier. Typically, there has to be some sort of connection between the defendant and the state where the court is located. For example, living in the state would create personal jurisdiction. Residency for purposes of personal jurisdiction is different from residency for other legal requirements such as voting and driving. Even temporary residency, such as a college student studying out of state, creates residency for personal jurisdiction purposes. Moreover, merely being in the state temporarily creates personal jurisdiction. If you’re driving through Nebraska, for example, and you’re speeding on a local highway, Nebraska courts have jurisdiction to hear a speeding ticket issued against you. Owning property in a state also creates jurisdiction. For corporations, courts generally hold that personal jurisdiction is proper in the state of incorporation as well as in any state the corporation does business.
Personal jurisdiction, like standing, is a constitutional requirement. The due process clause of the Fourteenth Amendment requires government processes to be carried out fairly. In 1980, the Supreme Court heard an important case on personal jurisdiction involving a car crash in Oklahoma.World-Wide Volkswagen v. Woodson, 444 U.S. 286 (1980). The plaintiff purchased the car in New York and filed a lawsuit against the manufacturer (Volkswagen) and the distributor and retailer (car dealer). The distributor and the retailer moved to dismiss the case for lack of personal jurisdiction, arguing that they had no business in Oklahoma, had no employees or property there, and did not target citizens of Oklahoma to purchase vehicles from them in New York. The Supreme Court held in favor of the distributor and car dealer, finding that neither had “purposefully availed” themselves of the privileges that come from doing business in Oklahoma. The Court noted that for personal jurisdiction to attach, “substantial notions of fair play and justice” cannot be offended.
Today, most states have written these concepts into laws known as long-arm statutes. These statutes set forth the procedure by which out-of-state defendants can be required to appear before a local court. The statutes provide for how service of process can occur. Service of process is the process by which any defendant (both local and out-of-state) is notified that it is being sued. Service of process typically requires a copy of the summons (notice to appear before a court) to be personally delivered to the defendant or the defendant’s agent. In the case of companies and other nonhuman entities, service of process is usually easy since they are required to have a registered agent as part of the process of forming an organization. Service can be more challenging with an individual, since some defendants know that litigation can be held up while service is attempted and therefore choose to avoid being served at all costs. While the best service is personal delivery of the summons, some states prescribe alternative methods such as leaving a copy with a family member while also mailing a copy.
The Internet era has raised some interesting personal jurisdiction issues. Does creating a Web site, for example, subject you to personal jurisdiction in all states where the Web site is accessible? Courts have ruled that the answer depends on what kind of Web site you have created. If it is a general informational Web site that describes a product, then there are insufficient minimum contacts to create personal jurisdiction. If, on the other hand, the Web site reaches out to specific customers and urges them to make a purchase, either through a shopping cart function or by calling the seller, then there are minimum contacts to justify jurisdiction.
Key Takeaways
Standing is a constitutional requirement that requires a plaintiff prove that he or she is the right person to bring a lawsuit and that he or she is bringing the lawsuit at the right time. Taxpayers lack standing to sue the government just by being taxpayers. Legal injury does not have to be monetary based; environmental harm, for example, may be sufficient to demonstrate standing. Standing has nothing to do with the merits of the underlying case. Courts must have personal jurisdiction over a defendant before litigation can proceed. Personal jurisdiction, a constitutional requirement, requires minimum contacts with the state such that substantial notions of fair play and justice are not offended. Once personal jurisdiction is established, service of process can occur, where a copy of the summons is delivered to the defendant. If the defendant lives out of state, a long-arm statute prescribes the method for service to occur. A Web site creates personal jurisdiction in any state where it reaches out for customers through a shopping cart function.
Exercise \(1\)
1. When President Obama nominated Hillary Clinton as secretary of state in 2008, several constitutional scholars observed that it may be unconstitutional for her to assume the post due to an often-ignored section of the Constitution. What procedural bar stopped citizens from challenging the nomination?
2. Do you believe the Supreme Court acted properly by finding that states with environmental damage from global warming had standing to challenge the federal government?
3. In the Volkswagen car crash case, the manufacturer (Volkswagen, a German company) and the importer did not contest personal jurisdiction of Oklahoma state courts. Why do you think they submitted to jurisdiction so readily?
4. If a car dealer in a neighboring state runs advertisements in your state claiming that its deals are better than those of in-state dealers, does that out-of-state car dealer create personal jurisdiction in your state?
5. If you sell something on eBay, do you create personal jurisdiction in the buyer’s state? Why or why not?
6. If you commit a tort on the Internet, do you create personal jurisdiction in the victim’s state? For example, if you defamed someone who lives out of state on Facebook, have you created jurisdiction in that foreign state? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/03%3A_Litigation/3.03%3A_Standing_and_Personal_Jurisdiction.txt |
Learning Objectives
• Explore pretrial procedures such as pleadings, discovery, and motions.
• Find out how class-action lawsuits are organized and prosecuted.
• Learn about issues and challenges facing parties during discovery.
After issues related to subject matter jurisdiction, standing, and personal jurisdiction are sorted out and parties have hired counsel to represent them, then a dispute can proceed to the pretrial stage. In civil cases, litigation begins with the filing of a complaint by the plaintiff. The complaint is a simple document setting forth who the parties are, the facts of the case, and what specific laws the defendant has violated. (Each of these is a claim.) The complaint ends with a prayer for relief. The plaintiff may be seeking damages (money), specific performance in certain kinds of contract cases, or a temporary or permanent injunction. It is much easier to get a temporary injunction in the early stages of litigation, because courts don’t want to see the defendant take some action that may result in irreparable harm. For example, if a real estate development company wants to tear down an old shopping mall to build a new skyscraper, and one of the tenants in the old mall claims it still has a right to be there, the tenant may be able to obtain a temporary injunction stopping the demolition until the lease issues are sorted out. If the demolition is allowed to continue and the tenant later turns out to be the winner, it will be too late to grant the tenant any meaningful remedy.
Citizen advocacy groups with an antilitigation public policy agenda often complain about frivolous lawsuits being filed in court. Most court systems have rules to prevent the filing of frivolous suits. In the federal system, the rules state that all claims must be signed by a lawyer certifying that to the “best of the person’s knowledge,” formed after “an inquiry reasonable under the circumstances,” the claim is not being presented for an unlawful purpose such as harassment and that the claims are either “warranted by existing law” or a nonfrivolous argument for modifying existing law. In practice, this standard is quite easy to meet, and it’s hard to think of a factual scenario—other than the most absurd—that would rise to the level of being legally frivolous.
The complaint is filed with the clerk of the court where the suit is to be heard. Every court has a clerk’s office to handle administrative matters relating to litigation. Even though the court system is a public service, there is usually a fee associated with filing a complaint to cover some of the court’s costs.
The clerk will next issue a summons to the defendant, along with a copy of the complaint. The summons is sent to a process server to effect service on the defendant. When the defendant is served, it is very important for the defendant to respond to the complaint in a timely manner. Ignoring the complaint, even if the defendant believes the complaint is devoid of any merit, is a fatal error. If the defendant does not reply to the complaint, the plaintiff can ask the court to issue a default judgment against the defendant, including granting all the relief the plaintiff is asking for.
In certain types of cases, there may be a large number of plaintiffs injured by a defendant’s actions. This may happen in a product liability lawsuit where a product is purchased by many thousands of consumers, all of whom experience the same product failure. The batteries for Apple’s popular iPod, for example, had a high failure rate, leading to a large number of consumer claims. There also may be a large number of plaintiffs in financial services cases, where a financial institution or investment firm defrauds a large number of investors. In these cases, several lead plaintiffs may attempt to form a class in a class-action lawsuit against the defendants. Under federal civil procedure rules, class actions may be granted when there are so many plaintiffs that it is impractical for them to file separate lawsuits, there are questions of law or fact that are common to members of the class, and the lead plaintiffs will fairly and adequately protect the interests of the class.
The defendant must file an answer to the complaint within a specified period of time, typically thirty days. The answer is a paragraph-by-paragraph response to the complaint, admitting certain paragraphs and denying others. The answer may also contain an affirmative defense (self-defense in an assault charge, for example) the defendant wishes to pursue. Taken together, the complaint and answer are known as the pleadings. The answer may admit, for example, noncontroversial claims by the plaintiff such as the defendant’s name, address, and the nature of the defendant’s relationship with the plaintiff. Each time the defendant denies a plaintiff’s claim in the complaint, that sets up a controversy or argument that must be litigated. Reducing the number of claims to be resolved before an actual trial begins makes the trial shorter. For example, in many civil cases, the plaintiff will make claims about liability and damages. A defendant may be willing to admit that it is liable but may argue about the plaintiff’s claims for damages. This can sometimes lead to bifurcated trials, where the issues of liability and damages are litigated separately.
At any point in litigation, either party may file motions with the court. The motions are designed to short-circuit the litigation and lead to an early end to the lawsuit. Litigation is so time consuming and expensive that either party would be gratified if the judge would simply cut the lawsuit short and declare a winner. One such motion is the motion to dismiss for failure to state a cause of action. In this motion, the defendant argues that even if it admits everything in the complaint is factually true, that doesn’t lead to any legal liability. In other words, the defendant’s conduct has not broken any laws. A similar motion is the motion for judgment on the pleadings. In this motion, one party asks the judge to decide the case based simply on the answer and complaint.
If a long period of time has passed since the incident in question and the filing of the lawsuit, a defendant may file a motion to dismiss based on the statute of limitations. Every civil and criminal action has a statute of limitations, which states that any claim or prosecution under the statute must be brought within a specified period of time or it will be dismissed. Only a few crimes are exempt from the statute of limitations and can be prosecuted at any time: murder (in most states) and rape (in many states). The statute of limitations exists to encourage aggrieved parties to file their lawsuits quickly, while evidence is still fresh and relevant people have memories of what occurred. As time passes, evidence may become stale, witnesses may die or move away, and those that can be located can’t remember what they saw or heard. In other words, the quicker a suit is filed, the more likely that the real truth will be discovered by litigation. For businesses, a statute of limitations also allows it to “close the books” on past liabilities, such as accounts payable or tax payments, knowing that too much time has passed for anyone to come collecting on those monies. It is possible, though, in many cases to toll the statute of limitations. If an accountant commits fraud, for example, and a criminal complaint is filed but the accountant flees overseas for many years, the statute of limitations does not run while the suspect is hiding.
In support of any motion, a party may submit an affidavit. Affidavits play an important role in pretrial procedure because they are an effective way for parties to tell their side of the story to the judge. They are limited, however, because even though they are given under oath, they may raise more questions and are not subject to examination by the other side.
After pleadings are filed, the litigation moves into the discovery phase. Discovery is a process in which each side finds out information about the other’s case. Let’s assume, for example, that you buy a new car and within a few weeks, a tire falls off suddenly while you’re driving. You would rightly conclude that there’s something wrong with the car, so you sue the manufacturer. At this point, you have no idea what’s wrong with the vehicle. Was the design flawed? Was there something wrong with the manufacturing of your specific vehicle? All you know is that new cars should not experience this sort of failure. After you file a lawsuit against the manufacturer, discovery allows you to find out more information about the vehicle so that you can effectively proceed with the lawsuit. You could find out what engineers did when they designed the vehicle and review records of similar accidents or factory records from the day your vehicle was produced.
Discovery is designed to prevent trial by surprise, where either side may suddenly produce a damning piece of evidence that allows it to win the trial. Since trials are based on the discovery of truth, they should be tried on the merits of the case rather than a party’s deceit. In that spirit, the rules of discovery are written broadly to cover scope and obligation. In scope, any piece of evidence that may be relevant to the trial is discoverable. Even if evidence may be ruled later to be inadmissible for a legal reason, it is discoverable during discovery. In obligation, both parties are obligated to turn over material that supports their own case, without demand from the other side. If the material harms their own case, they have to turn it over if the other side asks for it.
There are four types of discovery. The simplest (and least expensive) is an interrogatory. These are written questions addressed to the other party. The questions tend to be simple and straightforward, dealing with uncontroversial matters such as a company’s structure or the names and addresses of relevant witnesses.
A second type is a request for production. Using this form of deposition, a party can request the other party to produce written communications such as internal company reports, e-mails, product manuals, and engineering specifications. In some cases physical evidence may also be produced. If you sued a vehicle manufacturer because your tire fell off while driving, for example, the manufacturer may ask you to produce your vehicle so that its engineers can inspect it. Failure to preserve and produce key evidence in litigation can lead to charges of spoliation, which may result in severe sanctions against the offending party.
A third form of discovery is a request for admission. Remember that a complaint contains a series of claims the plaintiff is making against the defendant, and the answer is mainly a series of denials of those claims. As each party finds more information about the other’s case in discovery, one party may ask the other to admit that one of the contested claims is true. Doing so narrows the issues for trial because it is one less thing that the jury has to decide. Asking a party to give up a contested claim can be done at any time during litigation. If not done as a formal method of discovery, it may be done as a stipulation instead. For example, in your trial against the vehicle manufacturer, you may ask the manufacturer to admit that your specific vehicle was manufactured on a specific date at a specific factory.
Finally, discovery can take the form of a deposition. A deposition is a sworn oral statement, in response to questions, given by a potential witness in a trial to the attorneys in the case. A deposition hearing is attended by the witness being deposed and lawyers from both side, as well as a court reporter who keeps a written transcript of the entire deposition. In your product liability suit against your vehicle’s manufacturer, for example, you might want to depose the safety engineer who designed the car’s tire and braking systems. There is no judge present, so there is great latitude for parties to ask questions, even if those questions may result in testimony that is later inadmissible in court. Depositions serve to allow attorneys to prepare for trial by knowing everything a witness may say in court. They also serve to pin down a witness’s testimony, since a witness who changes testimony between a deposition and trial can be easily impeached. Depositions are easily the most expensive form of discovery, sometimes requiring weeks or months of advance planning, travel, extra costs, and lost work time from witnesses being deposed. In some cases, they can degenerate without the presence of a judge, as "Video Clip: A Deposition Goes Awry" shows.
Video Clip: A Deposition Goes Awry
(click to see video)
Although the policy behind liberal rules of discovery is to permit both sides to prepare adequately for trial, in effect discovery is an expensive phase of litigation. With most lawyers charging by the hour, responding to discovery requests can quickly rack up daunting legal bills. Discovery can also drag out litigation to many months or years. Most large corporations find they must dedicate entire in-house staffs of attorneys, paralegals, and support staff to respond exclusively to discovery requests. The judge assigned to the case is supposed to supervise discovery and ensure that the parties respond in a timely manner, as well as make rulings on specific discovery requests and objections. Theoretically, a judge has the power to sanction parties for abusive discovery, up to and including ordering a default judgment against the offending party. There are, however, few meaningful sanctions that can be levied against parties that abuse discovery, and plaintiffs in particular have a vested interest in making discovery last longer than the price of a sought-after settlement. These issues are magnified in e-discovery, when mountains of electronic data have to be sifted through to find relevant discoverable material. Objections to turning over material that may be proprietary, privileged, or the result of the work product doctrine also become more time consuming when parties are engaged in e-discovery.
During or after discovery, parties typically make a motion for summary judgment. This motion is designed to cut the trial short by asking the judge to decide based on the information discovered so far in the case. In essence, the party making the motion is saying, “Why have a trial?” since the evidence would lead any reasonable jury to the same and inevitable conclusion.
Key Takeaways
Litigation commences with the filing of a complaint by the plaintiff. If the plaintiff wishes to represent many others with the same claim against the same defendants, the plaintiff may try to certify the lawsuit as a class-action suit. Frivolous cases are prohibited in litigation, but it is relatively easy to argue that a case is not frivolous. The defendant files an answer to the complaint or risks a default judgment. Most civil and criminal cases must be brought within the prescribed statute of limitations. During the discovery phase of litigation, parties share and exchange information about each other’s cases so that neither side is surprised during the trial. There are four methods for conducting discovery: interrogatories, requests for production, requests for admissions, and depositions.
Exercise \(1\)
1. During the Catholic priest sex scandal, many potential plaintiffs who were abused as children found that their lawsuits against the church and individual priests were barred by the statute of limitations because the abuse happened so many years ago. Do you believe that these lawsuits were rightfully barred? Why or why not? Should the statute be changed in sexual misconduct cases?
2. Do you think there are too many frivolous cases filed? If you answered yes, how would you revise the federal rules of civil procedure to raise the standard on what constitutes a frivolous case?
3. Look at a sample interrogatory at http://www.justice.gov/atr/foia/frito-lay/8-16-96.htm. This interrogatory was issued by the U.S. Department of Justice in an antitrust investigation against Frito-Lay for possible violations of the Sherman Antitrust Act. What do you notice about the questions? How long do you think it would take to compile a response to these questions? If you were the defendant, would you object to any of them? If so, on what grounds? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/03%3A_Litigation/3.04%3A_Pretrial_Procedures.txt |
Learning Objectives
• Learn about jury selection.
• Follow a trial from opening statement to closing arguments.
• Explore the public policy rationale for the trial system.
After discovery is finally completed, and assuming that neither side has been successful in short-circuiting litigation through motions, the case is finally scheduled for a trial. In civil litigation, this is a most unusual development, for well over 90 percent of cases filed are resolved or settled before a trial. If a case actually goes to trial, it means there are genuine issues of fact that the parties cannot resolve, and both sides are determined to see their side win. Remember that a trial is a fact-finding process, through which the trier of fact (the jury in most cases or the judge in a bench trial) attempts to determine what happened. The trier of fact applies the facts to applicable law as instructed by the judge and determines guilt or innocence in a criminal case, or liability or no liability in a civil case. The first step in this process is to seat a jury.
At any given day in a courthouse, several citizens may be called by a judge as potential jurors in a case. If a jury needs twelve members, it’s not unusual for a judge to begin with a pool of more than fifty or sixty potential jurors to narrow down to a dozen. The process of selecting a petit jury is called voir dire.
Voir dire typically begins with the jurors filling out a written questionnaire. The questionnaire asks the jurors to identify their occupation, any work or occupational conflicts, and any potential conflicts of interest with the case. The process then continues with attorneys quizzing each potential juror in turn. During this questioning, attorneys ask each juror if he or she has any biases against upholding the law and whether he or she can keep an open mind during the trial.
If an attorney does not like a juror’s response, that juror may be excused. There are two types of challenges to a potential juror: peremptory or for cause. A party can make a for cause challenge if it can demonstrate to the judge that there is a good reason to excuse the juror, such as the juror’s personal relationship with one of the parties, or the juror’s stated unwillingness to be unbiased. Since these excuses are for a good reason, each side is allowed an unlimited number of for cause challenges. A party can also make a peremptory challenge against a juror, without giving any reason for the challenge. Since these challenges are unsupported by rationale or reason, each side is given a limited number of peremptory challenges. A party may make a peremptory challenge based on a juror’s perceived bias because of that juror’s occupation or life background but may not make a peremptory challenge because of the juror’s raceBatson v. Kentucky, 476 U.S. 79 (1986). or gender.
After a jury has been selected and sworn in, the trial begins. The plaintiff or prosecution begins by delivering an opening statement. The opening statement is a preview of the trial. In it, the attorneys explain the facts of the case to the jury and indicate what witnesses they will be calling and what the witnesses will say. Attorneys do not make any arguments during the opening statement; they simply lay out what jurors can expect from the trial ahead. In a trial against your vehicle’s manufacturer, your attorney may begin by telling the jury to expect testimony from you about your car accident, from your doctor about the injuries you suffered, and perhaps from an expert witness who has examined your vehicle and believes it was manufactured defectively. Once the plaintiff has delivered an opening statement, the defendant will deliver the defense opening statement. In a criminal case, the defense has the right to reserve delivering the opening statement until after the prosecution has rested its case (concluded presenting all the witnesses).
After opening statements, the trial moves into the examination phase. Jurors are presented with witnesses, called by each side, to give evidence. The plaintiff begins by calling its witnesses. The attorney will guide the witness in delivering testimony by a series of short open-ended questions during the direct examination. Leading questions (questions that call for a yes or no answer) are not permitted during direct examination. As the questioning proceeds, a court reporter maintains a record of all the words spoken in case there is an appeal. The opposing side may raise objections during the examination, which the judge will rule on. These rulings can also form the basis for a later appeal.
All the evidence in a trial must be introduced in this manner (questioning a live witness). If one side wants to introduce videotape into evidence, for example, it has to call the person who took the footage or was in charge of running the camera to testify about his or her personal knowledge of where the camera footage came from before the jury can watch the video. In a criminal case, if the prosecution wants to introduce the murder weapon into evidence, it must first call the detective or police officer who found the weapon to testify about where he or she found it and where it has been since then.
Hyperlink: O.J. Simpson Tries on Gloves
video.google.com/videoplay?docid=-7472594685651342793#
O. J. Simpson’s criminal murder trial was probably the most-watched courtroom proceeding in history. During the trial, the prosecution sought to introduce a pair of gloves into evidence. The prosecution claimed the gloves contained blood from the victims. In this scene, the defendant, O. J. Simpson, is asked to try on the gloves so that the jury can see for themselves whether or not the gloves might belong to him. The fact that the gloves appear too small for his hands later becomes fertile ground for the defense attorneys to argue that reasonable doubt exists as to his guilt.
After direct examination, the other side has the right to conduct a cross-examination. During the cross-examination, the attorney will try to discredit the witness to convince the jury that the witness is not credible. The attorney may probe into any potential biases the witness may have or try to prove that the witness’s recollection of events may not be as clear or certain as the witness believes. During cross-examination, attorneys frequently engage in asking leading questions, which is permitted.
Once the prosecution or plaintiff has called all its witnesses, and the witnesses have undergone direct and cross-examination, then the prosecution or plaintiff will rest its case. The defendant may make a motion for a directed verdict, arguing that no reasonable juror could possibly find in favor of the prosecution or plaintiff after hearing the evidence presented so far. This motion can be made anytime during the trial before the jury returns a verdict. The motion is typically denied, and the trial moves on to the defense phase. The defense will then present its witnesses, who are led through direct and cross-examination.
After the defense has rested its case, the attorneys once again address the jury in closing arguments. Here, the attorneys summarize the case for the jury. They address what witnesses were called and what the witnesses said. During closing arguments, the attorneys are permitted to be much more persuasive and argumentative than during the opening statement. They appeal to the jury’s emotions and argue how the jury should interpret the evidence before them.
Video Clip: Johnnie Cochran Delivers Closing Arguments
(click to see video)
After closing arguments are made, the judge in the case charges the jury by giving the jury its instructions. The instructions acquaint the jury with the relevant law. The jury then retires to deliberate. During deliberations, the jury will decide first what facts it believes to be true. Then it will apply those facts to the law as outlined in the jury instructions. In a trial against your vehicle’s manufacturer, for example, the judge may explain to the jury what is legally required for a product to be considered defective so that the jury can make a determination, based on the evidence presented, whether or not there is any liability.
Central to the jury’s deliberations is the burden of proof applicable to the case. In criminal trials, the prosecution always carries the burden of proof. That burden is to prove the defendant committed all the elements required in the crime beyond a reasonable doubt. If any member of the jury has any reasonable doubts about the defendant’s guilt or innocence, then the only appropriate verdict is not guilty. Many people confuse the burden with “without a doubt.” Jurors may have doubts, but the only question for the jurors is whether they have any reasonable doubts. This standard is deliberately set high because of the severe sanctions and penalties that follow a criminal conviction. In a criminal trial, the defense only has to prove reasonable doubt exists and has no burden of proof at all. That is why in criminal trials, the defense may strategically decide to not call any witnesses and to rest its case strictly on creating doubt by cross-examining the prosecution’s witnesses.
In civil cases the burden of proof is preponderance of the evidence. This standard requires the scales of justice to tilt ever so slightly toward one party to declare that party the winner. If the jury believes one side is 51 percent correct and the other is 49 percent correct, that is enough to declare a winner. It is a much easier standard to win, because it only requires a party to prove that its side is more likely than not telling the truth. In a civil liability suit against your vehicle’s manufacturer, your burden is to convince the jury that more likely than not, your vehicle was somehow defective. Sometimes it’s possible for a jury in a criminal trial to find the defendant not guilty, while a separate jury in a civil case applying a lower burden of proof finds the defendant liable for the same act. This is what happened to O. J. Simpson when he was tried for the murder of his wife.
During jury deliberations, the jurors are permitted to ask the judge for clarification about the law and to request to see the evidence again. If the jury is unable to come to a verdict, the jury is said to be deadlocked, and a mistrial results. Since trials are expensive and time consuming, the judge will usually instruct the jury to try its best before giving up. If the jury does arrive at a decision, it is called a verdict.
Once the jury delivers its verdict, the losing side typically makes a motion for judgment notwithstanding the verdict. In this motion, the party is arguing that the jury arrived at the wrong verdict and that no reasonable jury could have arrived at that verdict. The judge typically will not grant this verdict. Even if the judge believes that the jury arrived at the wrong factual conclusion, the judge is not permitted to substitute his or her judgment for that of the jury. If, however, the jury clearly ignored the law in arriving at its verdict in a criminal case, the judge may overrule the jury. This phenomenon is known as jury nullification.
If the judge denies the motion for judgment notwithstanding the verdict, then the judge enters the jury’s verdict as a judgment. After that, the losing party has the right to file an appeal. Remember that on appeal, the appellate court is only reviewing the record for legal error and cannot call new witnesses or substitute its judgment on the facts for the jury’s. In the following excerpt, Supreme Court Justice Ruth Bader Ginsburg uses the trial record to make a point in her dissenting opinion in an important employment discrimination case involving gender discrimination. Although hers was a dissenting opinion and the plaintiff lost her case, Congress reacted to the decision by passing the Lily Ledbetter Fair Pay Act, the first law signed by President Obama after he assumed office.
Hyperlink: Justice Ginsberg Reviews an Employment Discrimination Case
http://www.law.cornell.edu/supct/html/05-1074.ZD.html
From 1979 to 1998, Lilly Ledbetter worked as a supervisor at Goodyear’s plant in Gadsden, Alabama. Over the course of her career, her pay slipped when compared to the pay of men of equal experience and seniority. She sued the company, alleging pay discrimination on the basis of her gender under Title VII of the 1964 Civil Rights Act. The law states that any lawsuit must be initiated within 180 days of the unlawful discriminatory act occurring. Ledbetter argued that each paycheck she received was an unlawful discriminatory act, so the fact that she filed her lawsuit within 180 days of her last paycheck means her lawsuit is within the time limit. Goodyear argued that the discriminatory act was the decision to pay her less, which took place many years ago and that therefore her lawsuit is too late. In a 5–4 decision, the Supreme Court ruled in Goodyear’s favor. In her dissent, Justice Ginsburg returns to the trial record to make her point that Ledbetter is the victim of unlawful discrimination. The following is from the dissenting opinion:
Specifically, Ledbetter’s evidence demonstrated that her current pay was discriminatorily low due to a long series of decisions reflecting Goodyear’s pervasive discrimination against women managers in general and Ledbetter in particular. Ledbetter’s former supervisor, for example, admitted to the jury that Ledbetter’s pay, during a particular one-year period, fell below Goodyear’s minimum threshold for her position. Although Goodyear claimed the pay disparity was due to poor performance, the supervisor acknowledged that Ledbetter received a “Top Performance Award” in 1996. The jury also heard testimony that another supervisor—who evaluated Ledbetter in 1997 and whose evaluation led to her most recent raise denial—was openly biased against women. And two women who had previously worked as managers at the plant told the jury they had been subject to pervasive discrimination and were paid less than their male counterparts. One was paid less than the men she supervised. Ledbetter herself testified about the discriminatory animus conveyed to her by plant officials. Toward the end of her career, for instance, the plant manager told Ledbetter that the “plant did not need women, that [women] didn’t help it, [and] caused problems.” After weighing all the evidence, the jury found for Ledbetter, concluding that the pay disparity was due to intentional discrimination.
Once all appeals are exhausted, the winner in litigation can finally collect whatever damages it is entitled to. This process is called execution. If the loser is unable or unwilling to pay the judgment, the winner can petition the court to use its full legal resources, including asking the sheriff to seize the loser’s assets for sale, to satisfy the judgment. The winner can also ask that the loser’s wages be garnished until the judgment is satisfied. The loser in litigation cannot refile a civil lawsuit once it has been decided under the doctrine of res judicata. Just like criminal cases cannot be retried after acquittal under the double jeopardy clause of the Constitution, res judicata operates as a bar to relitigation.
Key Takeaways
The process of selecting a jury is called voir dire. Each side is permitted to question a potential juror and excuse that juror for any reason through a peremptory challenge or for a good reason through a for cause challenge. A trial begins with opening statements where the parties lay out the essential facts of their case. Next, witnesses are called to provide testimonial evidence. The side calling the witness conducts a direct examination, while the opposing side conducts a cross-examination. After all witnesses are called, the parties make closing arguments to the jury, which then deliberates and applies the law as outlined in the jury instructions. The burden of proof in a criminal case is “beyond a reasonable doubt,” while the burden of proof in a civil case is “preponderance of evidence.” A jury’s verdict must be converted into a legal judgment by the trial judge. Once all appeals are settled, res judicata prevents the case from being tried again.
Exercise \(1\)
1. Why would a jury engage in jury nullification? If a jury cannot engage in nullification, what are its alternatives to express a similar view?
2. One of President Obama’s first acts as president was to sign into law a statute aimed at overturning the Ledbetter decision. How can Congress overturn the Supreme Court in this instance?
3. Although litigation is rightfully criticized as slow and expensive, res judicata means the parties have only one chance to “get it right.” Do you think relaxing the rules of res judicata would help with the expense and time involved in litigating cases?
3.06: Concluding Thoughts
The litigation system, publicly financed, is an important dispute-resolution mechanism that processes millions of cases in both state and federal courts every year. The system permits parties to air their grievances against each other in an open and transparent manner and is typically very effective at finding the truth. The jury system, in particular, is largely admired for its ability to involve ordinary citizens in an important form of civil service. For many businesses, however, litigation can be a vexing and distracting problem. The extraordinarily high costs associated with complex litigation, along with pressure from stakeholders to settle cases rather than litigate them fully, means that most businesses would prefer to avoid litigation whenever possible. These problems have led many courts to experiment with various levels of reform, from mandatory pretrial settlement attempts to mandatory mediation to jury selection and management reforms. These reforms are aimed at maintaining the vitality and usefulness of the litigation system, which can be a trusted and valuable resource for all citizens and corporations. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/03%3A_Litigation/3.05%3A_The_Trial_and_Appeal.txt |
Learning Objectives
After reading this chapter, you should understand alternative dispute resolution (ADR) options, including the benefits and drawbacks to different methods of dispute resolution. You will know the legal basis for mandatory arbitration, as well as why parties enter into voluntary ADR methods. You will understand current debates regarding the fairness of ADR. Additionally, you should be able to answer the following questions:
• What are the benefits and drawbacks of ADR as compared to litigation?
• What legal basis supports the use of ADR rather than litigation?
• What unique challenges exist in ADR efforts among B2B (business to business), B2C (business to consumer), and B2E (business to employees)?
• What are the ethical implications of ADR between parties that are unequal in power?
Imagine that you’ve been wronged by a supplier, by your employer, or by a business where you are a customer. You’ve correctly determined that you have an actionable legal claim. What are you going to do? You probably won’t run to the courthouse to file a formal complaint to initiate litigation. This is because litigation is very expensive and time consuming. Besides, you may wish to continue doing business with the supplier, employer, or business. Perhaps the matter is of a private nature, and you do not want to engage in a public process to determine the outcome. You would like the dispute to be resolved, but you do not want to engage in public, time-consuming, expensive litigation to do it.
A common method of dispute resolution that avoids many of the challenges associated with litigation is alternative dispute resolution. Alternative dispute resolution (ADR) is a term that encompasses many different methods of dispute resolution other than litigation. ADR involves resolving disputes outside of the judicial process, though the judiciary can require parties to participate in specific types of ADR, such as arbitration, for some types of conflicts. Moreover, some ADR methods vest power to resolve the dispute in a neutral party, while other strategies vest that power in the parties themselves. See Figure 4.1.1 "A Continuum of Different ADR Methods" for a continuum of different ADR methods based on where power to solve the dispute is vested.
Common methods of ADR include negotiation, mediation, and arbitration. Lesser used methods of ADR include minitrials, hybrid forms of mediation-arbitration (with elements of both), and collaborative goal-oriented processes. ADR is often used to resolve disputes among businesses, employers and employees, and businesses and consumers. ADR can also be used in many other types of conflicts. For instance, ADR strategies can be used in domestic law cases, such as divorce, or in international legal issues, such as issues relating to transboundary pollution. This chapter limits its focus to the use of ADR methods in business. Particularly, we will examine the common methods of ADR, including the benefits and drawbacks to each. We will also examine potential consequences to parties that have unequal bargaining power. Additionally, we will examine the use of ADR methods in situations where ADR may not be the most appropriate method of dispute resolution, such as civil rights violations.
ADR methods are used outside of the courtroom, but that does not mean that they are outside of the interests of our legal system. Participation in ADR has important legal consequences. For instance, parties that have agreed by contract to be subject to binding arbitration give up their constitutional right to bring their complaint to court. The Federal Arbitration Act (FAA) is a federal statute under which parties are required to participate in arbitration when they have agreed by contract to do so, even in state court matters. Indeed, the FAA is a national policy favoring arbitration. Southland Corp. v. Keating, 465 U.S. 1 (1984). The Southland Corp. Court said that “in enacting…[the FAA], Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.” This is an example of federal preemption exercised through the Supremacy Clause in the U.S. Constitution.
There is a very good chance that you will—or already have—signed a contract that contains a mandatory arbitration clause. This means that if a dispute arises under that contract, then you will be required to arbitrate your claim rather than going straight to court. Under a binding arbitration clause, you will have waived your constitutional rights to go to court. Even if you have never signed such a contract and never will, there is still a good likelihood that you will be involved in a commercial dispute at some point in your life. Because of this, it’s important to understand the ADR process, situations in which litigation is a better choice than ADR, and special issues that arise when parties have unequal bargaining power.
Key Takeaways
Alternative dispute resolution (ADR) is a body of dispute-resolution methods outside of the litigation process. ADR is often faster, less expensive, and more private than litigation. For this reason, ADR can be the preferred dispute-resolution method, particularly when an ongoing relationship between disputants is desired. However, some types of disputes might be best resolved through litigation, such as in cases where parties have unequal power or resources or in civil rights violations. Common methods of dispute resolution are negotiation, mediation, and arbitration. Mandatory arbitration clauses are common in contracts, and such clauses are enforceable against the parties even if they wish to litigate their claims. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/04%3A_Alternative_Dispute_Resolution/4.01%3A_Introduction.txt |
Learning Objectives
• Understand the role of negotiation in avoiding and settling disputes.
• Explore negotiation as it is commonly employed in business.
• Understand the implications of bargaining power during negotiation.
• Become familiar with the benefits and drawbacks of negotiation as a form of alternative dispute resolution (ADR).
Imagine that you are a tent manufacturer. Your supplier of tent fabric routinely supplies you with appropriate water-resistant fabric to construct your tents, so that you can produce your products and bring them to market. After many years of a good working relationship, your fabric supplier delivered nonconforming goods. Specifically, the fabric delivered was not water-resistant, despite your need for water-resistant fabric to produce your tents. However, on your notifying the supplier of the problem, the supplier denied that the fabric was nonconforming to your order. You refused to pay for the goods. The fabric supplier insisted on payment before future delivery of any additional fabric. Without water-resistant fabric, you cannot continue to produce your tents.
This is an example of a business to business (B2B) dispute. Despite the problem, you will likely wish to continue working with this supplier, since you have a good, long-standing relationship with it. This problem seems to be a “hiccup” in your regular business relationship. Accordingly, you will probably want to resolve this dispute quickly and without hard feelings. It is very unlikely that you will immediately hire an attorney to file a formal complaint against your supplier. However, that does not change the fact that there is a dispute that needs to be resolved.
One of the first strategies that you and your supplier are likely to employ is negotiation. Negotiation is a method of alternative dispute resolution (ADR) that retains power to resolve the dispute to the parties involved. No outside party is vested with authoritative decision-making power concerning the resolution of the dispute. Negotiation requires the parties to define the conflicts and agree to an outcome to resolve those conflicts. Often, this can take the form of a compromise. Note that a compromise does not mean that anyone “loses.” Indeed, if both parties are satisfied with the result of the negotiation and the business relationship can continue moving forward, then both parties will be very likely to consider this as a “winning” situation.
Benefits to negotiation as a method of ADR include its potential for a speedy resolution, the inexpensive nature of participation, and the fact that parties participate voluntarily. Drawbacks include the fact that there are no set rules, and either party may bargain badly or even unethically, if they choose to do so. In a negotiation, there is no neutral party charged with ensuring that rules are followed, that the negotiation strategy is fair, or that the overall outcome is sound. Moreover, any party can walk away whenever it wishes. There is no guarantee of resolution through this method. The result may not be “win-win” or “win-lose,” but no resolution at all. Also, generally speaking, attorneys are not involved in many negotiations. This last point may be seen as a drawback or a benefit, depending on the circumstances of the negotiation.
Though our example involves B2B, the parties may or may not have equal bargaining power. If your business and your supplier are both dependent on each other for roughly equal portions of the respective businesses, then they are most likely relatively equal with respect to bargaining power. However, in our example, if your business is a very small business but your supplier is a very large business—perhaps with a patent protecting the rights to the specialty fabric that you need—then we might say that the B2B negotiation is potentially unbalanced, since one party has a much more powerful bargaining position than the other. Specifically, your business needs that particular type of fabric, which is only available from one supplier. But your supplier does not need your business because it has a legal monopoly in the form of a patent for its product, and it probably sells to many manufacturers. This would be an example of unequal bargaining power.
When the negotiation occurs as a result of a dispute, but not a legal dispute per se, then the party with the weakest bargaining position may be in a very vulnerable spot. This is illustrated in "Hyperlink: Rubbermaid’s Unequal Bargaining Power". When Rubbermaid’s raw materials price for resin increased, it needed to raise its prices. However, Wal-Mart refused to accept the necessary price increase for Rubbermaid products. This refusal had a substantial negative impact on Rubbermaid’s business, since Wal-Mart was its main customer. In short, Rubbermaid needed Wal-Mart, but Wal-Mart did not need Rubbermaid.
Hyperlink: Rubbermaid's Unequal Bargaining Power
A Question of Ethics
http://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=frol02s48aq71&continuous=1
Watch “Muscling Manufacturers,” a clip from Is Wal-Mart Good for America? to see how unequal bargaining power can affect the least powerful party in a negotiation.
As economist Brink Lindsey from the Cato Institute commented, “We’ve definitely seen a shift in the balance of bargaining power between manufacturers and retailers…Back in the old days, manufacturing was a high-productivity endeavor; retailing and distribution was fairly low-productivity…And so manufacturers called the shots.”Hedrick Smith, “Who Calls the Shots in the Global Economy?” PBS, November 16, 2004, http://www.pbs.org/wgbh/pages/frontline/shows/walmart/secrets/shots.html (accessed on August 23, 2010).
That doesn’t appear to be the case anymore.
Negotiation is a skill often developed by people who are charged with settling existing disputes or with creating new agreements. Since we are focusing on dispute resolution in this chapter, we will limit our discussion to the resolution of disputes rather than the negotiation of new contract terms, but keep in mind that these activities essentially draw on the same skills.
In Getting to Yes, written by members of the Harvard Program on Negotiation, the goal of negotiation is viewed as “win-win.”Roger Fisher, William Ury, and Bruce Patton, Getting to Yes (New York: Penguin Books, 1991). Note that this is a substantially different goal from litigation. Our adversarial legal system requires one party to “win” and the other party to “lose.” Getting to Yes focuses on principled negotiation, and it sets forth specific steps and discusses strategies to allow participants to achieve the “win-win” goal. This book’s popularity perhaps suggests that people have a real interest in learning about ADR, avoiding litigation, and ensuring that all parties leave the resolution process as “winners.” Some concepts common in negotiation include the BATNA, WATNA, and the bargaining zone. For example, the authors of Getting to Yes encourage negotiators to know their best alternative to a negotiated agreement (BATNA). This ensures that unfavorable terms will not be accepted and terms consistent with a negotiator’s interests won’t be rejected. Roger Fisher, William Ury, and Bruce Patton, Getting to Yes (New York: Penguin Books, 1991), 100. Likewise, the worst alternative to a negotiated agreement (WATNA) is a concept used by some negotiators prior to entering negotiations. The bargaining zone is the area in which parties to a negotiation are willing to trade, barter, or negotiate their positions, within which parties can find an acceptable agreement. If you think of a Venn diagram, the bargaining zone would be where the two ovals overlap. The reservation point is essentially a party’s “bottom line,” beyond which it will not agree to terms.
Let’s go back to our example. Imagine that after negotiating with your fabric supplier, the following facts emerged: The fabric supplier believed that it sent the correct fabric to you, because one of your new employees inadvertently ordered the wrong fabric. You reviewed your business records and determined that this allegation was true. This sounds like a misunderstanding that would be easy to clear up in negotiation, doesn’t it? Imagine the embarrassment and hard feelings that would have been caused by immediately filing a formal complaint in court, not to mention the great expense that both parties would have incurred. Through negotiation, chances are very good that this misunderstanding will be resolved in a win-win outcome and that you will be able to continue your working relationship with your supplier.
Key Takeaways
Negotiation is a method of alternative dispute resolution (ADR) in which the parties retain power to decide on a resolution of the issue themselves, without relying on a neutral decision maker. Negotiation is also used between parties entering into agreements, when there is no legal dispute. Negotiation is often the first method of dispute resolution attempted, because it is inexpensive and relatively fast. Additionally, parties that wish to continue working together in the future often employ negotiation as a friendly method to resolve disputes. Negotiation between parties with unequal bargaining power can result in the stronger party being heavy-handed at the negotiation table, which can result in unfair outcomes for the weaker party. Since negotiation does not follow an externally imposed set of rules, parties may negotiate as their conscience dictates. However, negotiation is often considered a dispute-resolution option that can result in a win-win situation for all parties, as illustrated by the popular book Getting to Yes, in which negotiation strategies are set forth in detail.
Exercise \(1\)
1. Visit www.sfhgroup.com/ca/training/online-training/test-your-skills.php and click “Negotiate with Bill” under “Online Negotiation Course.” This is a free interactive negotiation exercise. After completing the negotiation, answer the following questions: How far did you get? (If you did not get to level three, go back and try it again. See if you can get all the way through to level three.) What negotiation strategies did you learn? In other words, what works? What doesn’t work?
2. What are the benefits of negotiation as a dispute-resolution method? What are the drawbacks?
3. How can parties that have unequal bargaining power negotiate meaningfully, without one party taking advantage of the other? Have you ever negotiated with someone who had more bargaining power than you? What were your strategies during the negotiation? Did you obtain your goal by the conclusion of the negotiation?
4. Watch the video in "Hyperlink: Rubbermaid’s Unequal Bargaining Power". If you were a manufacturer and you had to raise prices due to an increase in price for your raw materials, and if Wal-Mart was your most important customer, what strategies would you employ so that both parties would have a chance to have a “win-win” outcome? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/04%3A_Alternative_Dispute_Resolution/4.02%3A_Negotiation.txt |
Learning Objectives
• Learn what mediation is.
• Explore the process of mediation as an alternative dispute resolution (ADR) strategy.
• Identify disputes suitable to mediation as a form of ADR.
• Become familiar with the benefits and drawbacks of mediation as a form of ADR.
Mediation is a method of ADR in which parties work to form a mutually acceptable agreement. Like negotiation, parties in mediation do not vest authority to decide the dispute in a neutral third party. Instead, this authority remains with the parties themselves, who are free to terminate mediation if they believe it is not working. Often, when parties terminate mediation, they pursue another form of ADR, such as arbitration, or they choose to litigate their claims in court. Mediation is appropriate only for parties who are willing to participate in the process. Like negotiation, mediation seeks a “win-win” outcome for the parties involved. Additionally, mediation is confidential, which can be an attractive attribute for people who wish to avoid the public nature of litigation. The mediation process is usually much faster than litigation, and the associated costs can be substantially less expensive than litigation.
Unlike in many negotiations, a third party is involved in mediation. Indeed, a neutral mediator is crucial to the mediation process. Mediators act as a go-between for the parties, seeking to facilitate the agreement. Requirements to be a mediator vary by state. See "Hyperlink: Mediators" to compare the requirements between states. There are no uniform licensing requirements, but some states require specific training or qualifications for a person to be certified as a mediator. Mediators do not provide advice on the subject matter of the dispute. In fact, the mediators may not possess any subject-matter expertise concerning the nature of the dispute. However, many mediators are trained in conflict resolution, and this allows them to employ methods to discover common goals or objectives, set aside issues that are not relevant, and facilitate an agreement into which the parties will voluntarily enter. Mediators try to find common ground by identifying common goals or objectives and by asking parties to set aside the sometimes emotionally laden obstacles that are not relevant to the sought-after agreement itself.
Hyperlink: Mediators
http://www.mediationworks.com/medcert3/staterequirements.htm
Visit this site to see the various requirements and qualifications to become a mediator in the different states.
Disputants choose their mediator. This choice is often made based on the mediator’s reputation as a skilled conflict resolution expert, professional background, training, experience, cost, and availability. After a mediator is chosen, the parties prepare for mediation. For instance, prior to the mediation process, the mediator typically asks the parties to sign a mediation agreement. This agreement may embody the parties’ commitments to proceed in good faith, understanding of the voluntary nature of the process, commitments to confidentiality, and recognition of the mediator’s role of neutrality rather than one of legal counsel. At the outset, the mediator typically explains the process that the mediation will observe. The parties then proceed according to that plan, which may include opening statements, face-to-face communication, or indirect communication through the mediator. The mediator may suggest options for resolution and, depending on his or her skill, may be able to suggest alternatives not previously considered by the disputants.
Mediation is often an option for parties who cannot negotiate with each other but who could reach a mutually beneficial or mutually acceptable resolution with the assistance of a neutral party to help sort out the issues to find a resolution that achieves the parties’ objectives. Sometimes parties in mediation retain attorneys, but this is not required. If parties do retain counsel, their costs for participating in the mediation will obviously increase.
In business, mediation is often the method of ADR used in disputes between employers and employees about topics such as workplace conditions, wrongful discharge, or advancement grievances. Mediation is used in disputes between businesses, such as in contract disputes. Mediation is also used for disputes arising between businesses and consumers, such as in medical malpractice cases or health care disputes.
Like other forms of dispute resolution, mediation has benefits and drawbacks. Benefits are many. They include the relative expediency of reaching a resolution, the reduced costs as compared to litigation, the ability for parties that are unable to communicate with each other to resolve their dispute using a nonadversarial process, the imposition of rules on the process by the mediator to keep parties “within bounds” of the process, confidentiality, and the voluntary nature of participation. Of course, the potential for a “win-win” outcome is a benefit. Attorneys may or may not be involved, and this can be viewed as either a benefit or a drawback, depending on the circumstances.
Drawbacks to mediation also exist. For example, if disputants are not willing to participate in the mediation process, the mediation will not work. This is because mediation requires voluntary participation between willing parties to reach a mutually agreeable resolution. Additionally, even after considerable effort by the parties in dispute, the mediation may fail. This means that the resolution of the problem may have to be postponed until another form of ADR is used, or until the parties litigate their case in court. Since mediators are individuals, they have different levels of expertise in conflict resolution, and they possess different backgrounds and worldviews that might influence the manner in which they conduct mediation. Parties may be satisfied with one mediator but not satisfied in subsequent mediations with a different mediator. Even if an agreement is reached, the mediation itself is usually not binding. Parties can later become dissatisfied with the agreement reached during mediation and choose to pursue the dispute through other ADR methods or through litigation. For this reason, parties often enter into a legally binding contract that embodies the terms of the resolution of the mediation immediately on conclusion of the successful mediation. Therefore, the terms of the mediation can become binding if they are reduced to such a contract, and some parties may find this to be disadvantageous to their interests. Of course, any party that signs such an agreement would do so voluntarily. However, in some cases, if legal counsel is not involved, parties may not fully understand the implications of the agreement that they are signing.
Key Takeaways
Mediation is a method of ADR in which the parties retain power to decide the issue themselves without vesting that power in an outside decision-maker. However, mediation relies on neutral mediators who facilitate the mediation process to assist the parties in achieving an acceptable, voluntary agreement. Mediation is more formal than negotiation but less formal than arbitration or litigation. Mediation is relatively inexpensive, fast, and confidential, unlike litigation. Though nonbinding mediation resolutions are not binding on the parties, these resolution agreements may be incorporated into a legally binding contract, which is binding on the parties who execute the contract. Mediation does not follow a uniform set of rules, though mediators typically set forth rules that the mediation will observe at the outset of the process. Successful mediation often reflects not only the parties’ willingness to participate but also the mediator’s skill. There is no uniform set of rules for mediators to become licensed, and rules vary by state regarding requirements for mediator certification.
Exercise \(1\)
1. Visit the link in "Hyperlink: Mediators" and find your state’s requirements and qualifications for mediators. What would it take for you to become a mediator in your state? Do you think that your state requirements ensure that only qualified mediators practice? Why or why not?
2. Identify a situation in which you would choose mediation as your preferred method of dispute resolution. Why is mediation the best method in this situation? What are the potential benefits and drawbacks of mediation in this situation?
3. Should mediators be required to be licensed, like attorneys or physicians, before practicing? Why or why not?
4. Visit www.sfhgroup.com/ca/training/online-training/test-your-skills.php and scroll down to Mediation game. Click on “play game” under “The Angry Neighbours.” This is a free interactive mediation exercise. After completing the mediation, answer the following questions: Were you able to successfully mediate this dispute? If you did not reach a successful resolution, go back and try it again. See if you can reach a successful resolution. What mediation strategies did you learn? What works? What doesn’t work? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/04%3A_Alternative_Dispute_Resolution/4.03%3A_Mediation.txt |
Learning Objectives
• Explore the option of arbitration as an alternative dispute resolution (ADR) strategy.
• Explore contemporary issues of fairness in arbitration.
• Determine when arbitration is a viable option for dispute resolution.
• Examine the benefits and drawbacks of arbitration as a form of ADR.
Arbitration is a method of ADR in which parties vest authority in a third-party neutral decision-maker who will hear their case and issue a decision, which is called an arbitration award.
An arbitrator presides over arbitration proceedings. Arbitrators are neutral decision-makers who are often experts in the law and subject matter at issue in the dispute. Their decisions do not form binding precedent. Arbitrators may be members of the judiciary, but in arbitrations they are not judges. Arbitrators act in an analogous capacity to judges in trials. For instance, they determine which evidence can be introduced, hear the parties’ cases, and issue decisions. They may be certified by the state in which they arbitrate, and they may arbitrate only certain types of claims. For instance, the Better Business Bureau trains its own arbitrators to hear common complaints between businesses and consumers (B2C).
Participation in the arbitration proceeding is sometimes mandatory. Mandatory arbitration results when disputes arise out of a legally binding contract involving commerce in which the parties agreed to submit to mandatory arbitration. Arbitration is also mandatory when state law requires parties to enter into mandatory arbitration.
Although perhaps not obvious, federal law lies at the heart of mandatory arbitration clauses in contracts. Specifically, Congress enacted the Federal Arbitration Act (FAA)9 U.S.C. §1 et seq. through its Commerce Clause powers. This act requires parties to engage in arbitration when those parties have entered into legally binding contracts with a mandatory arbitration clause, providing the subject of those contracts involves commerce.9 U.S.C. §2. In Southland Park v. Keating, the U.S. Supreme Court interpreted this federal statute to apply to matters of both federal and state court jurisdiction. Indeed, the Court held that the FAA created a national policy in favor of arbitration. It also held that the FAA preempts state power to create a judicial forum for disputes arising under contracts with mandatory arbitration clauses. Southland Corp. v. Keating, 465 U.S. 1 (1984). In a later decision, the Court held that the FAA encompasses transactions within the broadest permissible exercise of congressional power under the Commerce Clause. Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003). This means that the FAA requires mandatory arbitration clauses to be enforceable for virtually any transaction involving interstate commerce, very broadly construed.
Some states require mandatory arbitration for certain types of disputes. For instance, in Oregon, the state courts require mandatory arbitration for civil suits where the prayer for damages is less than \$50,000, excluding attorney fees and costs.ORS 36.405. Many parties accept the arbitration award without appeal. However, when state law requires mandatory arbitration of certain types of disputes, parties are permitted to appeal because the arbitration is nonbinding. In nonbinding arbitration, the parties may choose to resolve their dispute through litigation if the arbitration award is rejected by a party. However, some states have statutory requirements that, in practice, create a chilling effect on appealing an arbitration award. For example, in the state of Washington, if the appealing party from a nonbinding mandatory arbitration does not do better at trial than the original award issued by the arbitrator, then that party will incur liability not only for its own expenses but also for those of the opposing side. Washington State Court Rules of Procedure, Superior Court Mandatory Arbitration Rules 7.3. In nonbinding arbitration, this is a powerful incentive for parties to accept the arbitration award without appealing to the judicial system.
Voluntary arbitration also exists, and it is frequently used in business disputes. Sometimes parties simply agree that they do not want to litigate a dispute because they believe that the benefits of arbitration outweigh the costs of litigation, so they choose voluntary arbitration in hopes of a speedy and relatively inexpensive outcome. Other times, parties are not certain how strong their case is. In such cases, arbitration can seem much more attractive than litigation.
Arbitration awards can be binding or nonbinding. Some states, like Washington State, have codified the rule that arbitration decisions are binding when parties voluntary submit to the arbitration procedure. Uniform Arbitration Act, RCW 7.04. In binding arbitration, the arbitration award is final; therefore, appealing an arbitration award to the judicial system is not available. In many states, an arbitration awards is converted to a judgment by the court, thereby creating the legal mechanism through which the judgment holder can pursue collection activities. This process, called confirmation, is contemplated by the FAA and often included in arbitration agreements. But even if the FAA does not apply, most states have enacted versions of either the Uniform Arbitration Act or the Revised Uniform Arbitration Act. These state laws allow confirmation of arbitration awards into judgments as well.
Like any other form of dispute resolution, arbitration has certain benefits and drawbacks. Arbitration is an adversarial process like a trial, and it will produce a “winner” and a “loser.” Arbitration is more formal than negotiation and mediation and, in many ways, it resembles a trial. Parties present their cases to the arbitrator by introducing evidence. After both sides have presented their cases, the arbitrator issues an arbitration award.
Rules related to arbitration differ by state. The rules of procedure that apply to litigation in a trial do not typically apply to arbitration. Specifically, the rules are often less formal or less restrictive on the presentation of evidence and the arbitration procedure. Arbitrators decide which evidence to allow, and they are not required to follow precedents or to provide their reasoning in the final award. In short, arbitrations adhere to rules, but those rules are not the same as rules of procedure for litigation. Regardless of which rules are followed, arbitrations proceed under a set of external rules known to all parties involved in any given arbitration.
Arbitration can be more expensive than negotiation or mediation, but it is often less expensive than litigation. In Circuit City Stores Inc. v. Adams, the U.S. Supreme Court noted that avoiding the cost of litigation was a real benefit of arbitration. Circuit City Stores, Inc., v. Adams, 532 U.S. 105 (2001). The costly discovery phase of a trial is nonexistent or sharply reduced in arbitration. However, arbitration is not necessarily inexpensive. Parties must bear the costs of the arbitrator, and they typically retain counsel to represent them. Additionally, in mandatory arbitration clause cases, the arbitration may be required to take place in a distant city from one of the disputants. This means that the party will have to pay travel costs and associated expenses during the arbitration proceeding. The Circuit City Court also noted that mandatory arbitration clauses avoid difficult choice-of-law problems that litigants often face, particularly in employment law cases.
Arbitration is faster than litigation, but it is not as private as negotiation or mediation. Unlike mediators, arbitrators are often subject-matter experts in the legal area of dispute. However, as is true for mediators, much depends on the arbitrator’s skill and judgment.
A common issue that arises is whether mandatory arbitration is fair in certain circumstances. It’s easy to imagine that arbitration is fair when both parties are equally situated. For example, business to business (B2B) arbitrations are often perceived as fair, especially if businesses are roughly the same size or have roughly equal bargaining power. This is because they will be able to devote approximately the same amount of resources to a dispute resolution, and they both understand the subject under dispute, whatever the commercial issue may be. Moreover, in B2B disputes, the subjects of disputes are commercial issues, which may not implicate deeper social and ethical questions. For example, contract disputes between businesses might involve whether goods are conforming goods or nonconforming goods under the Uniform Commercial Code (UCC). No powerful social or ethical questions arise in such disputes. Indeed, resolving such disputes might be seen as “business as usual” to many commercial enterprises.
However, issues of fairness often arise in business to employee (B2E) and business to consumer (B2C) situations, particularly where parties with unequal bargaining power have entered into a contract that contains a mandatory arbitration clause. In such cases, the weaker party has no real negotiating power to modify or to delete the mandatory arbitration clause, so that party is required to agree to such a clause if it wants to engage in certain types of transactions. For example, almost all credit card contracts contain mandatory arbitration clauses. This means that if a consumer wishes to have a credit card account, he will agree to waive his constitutional rights to a trial by signing the credit card contract. As we know, the FAA will require parties to adhere to the mandatory arbitration agreed to in such a contract, in the event that a dispute arises under that contract. In such cases, questions regarding whether consent was actually given may legitimately be raised. However, the U.S. Supreme Court has held that in B2E contexts, unequal bargaining power alone is not a sufficient reason to hold that arbitration agreements are unenforceable, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). and it is not sufficient to preclude arbitration. Lozano v. AT & T Wireless, 504 F.3d 718 (9th Cir. 2007).
Additionally, concerns about fairness do not end at contract formation. If a dispute arises and mandatory arbitration is commenced, the unequal power between parties will continue to be an important issue. In the case between a credit card company and an average consumer debtor, the credit card company would clearly be in a more powerful position vis-à-vis the debtor by virtue of the company’s financial strength and all that comes with it, such as experienced attorneys on staff, dispute-resolution experience, and contractual terms that favor it, rather than the consumer debtor. In such cases, if the consumer debtor is the aggrieved party, he may very well decide to drop the matter, especially if the arbitration clause requires arbitration proceedings to occur in a distant city. The credit card company will have vast financial resources as compared to the consumer debtor. Moreover, in this example, the credit card company’s legal counsel will know how to navigate the arbitration process and will have experience in dispute resolution, processes that often confound people who are not trained in law. Additionally, the list of arbitrators may include people who are dependent on repeat business from the credit card company for their own livelihoods, thereby creating—or at least suggesting—an inherent conflict of interest. Many mandatory arbitration clauses create binding awards on one party while reserving the right to bring a claim in court to the other party. That is, a mandatory arbitration clause may allow the credit card company to appeal an arbitrator’s award but to render an award binding on the consumer debtor. Obviously, this would allow the credit card company to appeal an unfavorable ruling, while requiring the consumer debtor to abide by an arbitrator’s unfavorable ruling. To a consumer debtor, the arbitration experience can seem like a game played on the credit card company’s home court—daunting, feckless, and intimidating.
Additionally, some types of disputes that have been subjected to mandatory arbitration raise serious questions about the appropriateness of ADR, due to the nature of the underlying dispute. For example, in some recent B2E disputes, claims relating to sexual assault have been subjected to mandatory arbitration when the employee signed an employment contract with a mandatory arbitration clause. Tracy Barker, for example, was reportedly sexually assaulted by a State Department employee in Iraq while she was employed as a civilian contractor by KBR Inc., a former Halliburton subsidiary. When she tried to bring her claim in court, the judge dismissed the claim, citing the mandatory arbitration clause in her employment contract. After arbitration, she won a three-million-dollar arbitration award. As KBR Inc. noted, this “decision validates what KBR has maintained all along; that the arbitration process is truly neutral and works in the best interest of the parties involved.” Despite this statement, KBR Inc. has filed a motion to modify the award. Juan A. Lozano, “Woman Awarded \$3M in Assault Claim against KBR,” AP News, November 19, 2009, www.thefreelibrary.com/Woman+awarded+%243M+in+ assault+claim+against+KBR-a01612064743 (accessed September 24, 2010).
In a similar case, employee Jamie Leigh Jones worked for KBR Inc. in Iraq when she was drugged and gang raped. She was initially prohibited from suing KBR Inc. in court because her employment contract contained a mandatory arbitration clause. However, when considering this case, the Fifth Circuit Court of Appeals ruled that sexual assault cases may, in fact, be brought in court rather than being subjected to mandatory arbitration, despite the contract language requiring mandatory arbitration. Jones v. Halliburton Co., 583 F.3d 228 (5th Cir. 2009). Jones’s claims were beyond the scope of the arbitration clause, because sexual assault is not within the scope of employment. Moreover, under Senator Al Franken’s lead, the Senate took action to prohibit the Department of Defense from contracting with defense contractors that require mandatory arbitration for sexual assault claims. If such action is passed, it would essentially allow the Fifth Circuit’s holding to apply in all federal jurisdictions rather than just in the Fifth Circuit. Check out "Video Clip: Al Franken" to hear the details of Senator Franken’s work on this matter. One might think that passing such a law would be a “no brainer” to lawmakers. However, some Senators voted against the measure, arguing that the federal government should not insert itself into rewriting contracts. Instead, some argued that the use of arbitration and mediation should be expanded for such cases.
Video Clip: Al Franken
Watch Senator Al Franken discuss the facts of the Jamie Leigh Jones case here:
(click to see video)
In B2C cases, different issues of fairness exist. As noted previously, when the disputants possess unequal power, these issues can be magnified. Public Citizen, a nonprofit organization that represents consumer interests in Congress, released a report concerning arbitration in B2C disputes. Specifically, the report argued that arbitration is unfair to consumers in B2C disputes and that consumers fare better in litigation than in arbitration. According to the report, incentives exist to favor businesses over consumers in the arbitration process. It pointed to the lack of appeal rights, lack of requirement to follow precedents or established law, limits on consumers’ remedies, prohibitions against class-action suits, limitations on access to jury trials, limitations on abilities to collect evidence, and greater expense as additional factors speaking to the unfairness of arbitration over litigation in B2C disputes. Check out "Hyperlink: Arbitration" for the full report.
Hyperlink: Arbitration
www.citizen.org/documents/ArbitrationDebateTrap(Final).pdf
Check out this Public Citizen report, The Arbitration Debate Trap: How Opponents of Corporate Accountability Distort the Debate on Arbitration, which argues arbitration is bad for consumers in B2C disputes.
Importantly, and despite the FAA’s broad interpretation, not all binding arbitration clauses have been upheld by courts in B2C cases. In 2007, the Ninth Circuit Court of Appeals ruled that AT&T’s binding arbitration clause for wireless customers is unenforceable under California state law. Lozano v. AT & T Wireless, 504 F.3d 718 (9th Cir. 2007). The court further noted that the relevant state law is not preempted by the FAA, because the FAA does not prevent the courts from applying state law. In this case, that law involved unconscionability of contract terms. As noted previously, the FAA requires parties to submit to mandatory arbitration when they agree to do so in a legally binding contract, and it preempts state powers to provide a judicial forum in those matters. However, the Ninth Circuit’s holding in this case underscores the fact that state contract law is not circumvented by the federal statute.
Arbitration is a widely used form of ADR, but important questions have been raised about its appropriateness in certain types of disputes. Before signing a mandatory arbitration agreement, it’s important to realize that under current law, your opportunity to bring your claim in court will be severely restricted or entirely precluded. Moreover, if you sign such an agreement with a party who holds inherently greater power than you, such as your employer, then you may find yourself at an extreme disadvantage in an arbitration proceeding.
Key Takeaways
Arbitration is a form of ADR in which parties vest authority to decide a dispute with a third-party arbitrator, who hears the evidence and issues an arbitration award. Arbitration may be binding or nonbinding, and it may be mandatory or voluntary. Arbitration awards issued by arbitrators can be confirmed to judgments by judges. Issues of fairness arise in arbitration when disputants possess unequal power, such as arbitration in employment or consumer disputes. Questions concerning the appropriateness of mandatory arbitration arise in cases involving issues of civil rights violations. The Federal Arbitration Act requires enforcement of mandatory arbitration clauses in contract disputes involving commerce where mandatory arbitration clauses exist. The Arbitration Fairness Act of 2009 would resolve several issues of unfairness, but this act has not yet been passed into law.
Exercise \(1\)
1. Check out Jon Stewart’s perspective on Senator Franken’s proposed measure to prevent the Department of Defense from contracting with defense contractors that require mandatory arbitration for disputes arising from sexual assaults at http://www.thedailyshow.com/watch/wed-october-14-2009/rape-nuts. Does the comedian accurately portray this issue? What role does popular culture have in shaping our opinions and conceptions of our legal system?
2. In the Barker v. Halliburton Inc. case, does the three-million-dollar arbitration award in favor of the sexual assault victim prove that arbitration works, even in violations of civil rights disputes? Why or why not?
3. Choose one argument in The Arbitration Debate Trap: How Opponents of Corporate Accountability Distort the Debate on Arbitration in "Hyperlink: Arbitration" and develop a counterargument to support the contention that arbitration is good in B2C disputes. Compare your argument with the argument in the report. Which side is the most persuasive? After completing this exercise, do you believe that arbitration is good or bad for consumers in B2C disputes? Why?
4. Bank of America announced that it would no longer require mandatory arbitration in disputes arising between it and consumer credit card account holders. Review the story here: http://www.reuters.com/article/idUSTRE57D03E20090814. What are the benefits and drawbacks to Bank of America’s credit card account customers with respect to this change?
5. In what contexts have you entered into an arbitration agreement (e.g., home purchase, credit card agreement, cell phone agreement)? Write a short essay discussing the implications of entering into that agreement. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/04%3A_Alternative_Dispute_Resolution/4.04%3A_Arbitration.txt |
Learning Objectives
• Learn about in-house dispute-resolution methods, med-arb, private judging, minitrials, and summary jury trials.
• Explore the benefits and drawbacks to forms of alternative dispute resolution (ADR) discussed in this section.
Remember that ADR is a broad term used to denote methods to resolve disputes outside of litigation. This can really be any method, whether or not it bears a specific label or adheres to a particular procedure. For instance, negotiation might be a quick meeting in the hallway between disputants, or it might involve a formal round of negotiations where all parties are represented by legal counsel.
However, when parties are attempting to resolve a dispute, it makes sense for them to agree to a specific procedure for doing so beforehand, so that each party understands how to proceed. Negotiation, mediation, and arbitration are the most common forms of ADR. However, these methods might not be appropriate for every dispute. Other forms of ADR exist, ranging from in-house programs to very formal external processes. This section briefly discusses commonly used alternatives to resolving disputes besides negotiation, mediation, arbitration, or litigation.
Some ADR processes or programs are available only to certain groups of people, such as members of a particular organization. For instance, some organizations, like Boeing, have an internal ethics hotline. This hotline is available for employees to report perceived ethics violation that they have observed. Ethics advisors answer employees’ questions and follow up on reports that need further investigation. One major benefit is that reporting parties generally (but not always) remain anonymous. Another benefit is that the company has time to redress problems that could give rise to disputes of much greater magnitude if left unaddressed.
An open-door policy is an in-house program that allows company employees to go directly to any level of management to file a complaint or grievance, without threat of retaliation for their reporting. In theory, this policy creates an open atmosphere of trust, and it breaks down class barriers between groups of employees. However, many employees may not feel comfortable in making a complaint about a manager’s decision. Moreover, supervisors may not be comfortable with their employees bypassing them to file complaints. Open-door policies sound very good in theory, but they may not work as well in practice.
Another type of in-house program is an ombudsmen’s office. These stations generally hear complaints from stakeholders, such as employees or customers. Ombudsmen try to troubleshoot these complaints by investigating and attempting to resolve the issues before they escalate into more formal complaints.
More formal methods of ADR include mediation-arbitration (med-arb), which is essentially a mediation followed by an arbitration. If the mediation does not produce a satisfactory outcome, then the parties submit to arbitration. The neutral party mediating the dispute also serves as the arbitrator if the dispute-resolution process goes that far. Med-arb has the same benefits and drawbacks as mediation and arbitration alone, with some important differences. For instance, parties in a med-arb know that their dispute will be resolved. This is unlike mediation alone, where parties may walk away if they do not think that the mediation is serving their interests. Moreover, the parties in med-arb have an opportunity to reach a win-win outcome as in mediation. However, if they do not reach a satisfactory outcome, then one party will “win” and one party will “lose” during the arbitration phase. The knowledge that an arbitration will definitely follow a failed mediation can be a strong incentive to ensure that the mediation phase of a med-arb works.
Private judging, contemplated by many state statutes, is a process in which active or retired judges may be hired for private trials. Private judging is essentially private litigation. The hired judge can preside over a private trial that is not truncated by limits on discovery or abbreviated rules of procedure, as would be the case in arbitration. Additionally, the judge who oversees the process is highly experienced in such matters as evidence and decision rendering. Moreover, the parties who can afford to pay for this service have a substantial benefit in not having to wait to have their cases heard in the public court. The private trial is also private rather than public, which may be important to parties who require confidentiality. In states where statutes permit hiring a judge for such matters, the parties’ ability to appeal is often preserved. Drawbacks include the sometimes questionable nature of enforceability of judgments rendered, though some state statutes allow enforceability of those judgments as if they were issued in public court. Moreover, this system may benefit those who can afford to pay for this service, while others must wait for their case to appear on the docket in public court. This raises questions of fairness. See "Hyperlink: Private Judges" for one state’s frequently asked questions (FAQ) regarding private judges.
Hyperlink: Private Judges
www.in.gov/judiciary/admin/private-judges/faq.html
Check out Indiana Courts’ Web page with frequently asked questions about private judges.
Does your state permit private judging?
A minitrial is a procedure that allows the parties to present their case to decision-makers on both sides of the dispute, following discovery. This is a private affair. After the cases are presented, the parties enter into mediation or negotiation to resolve their dispute.
A summary jury trial is a mock trial presented to a jury whose verdict is nonbinding. The presentation is brief and succinct, and it follows a discovery period. The jury does not know that its verdict will be advisory only. This process allows parties to measure the strengths and weaknesses of their cases prior to engaging in litigation, which presumably saves both time and money. After the minitrial, parties are in a better position to negotiate or mediate an outcome that fairly represents their positions.
Key Takeaways
Methods of ADR other than negotiation, mediation, and arbitration are available to disputants. For example, minitrials, med-arb, private judging, and summary jury trials are common alternatives, as are in-house programs like ombudsmen, anonymous ethics hotlines, and open-door policies. Benefits and drawbacks to these methods exist relative to other methods of ADR and to litigation.
Exercise \(1\)
1. Visit Boeing’s Ethics Line Web page: www.boeing.com/companyoffices/aboutus/ethics/hotline.html. Do you think this program can address all disputes before they get out of hand? Why or why not? What type of dispute might not be appropriate to bring to an ethics hotline program?
2. Locate two “ethics hotline” programs from an online search. Compare these programs. What are the benefits and drawbacks to each?
3. Check out "Hyperlink: Private Judges". Do you think that people should be permitted to hire judges to preside over private trials if they can afford to do so? What benefits to litigants in a private trial have over litigants in a public trial? What ethical issues exist with respect to private judges?
4. Why would a party choose med-arb over mediation or arbitration alone? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/04%3A_Alternative_Dispute_Resolution/4.05%3A_Other_Methods_of_Alternative_Dispute_Resolution.txt |
Learning Objectives
• Explore potential restrictions upon ADR.
• Review points of access to government to change public policy.
• Examine the Arbitration Fairness Act Bill.
Alternative dispute resolution can be a very useful alternative to litigation. There are many advantages to disputants, such as expediency, cost savings, and greater privacy than litigation. In business to business (B2B) disputes, alternative dispute resolution (ADR) often makes sense.
The Federal Arbitration Act (FAA) is a federal statute that the U.S. Supreme Court interpreted as a national policy favoring arbitration in Southland Corp. v. Keating.Southland Corp. v. Keating, 465 U.S. 1 (1984). According to the Southland Corp Court, state power to create judicial forums to resolve claims when contracting parties enter into a mandatory arbitration agreement has been preempted by the FAA. However, not all disputes are well suited for ADR. This is an area in which Congress could make substantial changes in public policy through the creation of new law, to ensure fairness between unequal parties and to ensure the protection of civil rights. Congress could do this by making ADR optional, rather than mandatory, for some types of disputes. It could exclude certain types of disputes from being bound to arbitration through mandatory arbitration clauses.
For example, the proposed Arbitration Fairness Act of 2009 (AFA) would invalidate mandatory arbitration clauses in employment and consumer disputes, as well as in disputes arising from civil rights violations. See "Hyperlink: Arbitration Fairness Act Bill". The AFA is a proposed bill to amend the FAA. Under the Commerce Clause, Congress has the power to limit the use of mandatory arbitration, just as it has the power to enforce mandatory arbitration clauses under the Commerce Clause through the existing FAA. By passing a new law that excludes certain types of disputes from being subjected to mandatory arbitration, Congress could set new policy regarding fairness in dispute resolution. Likewise, if it fails to act, Congress is also acceding to the U.S. Supreme Court’s broad interpretation of the FAA as a national policy favoring arbitration. Either way, policy regarding mandatory arbitration exists, and Congress has a central role in defining that policy.
Hyperlink: Arbitration Fairness Act Bill
thomas.loc.gov/cgi-bin/query/z?c111:H.R.1020
Review the Arbitration Fairness Act Bill, which would amend the Federal Arbitration Act.
In 1925, when the FAA was originally passed, records indicate that Congress intended that mandatory arbitration clauses be enforced in contracts between merchants, rather than between businesses and consumers or between employers and employees. In the latter relationships, the parties have vastly unequal power. Moreover, despite the existence of mandatory arbitration clauses in contracts, the FAA was not contemplated as a means to preempt state power to provide judicial forums for certain types of disputes. Margaret L. Moses, Statutory Misconstruction: How the Supreme Court Created a Federal Arbitration Law Never Enacted by Congress, 34 Fla. St. U.L. Rev. 99 (2006). However, the U.S. Supreme Court has greatly expanded the FAA’s applicability since then.
If Congress passed the AFA, this would be an example of one branch of government “checking” another branch’s power as contemplated by the U.S. Constitution. Specifically, the legislative branch would be checking the judicial branch’s power by passing a law to counteract the U.S. Supreme Court’s broad interpretation of the FAA in Southland Corp. v. Keating.
This is how our government is supposed to work. One branch checks another branch’s power. This “checking” of power maintains relative balance among the branches. Because people have different points of entry into the lawmaking process, this system ultimately balances the many special interests of the American people. For example, some businesses and employers that do not wish the AFA to pass may wonder what recourse they have. After all, the U.S. Supreme Court’s interpretation of the FAA currently favors their interests. Since the AFA has not yet passed, they could lobby lawmakers against its passage. Note too that if the AFA becomes law, these interest groups are not simply shut out of the government’s lawmaking process. They continue to have access to lawmaking. One point of entry is through the legislative branch. For instance, they could return to Congress and ask it to pass a new law to counteract the AFA, or to repeal the AFA altogether. They also have a point of entry to the lawmaking process through the judicial branch. Specifically, once a case or controversy arose under the AFA in which they had standing, they could ask the courts to interpret the statute narrowly, or they could ask the courts to strike down the statute altogether.
On the other side of the issue, consumers and employees who do not like the FAA’s current broad interpretation can work within our government system to change the law. For instance, they can ask Congress to pass a new law, such as the AFA. They could ask Congress to repeal the FAA. They could also wait for another case to arise under the FAA to try to get the relevant holding in the Southland Corp. case overturned. This is perhaps more difficult than the first two options, because any U.S. Supreme Court case produces many progeny at the circuit court level. Each decision at the circuit court level also produces binding precedent within that jurisdiction. It is very difficult to get a case before the U.S. Supreme Court. Even if that happened, there would be no guarantee that the Court would overturn a prior opinion. In fact, the opposite is usually true. Precedent is most often followed rather than overturned.
In the United States, the policy process is open for participation, though changes often take much work and time. People with special interests tend to coalesce and press for changes in the law to reflect those positions. This appears to be what is happening in the world of ADR now. After many years of mandatory arbitration requirements that have yielded perhaps unfair processes or results, groups that believe they should not be forced into ADR by mandatory arbitration clauses are building momentum for their position in Congress. If the AFA passes, that will not be the end of the story, however. New interest groups may form to support the previous law, or a new law altogether.
Key Takeaways
Public policy regarding arbitration has been codified in the FAA and expanded by the U.S. Supreme Court. To change public policy, interest groups can access the government lawmaking power through several points, including through the legislative branch and through the judicial branch. To change public policy regarding mandatory arbitration clauses, for instance, Congress could amend or repeal the FAA. Additionally, given another dispute arising under the FAA concerning its scope, the U.S. Supreme Court could overturn prior decisions that broadly interpret the FAA’s reach. Our government’s structure allows several points of access for those who would protect the status quo of public policy and for those who seek to change it. The U.S. government is a dynamic system that provides opportunities for special interests to coalesce and change the law and public policy.
Exercise \(1\)
1. How many points of entry are there into lawmaking processes? Which point would be the easiest to access if you wanted to change the law? Why?
2. Check out "Hyperlink: Arbitration Fairness Act Bill". Do you think that the AFA will solve the issue of perceived unfairness in dispute resolution? Why or why not? Are there any additions that you can make to this bill to make it more likely to achieve the goal of greater fairness in dispute resolution, if passed?
4.07: Concluding Thoughts
Alternative dispute resolution (ADR) is a popular and common group of methods to resolve disputes in many different contexts. In business, ADR is commonly used in business to business (B2B), business to consumer (B2C), and business to employee (B2E) disputes. Several methods of ADR exist. The most commonly employed methods include negotiation, mediation, and arbitration. Under federal law, national policy favors arbitration. Sometimes ADR is perceived as unfair, because parties have unequal power relative to each other or because the subject matter of the dispute is not considered suitable for ADR. Like other areas of law and public policy, ADR is dynamic and subject to change, particularly when special interest groups coalesce successfully and create momentum for change within our legal system. Currently, there is a nascent movement to exclude certain types of disputes from ADR by amending the federal law that requires mandatory arbitration when parties have contractually consented to it. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/04%3A_Alternative_Dispute_Resolution/4.06%3A_Public_Policy%2C_Legislation%2C_and_Alternative_Dispute_Resolution.txt |
Learning Objectives
• In this chapter, we will discuss the federal U.S. Constitution and how it affects businesses. Specifically, you should be able to answer the following questions:
• What are the main purposes of the U.S. Constitution?
• How does the Constitution grant authority to the government to regulate business?
• How does the Bill of Rights provide basic civil liberties to all persons in the United States?
• How do due process and equal protection operate to constrain governments from acting unfairly?
Video Clip: Schoolhouse Rock, the Preamble
(click to see video)
The Constitution is not the first constitution adopted by the original thirteen colonies. During the time of the Revolutionary War against Great Britain, the states were governed by the Articles of Confederation. The articles granted limited authority to a federal government, including the power to wage wars, conduct foreign policy, and resolve issues regarding claims by the states on western lands. Many leading scholars and statesmen at the time, known as Federalists, thought that the articles created a federal government that was too weak to survive. The lack of power to tax, for example, meant that the federal government was frequently near bankruptcy in spite of its repeated requests to the states to put forth more money to the federal government. Larger states resented the structure under the articles, which gave small states an equal vote to larger states. Finally, the articles reserved the power to regulate commerce to the states, meaning each pursued its own trade and tariff policy with other states and with foreign nations. In 1786, work began in a series of conventions to rewrite the articles, resulting in the adoption of the U.S. Constitution in Philadelphia in 1787.
In this chapter, we explore the Constitution in depth. We’ll examine how the Constitution sought to rectify the weaknesses in the articles, especially in commerce. We go beyond the meaning of the words and explain how judicial interpretation of the Constitution, while still evolving, has forever changed its original place in U.S. political economy. We’ll explore the first ten amendments to the Constitution, the Bill of Rights, and look at how many of the key civil liberties contained in the Bill of Rights also affect businesses. By the end of the chapter, you should have a solid grasp on why the Constitution remains an enduring document and why it’s important for business professionals to be able to speak on it with authority.
Key Takeaways
The Articles of Confederation established the United States of America. It provided a central federal government with limited powers, including the power to wage war. The articles ultimately failed because the federal government lacked the power to raise its own taxes or to regulate commerce. In 1787, the Philadelphia Convention adopted a new Constitution to replace the articles.
5.02: Federalism and Preemption
Learning Objectives
• Explore how the Constitution creates a limited government through the separation of powers and through checks and balances among the three branches of government.
• Learn how the Constitution resolves conflicts between state and federal laws.
• Understand the rules surrounding preemption.
Have you ever read the Constitution from beginning to end? Look at the text of the Constitution. It’s remarkably short—shorter than many people realize. Historically, it is the shortest and oldest written constitution still in force. Ironically, the Constitution’s brevity may be one of the reasons that it endures to this day, as judicial interpretation has kept its meaning relevant for modern times.
Much of its content deals with the allocation of power among three separate and coequal branches of government. Substantively, much more attention is paid to the limitations on the power given to each of the three branches than to any positive grant of rights. Indeed, while many Americans believe that it is their “constitutional right” to be free, many of those freedoms are actually contained in the Bill of Rights, which are amendments to the Constitution. In contrast, the main body of the Constitution is concerned primarily with structure. In other words, the Constitution is a document of prohibition, outlining what government cannot do as opposed to what government must do.
As a result of this structure, the Constitution is rarely the right place to deal with contemporary political issues, no matter how important. At the state level, many states permit frequent amendments to their constitutions to reflect contemporary public policy, from school funding to gambling to gay marriage. There is often support among many people for constitutional amendments to ban flag burning, permit prayer in school, ban gay marriage, or ban abortion. At the federal level, however, these issues are rarely resolved at the constitutional level. There is a practical bar, of course, given how difficult it is to amend the Constitution. Even if it were easier to amend, however, the Constitution remains very much a document of structure rather than substantive law.
During his confirmation hearings, Chief Justice John Roberts spoke of his role as an umpire calling the balls and strikes and not pitching or batting. If judges are umpires, then the Constitution sets forth the rules of the game. The biggest rule laid down in the Constitution is the separation of powers.
Fundamentally, the separation of powers requires that each branch of government play its own role in governing the people. The judicial branch plays a critical role in interpreting the Constitution and outlining the powers of the legislature and executive branches. The interplay between Article I (legislative) and Article II (executive) is no less important. Although more than two centuries have passed since the first Congress and the first president served, the limits of power between these two branches continue to be redefined, especially in the wake of the September 11 terrorist attacks.
Article I of the Constitution establishes the legislative branch through a bicameral legislature. The lower House of Representatives, with frequent elections (every even-numbered year), has 435 members, with representation spread proportionately to a state’s population as determined by a census every decade. The most populous state, California, has fifty-three members, while several states are so small that they have only one representative (Alaska, Delaware, Montana, North Dakota, South Dakota, Vermont, and Wyoming). The House is led by the Speaker of the House, typically from the party that holds the majority in the House. The House is generally thought to represent the most contemporary views of the American public, with its large body of members and frequent elections.
As a check on the majority will, and on the power of larger states, the Senate is a smaller body with one hundred members (two from each state) and with less frequent elections (every six years). The Senate is meant to be a more deliberative body and to ensure a wider level of debate before impassioned legislation is hastily rushed into law. The makeup of the Senate means that citizens from smaller states, representing much fewer people, can often frustrate the will of the majority of Americans. The Constitution places the power to legislate with both chambers, but the House retains the exclusive right to originate bills raising revenue (taxation), while the Senate maintains the exclusive right to provide advice and consent to the president, where advice and consent are required. Additionally, while the House retains the right to impeach officials for “high crimes and misdemeanors,” the Senate tries such impeached officials.
Article II of the Constitution establishes the executive branch of government. While the Constitution was being drafted, the delegates knew that they wanted George Washington to be president. Washington was in retirement in Mount Vernon at the time, after successfully leading the colonies in the Revolutionary War. Since the delegates knew Washington would be president, they spent remarkably little time in writing Article II, which is very short. Washington was elected to both his first and second terms with 100 percent of the Electoral College vote, something no other president has since done. While Article II sets forth some of the mechanisms for becoming president—and is the only place in the Constitution that prescribes a specific oath of office—when the Constitution was drafted, little was known about what the president’s role would be.
Article II grants the president an almost total power over foreign affairs, including the power to make treaties and appoint ambassadors. He is the commander-in-chief of the armed forces. The president is also responsible for executing, or enforcing, the laws of the country. While Congress can pass any legislation it wants to, ultimately legislation is meaningless unless there are sanctions for violating the law. Through the prosecutorial and police functions, the president ensures that the will of the people, as expressed through Congress, is carried out.
The Constitution’s deliberate ambiguity on the powers of the president left much room for debate on how strong the executive branch should be. After the September 11 attacks, many in the George W. Bush administration argued for a strong unitary executive theory. Bush administration lawyers reasoned that only a strong executive could effectively wage war with Al-Qaeda. Under a congressional authorization, the administration embarked on a program to capture and kill terrorists around the world and to gather as much information about terrorist activities as possible. Many in Congress believed, however, that the executive branch overstepped its authority in pursuing these goals, leaving Congress behind.
For example, to collect intelligence on suspected terrorists in the United States, Congress passed a law, the Foreign Intelligence Surveillance Act, in 1978. FISA, as the law is known, requires federal law enforcement officials to seek a search warrant from a secret court before carrying out surveillance or wiretapping. The Bush administration routinely carried out surveillance on persons in the United States without this judicial oversight, arguing that it was part of the unitary executive theory to do so. In another program, the Bush administration allegedly captured suspected terrorists abroad and moved them to secret prisons outside the jurisdiction of the United States for interrogation, a practice known as extraordinary rendition. In late 2009, an Italian court convicted twenty-three American officials, including members of the Central Intelligence Agency (CIA), of extraordinary rendition in the case of a Muslim cleric kidnapped from Milan. The officials were convicted in their absence and have not been extradited to Italy. Extraordinary rendition is likely illegal under U.S. and international law, but lawsuits attempting to find out more information about the program have been thwarted by the executive branch’s claim of the state secrets doctrine.
Congress and the president have also clashed over the treatment of suspected terrorists. Article I, Section 9 of the Constitution states that “The Privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.” The right of habeas corpus is a fundamentally important right, appearing first in the Magna Carta and considered so important by Constitutional delegates that it was inserted into the text of the Constitution itself, not in the Bill of Rights. When the Bush administration began imprisoning suspected terrorists at the military base in Guantanamo Bay, Cuba, the administration took a series of unprecedented positions on the legal status of those detainees, including the position that the detainees did not have the right to seek habeas relief. Federal courts, including the Supreme Court, gradually overturned most of these positions, and the detainees are now being tried by either military tribunals or civilian courts.
Another controversial position adopted by the administration was on the use of enhanced, or aggressive, interrogation methods. Critics claimed these techniques amounted to torture (which is banned by U.S. law as passed by Congress) and may be unconstitutional under the Eighth Amendment, which prohibits cruel or unusual punishment.
Video Clip: “Mancow” Waterboarded
(click to see video)
Another aspect of the separation of powers that is less obvious is the separation of power between the federal and state governments, known as federalism. You already know that state and federal governments sometimes share power and that the rules of subject matter jurisdiction determine which legal system has jurisdiction over a particular matter or controversy. In some areas, such as family or property law, the states have near-exclusive jurisdiction. In other areas, such as negotiating treaties with foreign countries or operating airports and licensing airlines, the federal government has near-exclusive authority. In the middle, however, is a large area of subject matter where both state and federal governments may potentially have jurisdiction. What happens if state and federal laws exist on the same subject matter, or worse, what happens if they directly contradict each other?
Legal rules of preemption seek to provide an answer to these questions. Under the Constitution’s Supremacy Clause (Article VI, Section 2), the Constitution and federal laws and treaties are the “supreme law of the land” and judges in every state “shall be bound” by those laws. Let’s say, for example, that Congress sets the minimum wage at \$7.25 an hour. A state that passes a law making the minimum wage lower than that would immediately see the law challenged in federal court as unconstitutional under preemption and Supremacy Clause principles, and the state law would be overturned.
Hyperlink: Medical Marijuana in the States
http://www.npr.org/templates/story/story.php?storyId=113924395
Under the federal Food and Drug Act, marijuana is classified as a Schedule I drug under the Controlled Substances Act, meaning it is restricted just like cocaine or heroin. Fourteen states have passed laws that permit marijuana to be grown, sold, and used for medicinal purposes, such as treating nausea and stimulating hunger in cancer patients. The federal government aggressively prosecuted medicinal use of marijuana, and in 2005 the Supreme Court ruled that the federal law trumps state laws, Gonzalez v. Raich, 545 U.S. 1 (2005). meaning that local growers could be arrested and prosecuted under federal law even if what they were doing was perfectly legal and authorized under state law. In 2009 the Obama administration announced a change in policy. Listen to this National Public Radio story about what this change means for the medicinal use of marijuana in the states.
When there is no direct conflict between state and federal law, then the rules of preemption state that courts must look to whether or not Congress intended to preempt the state law when it passed the federal statute. If there is no clear statement by Congress that it wishes to preempt state law, or if it is unclear what Congress meant to do, then the state law will survive if possible (i.e., there is a presumption against preemption). Even if there is no statement by Congress on preemption, however, if Congress so completely regulates a particular subject area that there is “no room” left for states to regulate, then preemption exists. For example, after September 11, Michigan passed a law requiring student pilots in Michigan to pass a Federal Bureau of Investigation (FBI) background check. The Federal Aviation Administration, which sets forth pilot qualifications and licensing, has no such requirement, and since the federal government regulates the aviation industry completely (from airports to pilots to airlines to training standards), Michigan’s law is preempted.
Hyperlink: Can States Regulate Car Safety Standards?
www.nhtsa.dot.gov/cars/rules/import/fmvss/index.html
Sometimes it’s not clear whether or not a state law is preempted, and the courts must undertake a searching inquiry to determine congressional intent. In Geier v. Honda, Geier v. American Honda Motor Company, 529 U.S. 861 (2000). for example, a teenager filed a tort lawsuit against Honda for injuries she suffered during a car accident. Her lawsuit claimed that her 1987 Honda Accord was defective because it didn’t have any airbags. Airbag technology, which existed at the time but was used primarily in expensive luxury cars, would have minimized her injuries. If she had won her state lawsuit in the District of Columbia, then in effect all 1987 Honda Accords sold in the District of Columbia would have to be equipped with airbags to avoid tort liability. Honda’s defense was preemption. Under a federal regulatory scheme known as the Federal Motor Vehicle Safety Standards (FMVSS), the federal government sets forth safety standards that cars must meet to be sold in the United States. FMVSS 208 sets the standard for seat belts, and in 1987 manufacturers were required to install either airbags or passive (motorized) seat belts. A rule that required manufacturers to install airbags exclusively would directly contradict FMVSS 208, so the Supreme Court ruled that FMVSS preempted any state attempts to regulate motor vehicle safety standards.
When the Supreme Court found preemption in the Honda case, many in the business community wondered if a new era of preemption might have arrived. Federal regulation would in effect provide a shield against liability lawsuits. These hopes were short-lived, as the Supreme Court continues to hold a presumption against preemption. The drug industry, in particular, would like preemption to end tort litigation.
Hyperlink: If the FDA Approves a Drug Label, Can Patients Still Sue Drug Manufacturers?
http://www.npr.org/templates/story/story.php?storyId=101465350
Wyeth Pharmaceuticals manufacturers an antinausea drug called Phenergan, which was approved by the U.S. Food and Drug Administration (FDA) in 1955. Under federal law, the FDA must approve the wording on labels and documentation accompanying regulated drugs. The FDA-approved label contained warnings against “intra-arterial” injection, which carried the risk of irreversible gangrene. The plaintiff in the case, Vermont musician Diana Levine, went to a clinic for treatment and ended up losing her arm when Phenergan was incorrectly administered to her. She sued Wyeth, arguing that the warning label on the drug didn’t prohibit the type of injection that led to her injuries. A jury awarded her more than six million dollars in damages. On appeal to the Supreme Court, Wyeth argued that since the FDA approved the label, lawsuits arguing that the label was inadequate were preempted. The Supreme Court examined the history of the Food and Drug Act and ruled for Diana Levine, holding that when Congress wrote the law, it never meant to preempt state laws. In fact, the Supreme Court found that Congress meant for state lawsuits to work alongside the Food and Drug Act to ensure drug safety for consumers.
Key Takeaways
The Constitution is mainly a structural document, setting forth the allocation of power among the three branches of government and the limitations on that power. It is concerned mainly with what the government cannot do, as opposed to what the government must do. At the federal level, constitutional amendments are rarely used to carry out social policy. Article I of the Constitution establishes a bicameral legislature, with a House of Representatives and a smaller, more deliberative Senate. Both chambers must agree before legislation can be passed. Article II of the Constitution establishes the executive power in the president, who must execute the laws passed by Congress. The balance of power between Congress and the president is subject to much interpretation and change throughout history, including the post–September 11 era. Power is also divided between state and federal governments under federalism. The Supremacy Clause states that when there is a conflict between state and federal law, federal law wins. If there is no direct conflict, the state law survives unless Congress expressly preempts state law.
Exercise \(1\)
1. One of the attempts to use the Constitution to achieve a social policy was Prohibition. Review the twenty-seven amendments to the Constitution. Other than the Bill of Rights, can you identify other amendments used to achieve social policy?
2. Can you name your representatives in the House of Representatives and the Senate? Who is the current Speaker of the House and the Senate Majority Leader?
3. Can you think of current examples where legislation that is popular with the majority of Americans is held up in the Senate, especially by Senators from smaller states?
4. Do you believe that the United States is better served by a strong or weak unitary executive? Explain your answer.
5. Where should the balance of power lie between Congress and the president in prosecuting the war on terror? If the president believes enhanced interrogation such as waterboarding is necessary to obtain necessary intelligence, should Congress attempt to intervene?
6. In 2007 five victims of extraordinary rendition filed suit against Jeppesen Dataplan Inc. (a Boeing subsidiary), claiming that Jeppesen provided logistical support to the CIA’s extraordinary rendition program. The government has so far successfully kept the case from going to trial, arguing that doing so would endanger government secrets. Do you believe that someone who has been subject to extraordinary rendition should be able to sue the government, or private companies, for what happened to them? Why or why not?
7. In the Geier case, the Supreme Court held that states may not regulate motor vehicle safety standards. How do you think states like California and Massachusetts can impose stricter emission controls on motor vehicles than the federal standard? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/05%3A_The_Constitution/5.01%3A_Introduction.txt |
Learning Objectives
• Explore how the Constitution grants the power to regulate commerce to the federal government.
• Understand how the meaning of the Commerce Clause has expanded greatly.
• Learn about state police powers and the limitations on those powers.
• Learn about the power given to Congress to tax and spend money.
Hyperlink: The Powers of Congress
http://topics.law.cornell.edu/constitution/articlei#section8
Members of the Constitutional Convention were divided about how powerful the new central government should be. To avoid the rise of tyrannical government, the Constitution carefully grants certain powers to Congress, reserving all other powers to the states. These powers are listed in Article I, Section 8. Look at this section in "Hyperlink: The Powers of Congress" and notice how detailed these powers are.
The list begins with monetary matters, an issue of great concern at the time because the prior government was bankrupt and states regulated their own money supply. The Congress, therefore, has the power to borrow money, lay and collect taxes, regulate commerce (the Commerce Clause), establish a uniform law on bankruptcy and naturalization, make money (currency) and establish its value, punish the counterfeiting of U.S. money, and establish a uniform system of weights and measures. The list then moves on to aspirational ideals for the young new country to strive toward. Congress has the power to establish post offices and post roads and to protect intellectual property in copyrights and patents. Next, the list turns to Congress’s adjudicative powers: to create lower courts under the Supreme Court created in Article III and to define crimes committed on the “high seas” and against the “law of nations.” Congress is also given fiscal responsibility over the armed forces and navy (note there is, of course, no mention of an air force) and the power to provide oversight to the militia. Then, to help Congress with carrying out these powers, Article I, Section 8 provides that the states may cede to Congress a district, not to exceed ten square miles, that will become the seat of government, and to exercise exclusive legislative authority over this district.
The scope of power granted under Article I, Section 8 is the subject of much debate among legal scholars. The clause granting Congress the power to regulate commerce is particularly troublesome. There is very little debate about the power of Congress to regulate foreign trade. This power is explicit, total, and exclusive. If Congress wanted to ban all imports and exports into and out of the United States, for example, it could legitimately do so. Indeed, Congress routinely uses economic trade sanctions against “rogue” nations such as Cuba and North Korea as a means of economic warfare to try to bring about regime change. Even in the case of friendly allies such as Canada, Mexico, and the European Union, Congress routinely engages in trade regulations that restrict or distort foreign trade. Since this power is exclusive to Congress, state attempts to regulate foreign commerce are invalid. Oregon, for example, cannot ban Oregon companies from exporting to Mexico or establish a free trade zone with duty-free imports with China.
There is more disagreement about Congress’s power to regulate domestic commerce. Notice how Article I, Section 8 is structured. Many scholars believe that this list is complete and exhaustive, since it lists all the powers the Founding Fathers wanted to give Congress at the time. The idea, they argue, was to create powerful and limited government, leaving the states room to govern in all other areas. As evidence, these scholars point to the structure of the list and the high level of detail provided (such as specific crimes to be made punishable and the square mile limitation for the seat of government). Other scholars believe that the list should be interpreted more broadly and that the language granting Congress the power to “make all laws necessary and proper” to carry out the enumerated powers demonstrates the Founding Fathers’ desire for a more flexible interpretation, to allow Congress the power to react to needs and challenges not foreseeable at the time the clause was drafted.
In the early part of the country’s history, the first view held firm sway, and together courts and Congress carefully observed the constitutional limits to the growth of federal government power. If you consider our modern federal government, however, it’s obvious that the second view is now more prevalent. Today, the federal government does a lot more than what is enumerated on the list in Article I, Section 8. From regulating educational standards, to defining clean air and water, to outlawing workplace discrimination, to licensing portions of the electromagnetic spectrum for cell phone and digital television providers to use, it’s clear that if a member of the Constitutional Convention were to travel forward in time, he would be shocked at both the pace of progress and the size and power of the federal government. How did our country’s view of congressional power evolve over time?
The answer can be traced to the Great Depression. In response to unprecedented economic distress, President Roosevelt sought to redefine the very nature of the employer/employee relationship. He, along with Congress, enacted legislation that established a minimum hourly wage, set maximum weekly working hours, established workplace safety rules, outlawed child labor, and provided for a safety net to protect older and disabled workers. These laws initially ran into stiff opposition at the Supreme Court. The justices at the time clung to a more formalistic reading of Article I, Section 8 and saw the employer/employee relationship as one governed by freedom of contract. In this view, if a worker wanted to work and an employer was willing to provide that work, then the government should not interfere with that contract. Thus, early portions of the New Deal were struck down as unconstitutional under the Commerce Clause.
After President Roosevelt proposed his court-packing plan, leading one of the swing votes on the Supreme Court to change his vote to begin upholding the New Deal, the barriers surrounding the interpretation of the Commerce Clause came crashing down. Courts have now adopted a very flexible reading of the Commerce Clause. As long as Congress makes reasonable findings that a certain activity has some sort of effect on interstate commerce, Congress can regulate that activity.
This broad interpretation of the Commerce Clause has been challenged repeatedly. In 1964, for example, Congress passed a broad and sweeping Civil Rights Act, prohibiting discrimination against citizens on the basis of race, color, national origin, and sex. Congress relied on its power under the Commerce Clause to pass this legislation. That same year, the Heart of Atlanta Motel in Georgia (Figure 5.3.1 "Heart of Atlanta Motel") filed a federal lawsuit seeking to overturn the Civil Rights Act as unconstitutional, arguing that Congress lacked the authority under the Commerce Clause to pass the law. The Supreme Court held the law to be constitutional, finding that since 75 percent of the motel’s clients came from out of state and since the motel was located near Interstates 75 and 85, the business had an “effect” on interstate commerce.Heart of Atlanta Motel v. United States, 379 U.S. 241 (1964). Subsequent civil rights legislation, including the important Americans with Disabilities Act, is also grounded in congressional authority to regulate interstate commerce.
In the late 1990s, several curious decisions by the conservative wing of the Supreme Court led some observers to wonder if the days of virtually unfettered authority by Congress to regulate under the Commerce Clause were coming to an end. Judicial conservatives, especially the late Chief Justice Rehnquist, have always been somewhat uncomfortable with the broad reading of the Commerce Clause, worried that it has led to a runaway federal government many times bigger than what the Founding Fathers intended. In a 1995 case, the Supreme Court held that the 1990 Gun-Free School Zones Act was unconstitutional. The law prohibited the possession of weapons in schools and was based on a congressional finding that possession of firearms in educational settings would lead to violent crime, which in turn affects general economic conditions by causing damage and raising insurance costs and by limiting travel to and through unsafe areas. Students intimidated by a violent educational setting would also be affected, learning less and leading to a weaker educational system and economy. By a 5–4 margin, the Supreme Court found these arguments unpersuasive and overturned the law, holding that Congress lacked authority under the Commerce Clause to regulate the carrying of handguns into schools. United States v. Lopez, 514 U.S. 549 (1995). Then, five years later, the Supreme Court overturned a portion of the 1994 Violence Against Women Act, which gave a woman the right to sue her attacker in federal court for civil damages, holding that the effects of violence against women were too “attenuated” to be valid under the Commerce Clause. United States v. Morris, 529 U.S. 598 (2000). Any expected revolution in the scope of Congress’s authority failed to materialize, however, and these two cases are probably aberrations rather than predictors of where the Court is heading on this topic.
While the Constitution limits the federal government’s powers to those enumerated in Article I, Section 8, the states also have broad lawmaking authority. These powers stem from the states’ police power, which permits states to regulate broadly to protect and promote the public order, health, safety, morals, and general welfare. You’ve probably experienced this yourself. Different states have different speed limits, for example. Some states permit the sale of alcohol on Sundays, while others prohibit it. Some states permit casino gambling, while others do not. A few states permit same-sex marriage, while many do not. Some states prohibit smoking in bars and restaurants, including North Carolina, home to the nation’s tobacco industry. In California, an attempt to rein in obesity resulted in a state law to require calorie counts on restaurant menus and a ban on the use of trans fats. In Texas, teenagers must have parental permission to use tanning beds at a salon. Massachusetts bans dog racing. Many states are implementing bans on texting while driving.
Hyperlink: How Assisted Suicide Ruling Affects Doctors' Work
http://www.npr.org/templates/story/story.php?storyId=5160904
In 1994 Oregon voters approved the country’s first physician-assisted suicide law, the Oregon Death with Dignity Act. The law permits certain patients to voluntarily hasten death by taking a lethal dose of prescription medication. To meet the law’s requirements, the patient must be terminally ill with less than six months to live, must be informed and voluntarily request the medication, must be able to consume the medication by himself or herself, must be referred to counseling, and must have the terminal diagnosis confirmed by a second doctor. Many patients, fearing a painful or torturous natural death, obtain the medication and never take it, but some do. In 2001 Attorney General John Ashcroft issued a rule interpreting the federal Controlled Substances Act as prohibiting any physician from prescribing medication under the Death with Dignity Act, subjecting any doctor who did so to federal prosecution. In a 6–3 decision, the Supreme Court decided that the Controlled Substances Act did not grant the attorney general the authority to override a state standard for regulating medicine. Gonzalez v. Oregon, 546 U.S. 243 (2006). In doing so, the Court held that the state police power is entitled to greater deference, in this case, than Congress’s powers under the Commerce Clause. Listen to the National Public Radio story for one physician’s account of how the Death with Dignity Act has affected his practice.
The Oregon Death with Dignity Act case illustrates how a state, in exercising its police power, can actually grant more civil rights to its citizens than the federal government does or wishes to. Similarly, states that have legalized same-sex marriage have done so under their police powers, which is permissible as long as the exercise of police power does not violate the federal Constitution. Generally, this means the state legislation must be reasonable and applied fairly rather than arbitrarily. Additionally, a critical limitation on the state police power is that it cannot interfere with Congress’s power to regulate interstate commerce. This concept is known as the dormant commerce clause because it restricts the states’ abilities to regulate commerce, rather than the federal government’s.
A state law that discriminates against out-of-state commerce, or places an undue burden on interstate commerce, would violate the dormant commerce clause. For example, if a state required out-of-state corporations to pay a higher tax or fee than an in-state corporation, that would be unconstitutional. A state that required health and safety inspections of out-of-state, but not in-state, produce or goods would be unconstitutional. In 2005 the Supreme Court held that state restrictions prohibiting out-of-state wineries from selling directly to consumers in-state was unconstitutional. Granholm v. Heald, 544 U.S. 460 (2005). Federal courts have repeatedly held that state attempts to regulate Internet content (typically to prevent pornography) are unduly burdensome on interstate commerce and therefore unconstitutional. Note, however, that this prohibition against out-of-state discrimination does not prevent a state from exercising its police power to protect state citizens, as long as the power is exercised evenly and equally. If a state wanted to weigh trucks on highways to ensure they did not exceed maximum weight rules, for example, that action would be permissible even if the trucks came from out of state, as long as the requirement applied equally to all trucks on that state’s highways.
In addition to the power to regulate commerce, the Constitution places two critical powers with Congress: the taxing power and the power to spend the taxes it collects. The taxing power is a broad one, and the Supreme Court has not overturned a tax passed by Congress in nearly a century. As long as the tax bears some reasonable relationship to generating revenue, the tax is valid.
States are also permitted to tax, but only if the activity taxed has a nexus to the state. A transaction (such as a sale) that takes place inside the state would create a nexus for sales tax to attach. Working typically creates a nexus for state or local income tax to apply, and owning real property creates a nexus for real estate tax to apply. What happens, however, if a state’s citizen purchases goods from a seller out of state? Traditionally, buyers do not pay sales tax to the government directly—rather, they pay the sales tax to the seller, who collects the tax on behalf of the government and turns it over to the government at regular intervals. In the past, mail-order catalog sellers from out of state would not collect sales tax in states where they don’t have a physical presence. As the popularity of e-commerce has skyrocketed, more and more states are reexamining how to tax transactions from out-of-state sellers by compelling those sellers to collect the applicable sales tax. Some states are so desperate they are starting to look for a nexus anywhere they can. In New York, for example, the legislature passed a law requiring Amazon.com to collect sales tax from New York residents based on the presence of New York citizens who link to Amazon’s Web site in turn for a commission generated by those links.
Congress also has the power to “pay the debts and provide for the common defense and general welfare.” This spending power is considered very broad. Courts have interpreted this power to mean that Congress can spend money not only to carry out its powers under Article I, Section 8 but also to promote any other objective, as long as it does not violate the Constitution or Bill of Rights. For example, in 1984 Congress passed the National Minimum Drinking Age Act, which required states to adopt a minimum age of twenty-one for the purchase and possession of alcohol. If a state did not adopt the age-twenty-one requirement, Congress would withhold federal highway funds from that state to repair and build new roads. One by one, states began adopting age twenty-one as the minimum drinking age, even though the age requirement would typically be a matter of state police power. In a challenge by South Dakota, which wanted to keep nineteen as the minimum drinking age, the Supreme Court upheld Congress’s use of withholding funds to force the states to raise the minimum drinking age. South Dakota v. Dole, 483 U.S. 203 (1987). Congress has used the spending power to coerce states to adopt a fifty-five-mile-per-hour speed limit (rescinded by the Clinton administration) and to lower the driving under the influence (DUI) blood alcohol level limit from 0.10 in most states to 0.08.
Key Takeaways
Article I, Section 8 of the Constitution grants certain specific powers to Congress. The power to regulate commerce is one of these powers, and the power of foreign commerce is explicit, total, and exclusive. During the Great Depression, the Supreme Court greatly expanded the interpretation of Congress’s ability to regulate domestic interstate commerce, and this expansion led to congressional authority to regulate virtually all human activity within the United States, with very few limited exceptions. This authority extends to civil rights, where Congress has passed several key pieces of legislation, including the Civil Rights Act of 1964 and the Americans with Disabilities Act, under the Commerce Clause. Attempts by judicial conservatives to circumscribe the power of the Commerce Clause appear to have failed for now. Unlike the federal government, states have broad police powers to regulate for the health, safety, and moral well-being of their citizens. The exercise of these police powers cannot violate the federal Constitution and, importantly, cannot violate the dormant commerce clause by discriminating against or placing an undue burden on interstate commerce. The power to tax is broad, and as long as a tax bears a reasonable relationship to raising revenue, the tax is upheld as constitutional. The power to spend is similarly broad, and Congress can spend funds to achieve broad objectives beyond its enumerated powers.
Exercise \(1\)
1. Article I, Section 8 of the Constitution establishes the seat of government, which today is Washington, DC. Residents of Washington, DC, have no representation in Congress other than a nonvoting delegate. Should Washington, DC, residents be granted more representation? What are the legal impediments toward such a move? What would be the political repercussions?
2. Today the United States is one of the few remaining countries to refuse the adoption of the metric system for weights and measures. Would the decision to “go metric” be within the powers of Congress? For more information on this topic, explore the National Institute of Standards and Technology at http://www.nist.gov.
3. Congressional authority to regulate foreign trade extends to the use of economic sanctions against rogue foreign nations. How effective have these sanctions been in the past? Do you believe it is more effective for Congress to ban trade with a foreign nation to encourage its citizens to overthrow hostile governments or for Congress to encourage trade so that those citizens may prosper economically?
4. If states are prohibited by the dormant commerce clause from discriminating against out-of-state commerce, how can state universities charge a lower tuition rate to in-state residents? Can you distinguish the role the state is playing when it does so, between that of a spender and that of a collector of monies?
5. Read the New York Times article on Amazon.com and its efforts to avoid a nexus to collect sales tax, at http://www.nytimes.com/2009/12/27/business/27digi.html. Amazon.com generates more than twenty billion dollars in sales annually but only collects sales taxes in five states, where it is headquartered and where it has facilities. Through a process called “entity isolation,” the company has created methods that allow it to avoid creating a nexus even in states where it has employees and facilities. What are the implications of this behavior?
6. In 2005, in an effort to coerce states to tighten up standards for issuing identity cards and driver licenses in the fight against terrorism, Congress passed the REAL ID Act stipulating certain requirements for state-issued identification. States that failed to comply would be punished by its citizens being denied access to federally run facilities including airports. How is this an exercise of the spending power? Do you believe Congress should have the ability to stipulate who can use federally funded airports? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/05%3A_The_Constitution/5.03%3A_The_Commerce%2C_Taxing%2C_and_Spending_Clauses.txt |
Learning Objectives
• Learn how the Constitution protects the civil liberties of business entities.
• Explore how the First Amendment protects a company’s right to speak.
• Discuss how the due process clause protects companies from arbitrary government action.
• Learn how the equal protection clause protects companies from government discrimination.
The ink on the Constitution was barely dry when the first Congress began turning its attention to amending it. During the debate surrounding the Constitution, there was much discussion about whether or not an explicit protection of civil liberty was necessary. Some believed that the British common-law system implicitly protected civil liberties, so a written declaration of rights wasn’t necessary. Others believed that the Constitution created a strong federal government and that a written declaration of rights was therefore critically necessary. In 1789, the same year the Constitution went into effect, Congress proposed ten amendments to the Constitution, a package that became known as the Bill of Rights. Within two years, the Bill of Rights had garnered the necessary votes to become law.
When we speak of civil liberties protected in the Constitution, we often think of how these liberties apply to people. Although the Constitution does not contain the word “corporation,” corporations have some characteristics of being a “person,” so various courts have held that several of these civil rights also apply to business entities. In this section we’ll take a closer look at how these rights apply to businesses. In particular, we’ll examine the First, Fifth, and Fourteenth amendments.
Before we begin, it’s worth making some observations about civil liberties generally. First, there are no absolute rights, in spite of the wording of any specific amendment. For example, the First Amendment states that “Congress shall make no law abridging the freedom of speech.” In fact, there are many laws that limit the freedom of speech. You aren’t allowed to libel or slander someone, for example, or incite a crowd into a riot. Instead of absolute rights, courts have to constantly balance competing interests in deciding where the limits of our rights lie. The right of the public to know information about the lives of politicians and other high-profile figures, for example, must often be balanced by the right those citizens have to their own privacy.
Second, it’s fair to say that while the Constitution sets up a system of government based on principles of representative democracy, the Bill of Rights exists to protect the minority, not the majority. The vast majority of Americans will go through life without ever having their constitutional rights trampled on. It is for the very small minority of Americans that find themselves victims of constitutional violations that we find the greatest strength of the Bill of Rights. For this reason, many issues raised by civil liberties generally rise above the political process, where the majority generally prevails. For example, public opinion polls show that well over 95 percent of Americans feel that burning the American flag should be illegal. When such an overwhelming majority agrees on something, in a democracy the majority should prevail. In our democracy, however, the Supreme Court has stepped in and decided that the First Amendment will protect the very tiny percentage of the American population that wishes to burn the flag as a display of political opposition. Additionally, it’s important to note that the only reason those of us in the majority know where the boundaries of our civil liberties lie is because of that tiny minority. If Americans weren’t willing to test the boundaries by burning the flag or joining the Communist Party or refusing to take loyalty oaths or refusing to send their Amish children to public schools, then our civil liberties would remain theoretical ideals rather than concrete rights. Finally, note that other than the right to vote, the civil liberties protected by the Constitution extend to all persons physically on U.S. soil, not just citizens or legal immigrants. Persons visiting the United States temporarily, such as tourists and students, as well as undocumented aliens, are all entitled to the full protections of the U.S. Constitution while subject to U.S. law.
Third, the extent of our civil liberties protections vary from time to time. Society evolves with progress and challenges, and with that evolution, different needs arise in the realm of civil liberties. The Founding Fathers could not contemplate a digital world where an act of defamation on Facebook can spread to millions of people in a matter of hours, or imagine a society as pluralistic and diverse as ours has become. One constitutional amendment, the Eighth, illustrates how time shifts the meaning and application of civil liberty. The Eighth Amendment prohibits “cruel and unusual” punishment. The Supreme Court, in defining what “cruel and unusual” is, looks to “evolving standards of decency” in making the determination—in other words, what is cruel and unusual today may have been normal in years past.
Finally, major portions of the Bill of Rights apply equally to the states as they do the federal government. When adopted, the amendments were meant to restrict the federal government only (for example, “Congress shall make no law respecting an establishment of religion.”). States were not similarly restricted, and many states did in fact establish official state churches in the early days of the United States. After the Civil War, the Constitution was amended to include the Fourteenth Amendment, which prevents any state from depriving citizens of their rights without “due process of law.” Gradually, throughout the twentieth century, the Supreme Court developed a doctrine called incorporation, by which the limitations on government behavior in the Bill of Rights were extended to apply to the states as well. While many portions of the Bill of Rights apply to the states, not all of it does. There is no requirement, for example, that states use a grand jury system to indict criminals. There is also no requirement that states provide juries in civil trials.
Hyperlink: Does the Second Amendment Apply to the States?
http://www.npr.org/templates/story/story.php?storyId=128182208
In 2008 the Supreme Court handed down a major victory for gun owners and gun rights advocates by declaring that a ban on handguns in the District of Columbia was unconstitutional under the Second Amendment, which the Court held protected an individual’s right to possess a firearm in private homes in Washington, DC, and other federal territories. District of Columbia v. Heller, 554 U.S. ___ (2008), http://www.law.cornell.edu/supct/html/07-290.ZS.html (accessed October 2, 2010). Soon after the case was decided, several lawsuits were filed across the nation, challenging similar bans on handguns in various states. In 2010 the Supreme Court decided that the Second Amendment is indeed incorporated against the states, meaning that state laws banning the possession of handguns in private homes are unconstitutional.McDonald v. Chicago, 561 U.S. ___ (2010), http://www.supremecourt.gov/opinions/09pdf/08-1521.pdf (accessed October 2, 2010).
We turn our attention first to the First Amendment. The First Amendment contains several important clauses pertaining to speech and religion. The two different clauses on religion are designed to be almost always in conflict with each other. On the one hand, the First Amendment prohibits the government from establishing any religion—this is called the Establishment Clause. On the other hand, the First Amendment prohibits the government from restricting the free exercise of religion—this is called the Free Exercise Clause. The conflict arises when some segments of society believe that the Free Exercise Clause means that they can practice their religion freely and openly, such as in a public school or city hall. Those who believe in what Thomas Jefferson called a “wall of separation” between church and state, on the other hand, believe that the Free Exercise Clause must be subservient to the Establishment Clause, which would strictly prohibit such public displays of religious life.
As is often true in Bill of Rights cases, courts have had to fashion a test to draw the lines between these two competing visions of the Establishment and Free Exercise clauses. Generally speaking, the use of public funds for religious purposes and the public display of religious life are generally acceptable as long as the primary motivation is not to advance a specific religion. A city that wishes to display a Christmas tree or nativity scene, for example, would be permitted to do so as part of a general holiday-themed cultural display that also included a menorah and Rudolph, while a public high school that wished to have a public prayer before a football game would be prohibited. Several evangelical Christian groups have campaigned hard to de-emphasize teaching evolution in public high schools, replacing it with an alternative theory called intelligent design, which states that the universe is so complex that it is impossible to be explained by random nature and, therefore, an intelligent entity designed it. In one high-profile trial involving a lawsuit against a school board for adopting intelligent design, a Republican-appointed federal judge found intelligent design to be a thin disguise for the teaching of Bible-based creationism, a violation of the Establishment Clause. Kitzmiller v. Dover Area School District, 400 F. Supp. 2d 707 (M.D. Pa. 2005). On the other hand, the Supreme Court has found that the use of public funds to display the Ten Commandments on public lands such as parks is not automatically an Establishment Clause violation, depending on the context in which the monument or statue was erected. Van Orden v. Perry, 545 U.S. 677 (2005).
The First Amendment also protects the right to freedom of speech. While many nations believe in the right of citizens to think and speak freely, the United States is fairly unique in enshrining those principles into constitutional law. As is true in most Bill of Rights cases, the cases that test the limits of the First Amendment tend to be ones that involve the most unpopular, even heinous, speech. For example, after World War II many European nations outlawed the Nazi Party along with any Nazi propaganda material, as well as neofascist ideology. As a result, many pro-Nazi and white supremacist Web sites, books, catalogs, and music are hosted in the United States, where the First Amendment protects even hateful speech.
Not all speech is protected by the First Amendment; the type of speech very much drives the level of protection afforded it under the First Amendment. Courts generally recognize political speech as speech most deserving of protection. Political dissent, displeasure with the government, forced loyalty oaths, restrictions on party membership, and even speech advocating the overthrow of government, all deserve extraordinary protection under the First Amendment. Political speech isn’t always written or uttered—it can sometimes take place through symbolic speech. The Supreme Court has held, for example, that burning the U.S. flag as a form of protest against U.S. government policy is symbolic speech, and therefore attempts to criminalize flag burning are unconstitutional restrictions on political speech.Texas v. Johnson, 491 U.S. 397 (1989).
On the other end of the spectrum is speech that deserves no protection under the First Amendment at all, such as speech that incites a panic (yelling “Fire” in a crowded theater when there is no fire, for example). Defamation is another type of speech that falls into this category, and both libel and slander are actionable torts. Obscene speech is also not subject to any protection under the First Amendment. Defining what is obscene has always vexed courts. The best test courts have developed is called the Miller test. Miller v. California, 413 U.S. 15 (1973). Under the Miller test, material is considered obscene if when applying contemporary community standards, the work, taken as a whole, appeals to a prurient interest in sex; portrays sexual conduct as specifically defined by applicable state law; and lacks serious literary, artistic, political, or scientific value. It’s important to keep in mind, however, that even obscene and defamatory speech is subject to the doctrine of prior restraint. Attempts to shut down the speech before it is uttered are considered unconstitutional.
Hyperlink: Fleeting Expletives
http://www.npr.org/templates/story/story.php?storyId=10741235
Although the First Amendment generally prevents the U.S. government from engaging in censorship, an exception exists for broadcast radio and television. Unlike cable and satellite programming, which requires viewers and listeners to “opt in” with a paid subscription to access content, broadcast radio and television use the public airwaves to carry transmissions that are readily accessible for free by anyone with a television or a radio. In 1973, in a case involving comedian George Carlin’s “Dirty Words” monologue, the Supreme Court held that although the monologue wasn’t obscene, the government (through the Federal Communications Commission, or FCC) could nonetheless regulate indecent material when vulnerable listeners, such as children, may be listening.F.C.C. v. Pacifica, 438 U.S. 726 (1978). Under this authority, the FCC enforces the “fleeting expletives” rule, which fines broadcasters for airing even momentary exclamations of profanity during live broadcasts. In 2010, after several rounds of litigation, the Second Circuit Court of Appeals held the FCC’s policy was unconstitutionally vague.
One area of First Amendment law that remains unsettled is what rights corporations have to speak, also known as commercial speech. In the early part of the twentieth century, the Supreme Court found that corporations had virtually no protection under the First Amendment. This view gradually evolved as the role and influence of companies grew. Today, corporations engage not just in purely commercial speech such as product advertising but also in matters of public policy, from globalization to human rights to environmental protection and global warming. In 2002 it looked like the Supreme Court would finally issue some guidance on this issue.Nike v. Kasky, 539 U.S. 654 (2003). In California, Nike Inc. was under fire from labor activists for allegedly engaging in sweatshop conditions in its foreign factories, including hiring child labor. In response to these allegations, Nike issued a series of press releases and denials, the “speech” in this case. Several activists filed lawsuits against Nike, claiming that these press releases and denials constituted false advertising by a company, which is against California law. Nike’s defense was that the press releases were more like political speech and were therefore protected by the First Amendment. Nike lost the argument in California state courts, and when the U.S. Supreme Court agreed to hear the case, the parties settled before the case could proceed any further.
In early 2010, however, the Supreme Court handed down another important decision on the rights of corporations to speak.Citizens United v. Federal Election Commission, 558 U.S. ___ (2010), http://www.fec.gov/ law/litigation/cu_sc08_opinion.pdf (accessed October 2, 2010). In striking down federal and twenty-two state restrictions on corporate spending on political campaigns, the Supreme Court held that corporations are persons and therefore entitled to engage in political speech. Since corporations are unable to literally “speak,” they speak through spending money, and thus restrictions on how corporations may spend money during political campaigns are unconstitutional. The four dissenting justices worried about the implications of this ruling. If corporations aren’t allowed to vote, then why should corporations be allowed to spend freely to drown out the voices of real voters, who have no hopes of matching corporate spending on issue advertisements? Similarly, foreign persons have the same rights as U.S. citizens in making speeches on U.S. soil. If corporations are persons for purposes of speech, then it stands to reason that foreign corporations operating in the United States are entitled to the same protections and can also spend freely to influence U.S. elections. The implications of this ruling will likely be felt for many years to come.
Not all protected speech is protected all the time in all places. The government is permitted to place reasonable time, place, and manner restrictions on speech to maintain important governmental functions. These restrictions are generally upheld if they further an important or substantial governmental interest, they are unrelated to the suppression of free expression (in other words, are content neutral), and any restriction on First Amendment freedoms is no greater than that necessary to further governmental interests (the restriction is not overbreadth). Thus, for example, courts have upheld restrictions on posting signs on city-owned utility poles and picketing or protest permit requirements. On the other hand, when Congress tried to make it illegal for commercial Web sites to allow minors to access “harmful” content on the Internet in the Child Online Protection Act (COPA), the Supreme Court held the Act unconstitutional because of the overbreadth doctrine. ACLU v. Ashcroft, 535 U.S. 564 (2002). The Court found there were less restrictive alternatives than the Act, such as blocking and filtering software, and therefore the burdens placed by COPA on the First Amendment, by sweeping both legal as well as illegal behavior, were too heavy to be constitutional.
Does this doctrine permit school officials to curb the free speech rights of high school students, who otherwise have rights outside of school hours? In 2002 an eighteen-year-old high school senior was suspended after he (with help from some friends) unfurled a banner during the Olympic torch relay through his town. The student, Joseph Frederick, was not in school that day and was standing across the street from the school when he unfurled the banner (Figure 5.4.1 "Joseph Frederick and Bong Hits 4 Jesus"). When asked later what the banner meant, Frederick replied that it was a nonsensical phrase he saw on a sticker while snowboarding. Frederick sued his high school principal for violating his First Amendment rights and won in the lower courts. On appeal, however, by a 5–4 decision the Supreme Court held that the school, which has a zero-tolerance policy on drug use, could restrict a student’s prodrug message even in these circumstances.Morse v. Frederick, 551 U.S. 393 (2007).
Another important restriction on governmental authority actually appears twice in the Constitution. The due process clause appears in both the Fifth Amendment (“No person shall…be deprived of life, liberty or property without due process of law”) and the Fourteenth Amendment (“Nor shall any State deprive any person of life, liberty, or property, without due process of law”). The Fifth Amendment applies to the federal government, and after the Civil War, the Fourteenth Amendment made due process applicable to the states as well. At its core, due process means “fundamental fairness and decency.” The clause requires that all government action that involves the taking of life, liberty, or property be done fairly and for fair reasons. Notice that the due process clause applies only to government action—it does not apply to the actions of private citizens or entities such as corporations or, for that matter, to actions of private universities and colleges.
As interpreted by the courts, the due process clause contains two components. The first is called procedural due process. Procedural due process requires that any government action that takes away life, liberty, or property must be made fairly and using fair procedures. In criminal cases, this means that before a government can move to take away life, liberty, or property, the defendant is entitled to at least adequate notice, a hearing, and a neutral judge. For example, in 2009 the Supreme Court held that a state Supreme Court judge’s refusal to remove himself from a case involving a big campaign donor violated the procedural due process clause promise for a neutral judge.
Hyperlink: The Biased Judge
http://www.npr.org/templates/story/story.php?storyId=105143851
Hugh Caperton, a small coal mine operator in West Virginia, sued the giant Massey Coal Company, alleging that Massey used illegal tactics to force him out of business. A jury awarded Caperton more than fifty million dollars in damages. When Massey appealed the case to the West Virginia Supreme Court, he spent more than three million dollars on a campaign to defeat an incumbent judge and promote another judge, who then refused to excuse himself from the appeal and ended up casting the swing vote in a 3–2 decision to overturn the fifty-million-dollar award. On appeal to the Supreme Court, the Court held that the judge’s actions violated procedural due process.
The second component of the due process clause is substantive due process. Substantive due process focuses on the content of government legislation itself. Generally speaking, government regulation is justified whenever the government can articulate a rational reason for the regulation. In certain categories, however, the government must articulate a compelling reason for the regulation. This is the case when the regulation affects a fundamental right, which is a right deeply rooted in American history and implicit in the concept of ordered liberty. The government must also set forth compelling reasons for restricting the right to vote or the right to travel. Since substantive due process is a fairly amorphous concept, it is often used as a general basis for any lawsuit challenging government procedures or laws that affect an individual’s or company’s civil liberties.
Hyperlink: A Question of Ethics
When Can a State Force Sterilization?
http://www.usatoday.com/news/health/2009-06-23-eugenics-carrie-buck_N.htm
In the early 1920s, the state of Virginia experimented with a eugenics program in an attempt to improve the human race by eliminating “defects” from the human gene pool. As part of this program, Virginia approved a law that would allow the forced sterilization of inmates in state institutions. Eighteen-year-old Carrie Buck became the first woman sterilized under this program. Buck, who had been raped by a nephew, was committed to the Virginia State Colony for Epileptics and Feeble-minded in Lynchburg, Virginia. Her birth mother was also committed, as was her daughter. When Buck challenged Virginia’s law at the Supreme Court, Justice Oliver Wendell Holmes overruled her due process objections, holding that “it is better for all the world, if instead of waiting to execute degenerate offspring for crime, or to let them starve for their imbecility, society can prevent those who are manifestly unfit from continuing their kind…Three generations of imbeciles are enough.”Buck v. Bell, 274 U.S. 200 (1927). Buck became the first of tens of thousands of Americans forced to undergo sterilization as part of a general belief in eugenics, a belief apparently shared by members of the Supreme Court. Read the linked article to learn more about Carrie Buck, including the total lack of any evidence of mental defect when she was sterilized.
Businesses have used the substantive due process clause to limit the award of punitive damages in tort cases. They argue that a startlingly high punitive damage award is a state-sanctioned deprivation of property, which means the due process clause is implicated. Furthermore, if the award is grossly excessive, then due process is violated. In 1996 the Supreme Court heard an appeal from German automobile manufacturer BMW arising from a case from Alabama.BMW of North America Inc. v. Gore, 517 U.S. 559 (1996). The plaintiff argued that although he bought his car new, it had in fact suffered some paint damage while in transit to the dealer, and the damage was not disclosed to him. When he found out about the prior damage, he sued BMW, arguing that BMW’s policy (which is that if damage to new cars can be repaired for 3 percent of the car’s value or less, then the car can be repaired and sold as new) damaged the resale value of his car. It cost six hundred dollars to fix the actual damage to his car, and the jury awarded him four thousand dollars in compensatory damages for the lost resale value on his car. The jury then awarded him four million dollars in punitive damages, which the Alabama Supreme Court reduced to two million. The Supreme Court found the punitive damages award unconstitutional under the due process clause. In its holding, the Court said that there are three factors that determine if a punitive damage award is too high. First is the degree of reprehensibility of the defendant’s conduct. Second is the ratio between the compensatory and punitive damage award; generally, this ratio should be less than ten. Finally, courts should compare the punitive damage award with civil or criminal penalties awarded for similar misconduct. The Court reiterated its holding again in a case involving a \$145 million punitive damage award against State Farm in a case where the compensatory award was one million dollars. State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003). Interestingly, Justices Scalia and Thomas, both conservative and generally seen as friendly to business interests, dissent from this view, finding that nothing in the due process clause prevents high punitive damage awards.
The final constitutional protection we’ll consider here is the Equal Protection Clause of the Fourteenth Amendment. The clause states that “No state shall deny to any person within its jurisdiction the equal protection of the laws.” As discussed previously, this clause incorporates Constitutional protections against the states in addition to the federal government. Although drafted and adopted in response to resistance to efforts at integration of African Americans in the South after the Civil War, the promise of the Equal Protection Clause (enshrined at the Supreme Court building, Figure 5.4.2 "U.S. Supreme Court Building") continues to find application in all manner of American public life where discrimination is an issue.
The Equal Protection Clause is implicated anytime a law limits the liberty of some people but not others. In other words, it operates to scrutinize government-sponsored discrimination. While the word “discrimination” has a negative connotation, in legal terms not all discrimination is illegal. A criminal law might discriminate against those who steal, for example, in favor of those who don’t steal. The Equal Protection Clause seeks to determine what forms of discrimination are permissible.
To establish a guideline for courts to use in answering equal protection cases, the Supreme Court has established three standards of review when examining statutes that discriminate. The three standards are known as minimal scrutiny, intermediate scrutiny, and strict scrutiny.
In the minimal scrutiny test, think of the courts turning on a twenty-watt lightbulb to look at the statute. There’s enough light to see the statute, but the light is so dim that the judges won’t examine the statute in great detail. Under this standard, government needs to put forth only a rational basis for the law—the law simply has to be reasonably related to some legitimate government interest. If the judge is satisfied that the law is based on some rational basis (keeping in mind that with the twenty-watt lightbulb, the inquiry isn’t very deep), then the law passes equal protection. Thus, a law that imprisons thieves easily passes minimal scrutiny, since there are many rational reasons to imprison thieves. As a matter of course, the vast majority of cases that are scrutinized under minimal scrutiny easily pass review. Most laws fall into this category of scrutiny by default—courts apply heightened scrutiny only in special circumstances. Even under this low standard, however, governments must be able to articulate a rational basis for the law. For example, in 1995 Colorado approved a state constitutional amendment that would have prevented any city, town, or county in Colorado from recognizing homosexuals as a protected class of citizens. The Supreme Court struck down the constitutional amendment, finding there was no rational basis for it and that it was in fact motivated by a “bare desire to harm a politically unpopular group.”Romer v. Evans, 517 U.S. 620 (1996).
The intermediate scrutiny test is reserved for cases where the government discriminates on the basis of sex or gender. Under this test, the government has to prove that the law in question is substantially related to an important government interest. Think of the courts turning on a sixty-watt lightbulb in this test, because they’re expecting the government to provide more than just a rational justification for the law. Using this test, courts have invalidated gender restrictions on admissions to nursing school, laws that state only wives can receive alimony, and a higher minimum drinking age for men. In one important case, the Supreme Court held that the system for single-sex education at the Virginia Military Institute violated the Equal Protection Clause. United States v. Virginia, 518 U.S. 515 (1996). On the other hand, courts have been willing to tolerate gender discrimination in the male-only Selective Service (military draft) system.
The strict scrutiny test is used when the government discriminates against a suspect class. Under this test, the government has to prove that the law is justified by a compelling governmental interest, that the law is narrowly tailored to achieve that goal or interest, and that the law is the least restrictive means to achieve that interest. Here, the courts are turning on a one-hundred-watt lightbulb in examining the law, so they can examine the law in great detail to find justification. The standard is reserved for only a few classifications: laws that affect “fundamental rights” such as the rights in the Bill of Rights and any government discrimination that affects a “suspect classification” such as race or national origin. In practice, when courts find that strict scrutiny applies, a law is very often struck down as unconstitutional because it’s so hard for government to pass this standard of review. Certainly, most laws that discriminate on the basis of race are struck down on this basis. There are a few exceptions, however, where the Supreme Court has held that racial discrimination may be permissible even under strict scrutiny. The first case rose in the height of World War II, when the federal government sought to intern Japanese Americans into camps on the basis that they may pose a national security risk. Fred Korematsu sued the federal government under the equal protection clause, arguing that as an American citizen the government was unfairly discriminating against him on the basis of race, especially in light of the fact that Americans of Italian and German descent were not treated similarly. In a 6–3 decision, the Supreme Court sided with the government. Korematsu v. United States, 323 U.S. 214 (1944). Although that decision has never been overturned, the U.S. government officially apologized for the internment camps in the 1980s, paid many millions of dollars in reparations, and eventually awarded Fred Korematsu the Presidential Medal of Freedom.
A second case involving the use of racial discrimination surrounds the issue of affirmative action in higher education. Many elite colleges and universities would have no problem filling their entire entering class with stellar academic students with high grade point averages and standardized testing scores. If they did this, however, their classrooms would generally look quite similar, as these students tend to come from a largely white, upper-middle-class socioeconomic profile. In a belief that diversity adds value to the classroom learning experience, the University of Michigan added “points” to an applicant’s profile if the applicant was a student athlete, from a diverse racial background, or from a rural area in Michigan. When this practice was challenged, the Supreme Court found that this point system operated too much like a race quota, which has been illegal since the 1970s, and overturned the system. Gratz v. Bollinger, 539 U.S. 244 (2003). In a challenge by a law school applicant denied admission, however, the Supreme Court upheld the law school’s system, which rather than assigning a mathematical formula, used a system where race was only a “potential plus factor” to be considered with many other factors. Grutter v. Bollinger, 539 U.S. 306 (2003). After extensive briefing, including a record number of amicus briefs, the Court found that diversity in higher education is a compelling enough state interest that schools could consider race in deciding whether or not to admit students. The Court did caution, however, that schools should move toward race-neutral systems and that affirmative action should not last more than twenty-five more years.
Key Takeaways
The Bill of Rights provides key civil liberties to all Americans and persons on U.S. soil. These liberties are never absolute, subject to competing interests that courts must balance in making their decisions. These rights also vary from time to time and are generally designed to protect the weakest in society rather than the strongest. Many, but not all, of the restrictions on government activity found in the Bill of Rights also apply to the states through incorporation. The First Amendment prohibits the government from establishing religion and from restricting the free exercise thereof. The First Amendment also prohibits the government from restricting the freedom of speech. Political speech is protected to the fullest extent by the First Amendment, while obscene and defamatory speech is not protected at all but subject to the doctrine of prior restraint. Corporations have some free speech rights under the corporate speech doctrine. Generally speaking, states may impose reasonable time, place, and manner restrictions on the delivery of speech. Procedural due process requires that the government use fair procedures anytime it seeks to deprive a citizen of life, liberty, or property. Substantive due process requires the government to articulate a rational basis for passing laws or, when fundamental rights are involved, to articulate a compelling reason to do so. Substantive due process has been used by the Supreme Court to limit punitive damage amounts. Equal protection requires the government to justify discrimination. In cases of racial discrimination, courts apply strict scrutiny to the law. In cases involving sex or gender discrimination, the courts apply an intermediate level of scrutiny, and in all other cases, courts apply a minimal basis of scrutiny.
Exercise \(1\)
1. Although the First Amendment prohibits the government from establishing religion, there is no prohibition on spending money to support religious life generally. For example, the White House Office of Faith-based and Neighborhood Partnerships provides funding to several religious organizations, including organizations that maintain discriminatory policies toward gays and lesbians and routinely engage in proselytizing activity. Do you believe that public money should be used to fund these groups? Why or why not?
2. In 2006 Ohio passed a law requiring all public schools that receive a donation of a plaque or poster with Ohio’s state motto, “In God We Trust,” to display the donation prominently in a school cafeteria or classroom. Do you believe this law is a violation of the First Amendment? Why or why not?
3. During the 2004 Super Bowl halftime show, a performance by Janet Jackson and Justin Timberlake ended in a “wardrobe malfunction” when Janet Jackson’s breast was exposed for a split second. CBS was fined more than half a million dollars for this violation after a record number of complaints were filed with the FCC. Do you believe that the government’s action was fair?
4. In 1969 the Supreme Court ruled that school officials could not restrict students from wearing black armbands as a peace sign protesting the U.S. involvement in the Vietnam War, ruling that students do not shed their constitutional rights at the schoolhouse gates. Tinker v. Des Moines Independent Community School District, 393 U.S. 503 (1969). In 2007 the Supreme Court held that school officials could restrict students from engaging in speech that might undermine the school’s zero-tolerance policy on drug use. What factors do you think might explain the Court’s decisions in these two cases?
5. Try to find out if the Supreme Court has ever overturned Buck v. Bell. Do you believe that an attempt by the state to force sterilization on mentally disabled women would survive a due process challenge today? If the government is permitted to force sterilization, does that mean that the government also has the power to force women to have children if it can articulate compelling enough reasons to do so?
6. Laws discriminating on the basis of age fall into the minimal basis scrutiny category. A state that wishes to raise the drinking age to twenty-five or the driving age to twenty, for example, needs to put forward only a rational basis for that law. Do you believe that age should fall into this category or into one of the other two categories for heightened review??
7. Do you believe that public universities should be able to consider race as a factor in deciding whether or not to admit a student? If a university is unable to consider race, how else might it design an admissions program to achieve a diverse classroom? What would have been the impact if the Grutter case had been decided in favor of the plaintiff?
5.05: Concluding Thoughts
For being such a short document, the Constitution can be complex to interpret. The needs of a varied and diverse nation, as well as corporate enterprises, all demand a constitutional framework that is rigid enough to provide strict checks against tyranny by the majority, while flexible enough to adapt to new changing societal values and mores, as well as rapidly changing business conditions. Understanding the framework of government established by the Constitution, the powers of each branch of government, and the substantive rights afforded to individuals and companies is a critical part of being an informed citizen. As our nation faces a new century with both uncertain currents and a future brighter than the Founding Fathers could have envisioned, the Constitution will continue to provide bedrock principles to ensure the “blessings of liberty” to all. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/05%3A_The_Constitution/5.04%3A_Business_and_the_Bill_of_Rights.txt |
Learning Objectives
After reading this chapter, you should understand what a contract is, how a contract is formed, the types of law that govern contracts, the elements of common-law contract formation, and defenses to contracts. You will learn about performance and discharge, breach, and remedies. You will also understand important differences between common-law contracts and contracts between merchants under the Uniform Commercial Code (UCC). You will recognize commonly used clauses in contracts and their importance. You will also learn about assignment, delegation, and parol evidence. At the conclusion of this chapter, you should be able to answer the following questions:
• What is a contract?
• How is a contract formed?
• When does common law govern contract formation, and when is the UCC relevant?
• What are the defenses to performance of a contract?
• What does it mean to breach a contract, and what are the consequences of breach?
• What are remedies for breach of contract?
• What common clauses can be used to accomplish certain goals, such as ensuring expediency, limiting liability, or restricting assignment?
Clint Eastwood had a long-term relationship with Sondra Locke. Sadly, the relationship deteriorated and, allegedly, ended on unfriendly terms. The couple never married, but they shared a household for many years, and they worked on many professional projects together. When the relationship ended, Locke sued Eastwood for various causes of action. To settle the case, Eastwood proposed, among other things, that if Locke dropped the lawsuit against him, he would secure a development deal for Locke at Warner Bros. Inc. Locke was not only an actress; she was also a director. No doubt assuming that this deal would advance her professional interests and, at the same time, bring a long-standing personal dispute to an end, Locke agreed. Locke entered into a settlement agreement with Eastwood, and as promised, she contemporaneously entered into an agreement with Warner Bros. The agreement with Warner Bros. had two components. First, it required Locke to submit work that she was interested in developing, before she submitted it elsewhere. Warner Bros. was to accept or reject the work within thirty days. For this part of the contract, Locke would receive \$250,000 per year for three years. Second, the contract was a \$750,000 “pay or play” deal, which gave Warner Bros. a choice between using Locke’s services as a director and paying Locke a fee. Though Locke did not know this, Eastwood agreed to reimburse Warner Bros. for the cost of this contract if she did not have success in developing her projects or using her director services. Warner Bros. paid the \$1.5 million contemplated under the contract, but it did not develop any of Locke’s thirty proposed projects, and it did not hire her to direct any films.
Locke argued that the agreement had been a sham, because Warner Bros. had never intended to make films with her. She also argued that its only motivation for entering into the contract with her was to help Eastwood in settling her earlier claims against him. Locke sued Warner Bros. for a number of claims, including a breach of the implied covenant of good faith and fair dealing, and fraud. She alleged that she was deprived of the benefit of the bargain and that Warner Bros. had no intention of honoring its agreement with her. Warner Bros. won at trial, and Locke appealed.
The California Court of Appeals found that while the creative decisions of Warner Bros. were not appropriate for judicial review, acting in bad faith by refusing to consider the merits of Locke’s proposals was a matter for the courts. The court also noted that even though the contractual sum of money was paid, that alone did not constitute performance under the contract. Part of the value of the contract for Locke was the opportunity to work on projects that would earn additional money and promote and enhance Locke’s career. Moreover, the appellate court found that if Warner Bros. never intended to work with Locke but had entered into the contract solely to accommodate Eastwood, then a lack of good faith might be inferred.Locke v. Warner Bros. Inc., 57 Cal. App. 4th 354 (1997).
What do you think about this case? After all, Locke was compensated the amount of money explicitly contemplated under the contract. Should it matter whether one party acts in good faith or not? We might say that this contract contains all necessary elements to be enforceable, and it looks on its face as if it has been performed. However, a lack of good faith by one party could lead to damages. After the court’s decision, the parties settled for an undisclosed amount.
Contracts are a fundamental part of doing business. A contract is a legally enforceable promise. As you know, breaking promises is a big deal. Ethical questions arise when promises are broken. For example, what if you promised to mow your elderly neighbor’s lawn because you wanted to help him, but then you never got around to doing it? Wouldn’t you feel guilty about watching his grass grow into tall weeds?
When the promise is a legally enforceable promise, feeling guilty about breaking the promise is not the only fallout. When a legally enforceable promise is broken, the injured party can seek damages. In contracts, this usually means that the party who breaches the contract must pay the injured party an amount that would make that party whole again. Also, some people disagree about whether breaching a legally enforceable promise—that is, a contract—carries any ethical implications. For instance, if a company decides that it is less expensive to pay damages than fulfill its promise by performing under a contract, it might make the decision to breach based on rational decision making. That is, since it will be less expensive to breach, it makes sense to breach. Others disagree with this approach, pointing out that reliance on promises is an important part of business that provides necessary stability, regardless of whether keeping the promise makes economic sense or not.
If you had a business, would you breach a contract to save money? Why or why not?
Contracts are agreements between two or more parties. Generally speaking, contracts are a form of private law, because the terms of the contract are binding on those parties but not on everyone. The contract represents mutual assent to a bargained-for exchange between parties.
Generally speaking, in the United States parties may enter into contracts for whatever they wish and under any terms that they agree on. In other words, parties may assent to agreements even if those agreements represent bad bargains. However, there are certain external restrictions on our abilities to form contracts. Additionally, certain internal (to the contract) restrictions may exist on our abilities to exercise rights or to engage in other contracts.
Legal restrictions, external to the contract, limit our ability to bargain. For example, if you wanted to hire someone to work for your company, you could not contract with that person to work one-hundred-hour workweeks at twenty-five cents per hour. Even if you could find someone to work under those conditions and even if you both agreed to those terms of the contract, our statutory and regulatory laws prohibit you from entering into a contract with those terms. Such wages would violate minimum wage laws.
There may also be restrictions that are internal to the contract. Imagine that you entered into an employment contract with a company to work for \$55,000 per year, plus benefits, and for a term of two years. You might be pretty happy about that. But what if, one month later, another company offered you the same position at its company, but for a salary of \$65,000 per year, plus benefits. The better offer does not invalidate your first contract. In fact, in such a case, your first contract would probably contain a noncompete clause that would prohibit you from working in a similar capacity for a specified length of time and geographic area. So even if you decided to breach your first contract to enter into the second, you would be prohibited from doing so under the noncompete clause.
Key Takeaways
Contracts are legally enforceable promises that, if breached, result in compensable damages. Contracts are a fundamental part of doing business, which require not only performance of the terms of the contract but also good faith in dealing. Parties may enter into a contract for any agreement with terms, providing the agreement is legal. Also, restrictions on ability to contract may be external, such as those imposed by law, or they may be internal, such as those imposed by clauses like noncompete agreements. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/06%3A_Contracts/6.01%3A_Introduction.txt |
Learning Objectives
• Find out when the Uniform Commercial Code (UCC) is the appropriate law to apply and when the common law is the appropriate law.
• Learn the elements of common-law contracts.
• Identify the difference between common-law contracts and contracts between merchants.
A contract is a legally enforceable promise. Therefore, it is important to know whether promises made are legally enforceable. You certainly have made many promises in your life. You have probably broken a few promises, too. For example, if you promised your best friend that you would be best friends forever, but then your relationship changed, we might say that is a broken promise. However, you would not be held legally liable to pay damages for breaking that promise. On the other hand, if you promised your bank that you would make payments to it in exchange for the bank loaning money to you to purchase a car, and if you broke that promise by failing to pay as scheduled, then you have broken a legally enforceable promise. The bank could seek damages from you to make itself whole again. What is the difference between these two promises? Why would you have to pay damages to the bank but not to your former best friend? More specifically, why is one considered a breach of contract and the other simply a broken promise?
This section explores contract formation. We can examine the elements of formation to determine whether the contract is valid or whether it suffers some deficiency that renders it not legally enforceable.
In the United States, two primary sources of law govern our contracts: the common law and the Uniform Commercial Code. The Uniform Commercial Code (UCC) Article 2 governs contracts between a merchant and the sale of goods. Essentially, the UCC contains two sets of rules for contracts. One set involves rules for everyone, and the other set involves rules for merchants. In this section, we will explore the UCC as it applies to merchants. Chiefly, we will examine how the UCC requirements differ from common law in contract formation
However, we will first address common-law contracts. Common law governs contracts for services as well as contracts not otherwise governed by the UCC. It is important to recognize the elements of common-law contract formation because they are more stringent than the requirements for formation between merchants under the UCC. If all elements of common-law contract formation do not exist, then the contract may be void or voidable.
The elements of common-law contract formation include offer, acceptance, and consideration. Offer and acceptance together form mutual assent. Additionally, to be enforceable, the contract must be for a legal purpose and parties to the contract must have capacity to enter into the contract.
An offer gives power of acceptance to another party, and it includes the agreement’s essential elements, which must be definite and certain. For example, if an offerer says to you, “I offer to sell you my scooter for four hundred dollars,” then that offer is valid. It contains the price, the person to whom the offer is made, and the object of the offer (i.e., the scooter). It creates a power of acceptance in you, the offeree.
Importantly, in common-law contracts, the acceptance must be a mirror image of the offer to constitute valid acceptance. This means that the acceptance must be precisely the same as the offer. If the acceptance is not precisely the same, then it will fail to meet the requirements of an acceptance, and it will not constitute a valid element of formation in contract. To accept the offer, the offeree could say something like this: “I agree to buy your scooter for four hundred dollars.” If a counteroffer is made, then that would not be acceptance, because the counteroffer would not be a mirror image of the offer itself. So, for example, if the offeree said, “I agree to buy your scooter for three hundred dollars,” that would not be an acceptance. In fact, a counteroffer is a rejection of the offer. Once an offeree rejects an offer—either outright (e.g., by declining to accept) or through counteroffer, the offerer is free to walk away from the failed negotiation. In this example, he no longer has to sell his scooter at all, not even if the offeree changes his mind and agrees to pay four hundred dollars. Likewise, if the offerer revokes an offer before the offeree accepts, then the power of acceptance has been withdrawn by that revocation. The offerer would no longer have to sell the item originally offered. If the offerer wished to limit the time that an offer was valid, he could do so by limiting the time that the offer may be accepted. If the offer is not accepted during that time, then the offerer is not required to honor any acceptance that is made after expiration of the offer.
What if you saw an advertisement for a scooter for sale at a local shop? Perhaps the advertisement looked like this:
Do you think that this advertisement should create the power of acceptance in you, a potential customer? The fact is that an advertisement is not an offer. It is simply an invitation to bargain. Advertisements are requests for people to make offers. This places the power of acceptance on the merchant, who is free to reject offers or to choose to whom he sells. Of course, certain statutory protections exist today to protect consumers against unscrupulous merchants who might engage in unethical behavior, such as bait-and-switch or false advertising, or race-based denial of services or refusal to contract. Specifically, consumer protection statutes and civil rights statutes, respectively, would protect consumers in such circumstances.
If an offer is valid, then the acceptance must be a mirror image, as mentioned previously. A bilateral contract is a contract in which both parties make a promise. The previous example is an example of a bilateral contract. The following is a promise for a promise:
The offerer says, “I offer to sell you my scooter for four hundred dollars.”
The offeree replies, “I agree to buy your scooter for four hundred dollars.”
Specifically, it is a promise to sell the scooter in exchange for a promise to buy the scooter for four hundred dollars. Since this is a promise for a promise, then this is a bilateral contract.
A unilateral contract is one in which the accepting party may only accept through an action. Here is an example:
The offerer says, “I will sell this scooter to the first person who puts four hundred dollars cash in my hands.”
The offeree says nothing but places four hundred dollars cash into the offeror’s hands.
This is a promise for an action. Specifically, it is a promise to sell the scooter in exchange for the action of placing four hundred dollars cash into the offeror’s hands.
Common-law contracts can be either bilateral or unilateral.
Additionally, all common-law contracts must contain valid consideration. This means that there must be a bargained-for exchange of acts or promises, and both parties must incur new legal detriment or obligations as a result of the contract. Imagine that you have accepted a new position with a company. You have a valid employment contract that you’ve successfully negotiated prior to beginning work. All terms of the contract are valid, and both parties are bound to the contract. Basically, this means that you have agreed to work for a specified period of time, and your employer has agreed to compensate you with a specified salary and benefits in exchange for your work. So far, so good, right?
Now, imagine that during your first week, your boss appears in your office and asks you to sign a new contract that, in essence, is a noncompete agreement. This means that your employer now wants you to sign a new contract agreeing not to compete with the company if you decide to terminate your employment arrangement. The employer wants you to make this promise, but the employer does not offer anything additional in return. For the purposes of this example, let’s say that you sign the new agreement. Is this new agreement valid and binding on you? Probably not. Why? Because the company has not suffered any new legal detriment or obligation as a result of the contract. You have agreed to refrain from competing with the company if you leave, but the company itself has not given you anything in return for your promise. To make this contract binding against you, your employer should have provided consideration. For example, it could have asked you to sign the noncompete agreement in consideration of an additional one thousand dollars of salary per year. Then, the contract would have consideration and it would have a much greater chance of being found to be valid. Better yet, the company should have negotiated the noncompete agreement along with your original contract before you assumed your new position.
Let’s continue our example of an offeror who offers to sell his scooter for four hundred dollars. He says, “I offer to sell you my scooter for four hundred dollars.” If you reply, “I agree to buy your scooter for four hundred dollars, if I don’t find one that I like more,” then that does not constitute valid consideration. This is because you have placed a condition on the consideration. In essence, you have made what appears to be a promise to do something, but instead of being a promise, it is only an illusion of a promise. This is called an illusory promise, and it does not constitute valid consideration. There is no legal detriment to you here, because you might find a scooter that you like more than the one offered by the offeror. You have a way out. A legal detriment is a detriment (or burden or obligation) that is legally enforceable. You cannot “get out” of the promise without suffering legal detriment. The other party must be able to rely on the promise for it to constitute valid consideration. The thing bargained for can be an act or a promise (either to do something or to refrain from doing something.)
Additionally, for a contract to be valid, the subject matter of the contract must be for a legal purpose. If a distributor of illegal drugs hires a pilot to fly his illegal cargo to a particular place in exchange for payment, this is a contract for an illegal subject matter. If the drug dealer fails to honor his agreement to pay, or if the pilot fails to honor his agreement to transport the cargo, neither aggrieved party will find a remedy in our courts, even if the elements of contract are all present and perfectly formed.
Moreover, the parties to contract must have capacity to enter into the contract for its terms to be enforceable against them. Adults of sound mind have capacity. Minors lack legal capacity, but they may enter into contracts that they may cancel at their sole option. In other words, a minor who enters into a contract with a party who has capacity may void the contract, but the other party may not. This means that any contract with a minor is voidable by the minor under the infancy doctrine.
Let’s compare common-law contract formation with UCC contract formation. Recall that common law governs contracts for services and contracts not governed by the UCC. Article 2 of the UCC governs the sale of goods, which is defined by §2-105 and includes things that are moveable, but not money or securities. It does not include land or houses. Contracts between merchants are also governed by article 2 of the UCC. Generally speaking, §2-104 defines a merchant as a person who deals in goods or holds himself out as having special knowledge or skill regarding the practices or goods that are the subject of the transaction. Since contracts law is a state law issue, each state can have different laws related to contracts. The UCC seeks to provide uniformity to contracts law among the different states. However, like other uniform laws, the UCC does not become a law until state legislatures adopt it as law. All fifty states have adopted some version of the UCC.
As you can imagine, contracts between merchants do not always contain offers that include definite terms, and acceptances are not always mirror images. Merchants typically place a purchase order when they wish to purchase materials, and the seller often sends an invoice with the order when it ships. Merchants frequently use boilerplate language in their individual purchase orders and invoices. Obviously, not every merchant’s contract will contain the same language as those of other merchants. This can lead to discrepancies between terms that would be fatal in common-law contract formation, otherwise known as battle of the forms. However, the UCC provides more flexibility in contract formation than exists in common-law contracts, thereby accommodating the reality of business practices. The requirements for common-law contract formation would be too burdensome for merchants. Can you imagine if every merchant had to issue offers with definite terms and receive mirror image acceptances for every item that it sold or purchased to have valid, enforceable contracts? Such a burden might cause commerce to come to a screeching halt. Or it might lead to many contracts disputes.
The UCC also embodies some elements of the Statute of Frauds. The Statute of Frauds requires certain types of contracts to be in writing to be enforceable. Specifically, it requires contracts to be in writing for goods priced at five hundred dollars or more and signed by the defendant, for those contracts to be enforceable. Other important types of contracts relevant to business that must be in writing and signed by the defendant to be enforceable include contracts for any interest in land, promises to pay the debts of another, and contracts that cannot be performed within one year. The types of contracts that are contemplated by the Statute of Frauds but are not captured by the UCC are often embodied in state statutes. The peculiar name—the Statute of Frauds—is derived from its early incarnation in seventeenth-century England, when a statute was passed by parliament to reduce or prevent fraud in property transactions and other important civil matters.
Of primary concern to students of business are the differences between common-law contracts and the UCC. When analyzing a contracts issue, identification of the type of law that governs the contract should be addressed first. This is because you cannot know which rule applies unless you know which type of law is applicable.
The primary differences between common-law contracts and the UCC are in the UCC’s relaxation of various common-law contract formation requirements. See Table 6.1 "Differences between Contract Formations by Type of Law" for a comparison between common-law and UCC contract formation requirements. When a battle of the forms ensues between merchants, for example, the conflicting terms are not fatal to the contract. This is a major departure from the mirror image rule required by common-law contracts. For the UCC, the primary issue is whether the parties intended to enter into a binding agreement. New or additional terms included in an offer will become part of the contract on acceptance. Terms that conflict with each other will “fall out” of the contract and be replaced by UCC gap fillers, which can create the terms of the contract. Likewise, terms that are left open will be filled in. Gap fillers are terms provided by the UCC, and they can be inserted into a contract when those terms are not definite. While prices, delivery dates, warranties, and other terms can be “filled in” by the UCC gap fillers, quantity cannot. Quantity, therefore, is an essential term that must be specified in the contract for it to be binding.
Table 6.1 Differences between Contract Formations by Type of Law
UCC Common Law
Any manner that shows agreement to contract (e.g., words, actions, writing) Mirror image acceptance required
Quantity term required; other terms may be filled in with gap fillers Essential terms must be definite
Contracts between merchants; contracts for sale of goods priced at \$500 or more Contracts for services and for interest in real property
Key Takeaways
A contract is a legally enforceable promise. Common law and the UCC are different sources of contract law. Common law is the appropriate type of law for service contracts and contracts that do not fall under the UCC, like real estate contracts. The UCC governs contracts involving the sale of goods with a price of five hundred dollars or more and in contracts between merchants. Common-law contract formation requires a valid offer, acceptance, and consideration. The parties must have capacity, and the subject matter must be a legal purpose. The UCC relaxes formation requirements by allowing the use of gap fillers for undefined or conflicting terms and by allowing a contract to be formed by any manner that shows agreement to contract. Quantity is a required term for contracts governed by the UCC.
Exercise \(1\)
1. If a contract was not entered in good faith, do you think that fact alone should matter? Consider Locke v. Warner Bros. Inc., which was discussed in the introduction to this chapter. All essential elements of the contract appear to have existed, and the parties performed as required by the wording of the contract. How can lack of good faith be shown?
2. Has anyone ever broken a promise to you? Were those promises legally enforceable promises? Why or why not? Be sure to analyze the agreement by checking to see if all elements of contract formation were present. Remember to first determine whether the promise was one governed by the UCC or by common law.
3. What are the dangers inherent in making a counteroffer? Imagine that you really wanted to sell your house. You receive an attractive offer, but you wondered whether you might be able to sell the house for a little more money. What types of things should you think about before submitting a counteroffer? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/06%3A_Contracts/6.02%3A_Formation.txt |
Learning Objectives
• Learn what constitutes performance.
• Understand what it means to discharge obligations in a contract.
• Explore different standards of performance.
• Examine breach.
• Explore defenses to breach.
• Learn about equitable remedies.
A contract is an enforceable promise. When the promise is fulfilled, then the contract terms have been satisfied. This means that the parties are discharged from the contract, because they have already fulfilled their legal duties under it. That is, they have satisfactorily performed their obligations under the contract. Performance simply means undertaking the legal duties imposed on us by the terms of the contract. This is certainly what parties hope for when they enter into a contract—the successful execution of the terms of the contract and subsequent discharge from it.
But how do we know whether the contract terms have been performed? Sometimes it’s easy to determine. For instance, if I offer to sell you my scooter for four hundred dollars, you agree to buy my scooter for four hundred dollars, and we exchange those items, then we have fulfilled our obligations under the terms of the contract. We formed a contract, we fully performed our obligations under it (known as complete performance), and we are subsequently discharged from further duties arising under that contract.
In other cases, whether a party has performed can be trickier to determine. For example, imagine that you hire a builder to construct a new home for you. You specify all dimensions of the home, as well as your chosen building materials. Certainly, this would be a very detailed contract. Imagine that all essential elements have been determined and that the contract is valid. In short, the builder agrees to build your specified home, and you agree to pay the builder the agreed on price. Imagine that everything goes according to plan. When your home has been constructed, you visit it for the first time. To your dismay, you see that the foyer has been tiled in red ceramic, even though you clearly specified—and the contract clearly reflected—that the foyer should be tiled in blue ceramic. However, on your further inspection, every other item specified in the contract has been completely performed. Would we say that the builder has performed his duties under this contract? The item at issue is the problem with the foyer tile. Does this error rise to breach? More importantly, does this excuse your obligations under the contract to pay the builder for his work?
When a party fails to perform under the terms of the contract without a legally justifiable reason, the party is said to be in breach of the contract. However, in a service contract—such as a service to build a house—the standard of performance is substantial performance. This means that the performing party acted in good faith and conveyed enough benefit of the contract to the other party so that the other party can use the benefit for its intended purpose, and the defects arising under the contract may be remedied by money damages. A material breach in a service contract is when a party has not substantially performed under the terms of the contract. A minor breach is when the party has substantially performed but has not strictly performed. In our example, installation of the red tile in the foyer would not rise to material breach, because presumably, the builder acted in good faith, he produced a house that is capable of being used for its intended purpose, and the defects (the red tile) can be remedied through monetary damages. They simply need to be replaced by blue tiles. This was a minor breach. If this were your contract, you would have to pay the builder as required under the contract, less the cost of replacing the tile.
Consider the firing of Texas Tech’s head football coach, Mike Leach, in "Hyperlink: Coach Mike Leach" to practice your analytical skills. Try to identify what additional information you would need to determine whether substantial performance exists, or whether the contract has been materially breached.
Sometimes, substantial performance is not adequate. Adherence to a strict performance standard requires express terms in the contract to that effect and circumstances where such a high standard is reasonable. In our scooter example, if you tried to give the offeror three hundred dollars in cash and one hundred dollars in postage stamps, then that would most likely not satisfy the terms of the contract. You might recall that the contract was a bargain for a scooter in exchange for four hundred dollars. Here, strict performance makes sense and is reasonable.
Performance to the standard of personal satisfaction can be enforced if the contract expressly requires it. This means that the performance under the contract is scrutinized subjectively, either by one party to the contract or by a third-party beneficiary specified in the contract. If the subject of the contract is something for which approval is dependent on someone’s subjective opinion, like personal taste, then assessment can be made on a subjective standard providing this standard is clearly specified in the contract. For example, if you owned a piano bar, and you wished to hire a truly inspired pianist for entertainment, you might enter into a contract with a pianist subject to a personal satisfaction standard. Even if that person could tickle the ivory flawlessly, you might decide that his or her music is technically accurate but not truly inspired. Providing that your contract with the pianist allows for personal satisfaction to be the standard of performance, you may terminate that contract based on his or her failure to meet the personal satisfaction standard. This standard is unlike the substantial performance standard, which requires an objective assessment based on the reasonable person standard. Referring again to "Hyperlink: Coach Mike Leach", which standard appears to be controlling Texas Tech’s decision to terminate Coach Leach’s contract—personal satisfaction or substantial performance? Which standard is appropriate for a contract for coaching services?
Hyperlink: Coach Mike Leach
Head football coach Mike Leach of Texas Tech was fired for breach of contract. He had recently signed a \$12.7 million contract for five years, and he had been named by the Associated Press as the Big XII Coach of the Year in 2008. However, that didn’t stop Texas Tech from firing him, citing breach of performance as the reason for the termination. Under the terms of his contract, he was to “assure the fair and responsible treatment of student-athletes in relation to their health, welfare, and discipline.” Allegedly, Coach Leach forced a student athlete to stand in a shed after the athlete was diagnosed with a mild concussion. Leach’s supporters argue that the “shed” was a comfortable garage-like room with a cooler and a fan and that Coach Leach was simply having the player stand inside, out of the sun, in accordance with medical orders. Others argue that this was a sadistic punishment that was inappropriately levied against an injured player. Was Leach being cruel, or was he being protective of his charge in accordance with his contract terms?
Underlying this controversy are allegations that the firing occurred because Leach interviewed with another university unbeknownst to Texas Tech and because he has a colorful personality that might offend some people. For instance, he allegedly blamed his players’ “fat little girlfriends” for distracting them to their defeat against Texas A&M.
Coach Leach was fired just before receiving an alleged \$800,000 contractual bonus.
Check out the story here:
http://www.cnn.com/2009/US/12/31/texas.tech.leach/index.html?iref=allsearch
Check out the video of the story here:
http://sports.espn.go.com/ncf/bowls09/news/story?id=4781981
Watch Coach Leach here:
http://sports.espn.go.com/ncf/bowls09/news/story?id=4781981
Watch speculation about Coach Leach’s likelihood of being hired here:
http://sports.espn.go.com/ncf/bowls09/news/story?id=4781981
See the exercises in this section for related questions and discussion.
As mentioned previously, when the promises in a contract have been fulfilled based on the appropriate standard—substantial performance, strict performance, or personal satisfaction—then the parties are discharged. However, when a material breach occurs, the injured party may bring a claim for damages. But that isn’t necessarily the end of the story. The breaching party may have a valid reason for breaching the contract. These valid reasons are known as defenses to contract. These defenses include formation problems, lack of capacity, illegality of subject matter, impossibility, duress, unconscionability, undue influence, violation of the Statute of Frauds requirement that certain types of contracts must be in writing to be enforceable against the defendant, exceeding the statute of limitations, mistake, misrepresentation, fraud, commercial impracticability, and frustration of purpose. Bankruptcy discharge is a permanent legal excuse from performance, and it will discharge obligations that are dischargeable by law if the debtor successful fulfills his obligations under the bankruptcy. Obligations that are not dischargeable by law will not be permanently discharged by a bankruptcy. However, during the bankruptcy, the performance of contract terms requiring payment of debt incurred prior to filing the bankruptcy petition is suspended by the court until the bankruptcy is terminated either by successful completion of the bankruptcy or by dismissal of the case.
Formation problems in common-law contracts relate to whether the offer, acceptance, and consideration were valid. For example, if the offer did not contain the essential terms in definite and certain form, then that offer will not be valid. If I offered to sell you my house for a fair price, it would not be a sufficient offer because the price term is an essential element, and in this offer it is vague. To say that a house will be sold “for a fair price” is not specific. Likewise, in a common-law contract, if the acceptance is not a mirror image of the offer, then the acceptance will not be valid. Similarly, if consideration does not firmly commit the parties to the deal, then consideration will fail, as is the case with an illusory promise. For example, if I offered to sell you my house for \$150,000, and you agreed to buy it “if you like it,” then that is not a firm commitment. Consideration will fail, and the contract has not formed. As a practical matter, how can this defense be used? The defendant simply needs to show that the contract was never formed in the first place, due to one or more deficiencies in formation. Keep in mind, however, that if the Uniform Commercial Code (UCC) is the relevant type of law, formation is much simpler than in common law. For example, all essential elements do not need to be stated in definite and certain terms (but quantity must be stated), and acceptance does not need to be a mirror image of the offer. Accordingly, in contracts in which the UCC is the relevant type of law, this defense can be more challenging to successfully mount.
Sometimes when all elements of the contract are not present, the court will enforce the promise through an equitable remedy to avoid a perceived injustice that would occur if the contract failed based on a formation defect. Quasi-contract and promissory estoppel are two types of equitable remedies that a court may impose. When detrimental reliance is found, an equitable remedy can substitute for consideration. This allows the court to enforce the terms of the “contract,” even though, technically speaking, there was no contract to begin with.
Quasi-contract is determined when one party will receive a benefit from the other unjustly (unjust enrichment), and the party who tendered the benefit reasonably expected to be paid for it. The party who received the benefit knew that the other party reasonably expected to be paid. For example, imagine that your neighbor hired painters to paint his house, but the painters accidentally appeared at your house to work. Instead of sending them away, you decided to let them paint your house, but you did not tell them that they were at the wrong house. At the end of the job, they demanded payment. You point out that they never had a contract with you. While this would be true in fact, the issue is that you would be unjustly enriched by their painting of your house if you were not made to pay. Additionally, you knew that the painters would reasonably expect to be paid for their services, and you did nothing to stop them. This would be a good case for a court to impose the equitable remedy of quasi-contract. The damages awarded in such case are called quantum meruit, which means “as much as is deserved.” The painters will receive the value of their services in damages. Compare this situation with one in which you were on vacation when the painters painted your house. You knew nothing of their presence. In such a case, quasi-contract would not be imposed as an equitable remedy because you were not aware of their presence. In fact, you would have a potential claim against the painters for interfering with your property and entering your land without your permission. Promissory estoppel is another equitable remedy. It is imposed on parties when one party detrimentally relied on another’s promise, and to avoid injustice, the enforcement of the promise is required. Like quasi-contract, when promissory estoppel is used, there is some formation problem with the contract so, technically speaking, no contract exists.
The remaining defenses discussed in this chapter are relevant if the contract is valid. That is, there are no formation problems. For example, if a party lacks capacity to enter into a binding contract, that can be used as a defense. When people lack the mental ability to understand, they lack capacity. Sometimes, it may seem that someone understands, even though he or she might actually lack legal capacity. This is the case with minors. Though some may certainly understand the terms of a contract, they lack the legal capacity to be bound to it. That means that they can disaffirm the contract if they wish. Likewise, someone who suffers from a temporary or permanent cognitive defect lacks capacity to be bound to a contract. This may be the case with an infant, a person who suffers from dementia, or a person who has other profound cognitive or mental impairment. Use of alcohol or drugs may impair capacity, but the courts are reluctant to find this as a convincing defense, particularly if the person voluntarily imbibed in the alcohol or drug use themselves. If they were involuntarily drugged, however, then lack of capacity can be a good defense. If someone does not read or speak the language in which the contract is written, that can also indicate a lack of capacity.
If the subject matter of a contract or the terms of the contract are illegal, then the contract may be void at the outset, or it may become void if the subject matter or the terms of the contract become illegal after the contract is formed. The former case can be illustrated by imagining a contract for the production of illegal drugs. A defense to performance is that the contract itself concerns an illegal subject matter. A court will not step in to such a contract to enforce its promises.
The latter case of illegality of the terms of the contract is an example of impossibility as a defense. Impossibility is a defense that can be used when performing the contract has become truly impossible. For example, if you entered into a contract to do business in a country that was subsequently placed on a no-trade list by the federal government, then you would be excused from performing your obligations under that contract, because it would violate federal law for you to perform as promised. It would be impossible, and impossibility would be a valid defense. Sometimes impossibility does not involve the legality of the subject matter or the terms of the contract. Instead, it might simply be a matter of the destruction of the subject matter of the contract. In our scooter example, imagine that before the transaction was completed, the scooter was crushed by the trash collector by accident. The subject matter of the contract was destroyed, and so it would be impossible for the offerer to perform. The offerer would not need to find another scooter to sell to fulfill the obligations under the contract. Instead, he or she would use the defense of impossibility.
Another defense to contract performance is duress. If a party suffers from duress when entering the contract, that party will have a valid defense. Duress means that the party had no other reasonable alternative but to enter into the contract. The party was coerced into entering into the agreement. For example, imagine that you entered into a contract for automobile insurance. Part of your insurance contract requires your insurance company to defend you in the event of a lawsuit arising from a traffic accident. Imagine that you are involved in a traffic accident and your insurance company refuses to defend you. This is bad news, because you will still need to mount a defense. You will probably expend a great deal of money defending yourself, not to mention trying to launch a complaint against your insurance company for breach of contract. After spending all of your savings and borrowing just to pay your bills, imagine that your insurance company comes to you with an offer to pay you fifty thousand dollars if you sign a waiver that it has no liability to you. You will probably sign that waiver and take the money. Why? Because you have no reasonable alternative. This is an example of economic duress, and it is likely that no court would enforce the waiver for the benefit of the insurance company given such facts. The insurance company forced you into signing an agreement with it that you would not have signed if you had any other reasonable alternative.
Unconscionability is a defense used when the contract contains markedly unfair terms against the party with less bargaining power or sophistication than the party who created the terms and induced the other party to sign it. For example, imagine a biotech company discovering a cure for cancer from a plant growing on the private lands of an indigenous people. Imagine that the indigenous people did not understand the importance of the discovery, and they did not understand the value of it. If the biotech company offered to pay for the absolute and complete rights to the plant with ten dollars and a bag of flour, that contract might be said to be unconscionable.
Undue influence is a defense that can be used when one party ceases to be able to exercise his or her free will due to the superior power and influence exerted over that party by the other. For example, imagine an elderly person who is completely isolated from social contact due to poor health and remote living conditions. That person might be quite lonely and eager for company. Say that an unscrupulous person entered that elderly person’s life and exerted influence over that person so that the elderly person really could not exercise his free will any longer. If, consequently, the elderly person entered into a contract with the other party to transfer all of his wealth to that person, we might say that this is a case of undue influence. How might this happen? Maybe the unscrupulous intruder is the only human contact that the elderly person has, and maybe he or she led the wealthy elderly person to believe that the only way to salvation is by handing over his assets.
Remember, too, that the Statute of Frauds requires certain contracts to be in writing and signed by the defendant to be enforceable against the defendant. If those types of contracts are not in writing, that can be used as a defense to performance. Contracts for any interest in land, in consideration of marriage, and to pay the debts of another that cannot be performed within one year and contracts for the sale of goods with a price of five hundred dollars or more are all examples of contracts that are required to be in writing to be enforceable according to the Statute of Frauds. If a contract exists for these items, but the contract is not in writing, it may be performed. However, if there is a dispute arising under the contract, it will not be enforced because it violates the Statute of Frauds requirement for a writing.
The statute of limitations is an affirmative defense that can be raised by a defendant to argue that the complaint is being brought too late, by law, to do anything about it. This means that if a dispute arises under a contract, then the plaintiff must bring a complaint concerning that dispute within a certain time period. Every state has different statutes of limitations for different types of disputes. Contracts statutes of limitations range from three to ten years, depending on whether the contract was oral or written, and depending on the jurisdiction.
Mistake is rarely a successful defense to contract, but it is a defense nonetheless. Mistake does not mean bad bargaining. After all, we have the freedom to bargain badly, and the courts will not step in to save us if we do so. For instance, if you agree to buy a house for \$170,000, but the house is only worth \$150,000, you may have bargained badly, particularly if the seller did not deceive you in any way. The court will not step in to rewrite the contract or allow you to use mistake as a defense to excuse your performance. Indeed, the court will enforce the terms of the contract if it is a valid contract. Mistake refers to something that is truly a mistake either by one party or by both. If the parties to a contract truly make a mistake with respect to essential terms of the contract, then that can be used as a defense to performance.
Misrepresentation and fraud are also defenses to contract. Misrepresentation is when a party makes a false statement that induces the other party to enter into the contract. Fraud is a closely related concept, and it simply means that one party has used deception to acquire money or property. Often, unscrupulous salespeople will commit fraud or misrepresent the subject matter of the contract in such a way that the other party will enter into the contract. However, fraud and misrepresentation both may be used as successful defenses in such circumstances.
Commercial impracticability is a defense that can be used when fulfilling a contract has become extraordinarily difficult or unfair for one party.
Frustration of purpose is when the contract has become essentially worthless to one party, though the event giving rise to that state was nonexistent or unknown to both parties to the contract at formation.
Finally, sometimes a party to a contract files for bankruptcy protection. When that party is required to pay a debt that was incurred before the bankruptcy was filed, that duty is suspended temporarily or permanently when the bankruptcy is filed through the court’s automatic stay. In other words, the debt does not have to be paid during the course of the bankruptcy. At the conclusion of the bankruptcy, if the debtor is successful in bankruptcy and if the contract obligation is a dischargeable debt, then the debt will never have to be paid. The debt is, in fact, discharged. Bankruptcy is a defense to performance of contract for debtors who file for bankruptcy protection.
Remedies for breach of contract are typically monetary damages. Expectation damages, including compensatory and consequential damages, can be recovered. However, consequential damages may not be speculative. Indeed, they must be foreseeable to both parties at the time of the contract formation to constitute damages by breach. Specific performance might be required under certain types of contracts, such as in contracts for land. For example, in contracts for real property, the assumption is that land is unique. Therefore, monetary damages are not adequate, because “replacement” land cannot be found that would be like the land that is the subject of the contract. Importantly, specific performance is not an appropriate remedy for service contracts, given the prohibition against involuntary servitude in the Thirteenth Amendment to the U.S. Constitution. Finally, it is important to note that on breach, the injured party has a duty to mitigate his damages. This means that he must avoid damages by making reasonable efforts to do so. If a tenant breaches a contract by moving out of his apartment before the lease is over, the landlord will be able to recover damages from that tenant for breaking the lease (i.e., breaching the contract). However, the landlord also has a duty to mitigate those damages by trying to find another tenant.
Key Takeaways
A contract is an enforceable promise. Parties to the contract must perform according to the relevant standard—substantial performance for most service contracts, personal satisfaction, complete performance, or strict performance. Once parties have performed, they are discharged from further obligations under the contract. Failure to perform according to the requisite standard is a breach, which is a compensable injury. A breach may be minor or major. Several defenses exist to breach of contract.
Exercise \(1\)
1. Referring to "Hyperlink: Coach Mike Leach", what additional information would you need to determine whether Coach Leach’s services fell below substantial performance and were a material breach or whether he substantially performed his contract so that he did not materially breach it? Should coaching services be evaluated based on substantial performance or personal satisfaction? Why?
2. In international business, it is very common for parties to contract not to read or speak the same language. If someone sought to enter into a contract with you, but that party could not read the language in which your contract was written, should you enter into that contract with that person? How can this problem be overcome so that both parties can form a legally binding contract with each other? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/06%3A_Contracts/6.03%3A_Performance_and_Discharge%2C_Breach%2C_Defenses%2C_Equitable_Remedies.txt |
Learning Objectives
• Learn about assignment and delegation.
• Examine novation.
• Explore restrictions on assignment, exculpatory clauses, noncompete clauses, mandatory arbitration clauses, acceleration clauses, and liquidated damages clauses.
• Explore the parol evidence rule.
What if you formed a contract with a rock ’n’ roll band for its services? Specifically, you wanted the band to play at your nightclub, because you thought that your customers would enjoy the band enough to pay to see it perform. You hired this specific band because you heard that it drew large crowds of paying customers. Imagine your surprise when, as you anticipate the band’s performance, you discover that another band—one you have never heard of—has come to play instead of the original contracting band. On inquiry, you learn that the original band transferred its duties to perform to a lesser-known band. Can it do that?
Contract elements—the terms of the contract—are important. They may, among other things, foreclose your ability to bring a complaint in court, they may render you unable to be hired in your profession (at least within certain boundaries), or they may limit liability to a party that had a role in causing injury to you. If you are not aware of these elements, then you may face an unpleasant surprise if you act in a way contrary to the restrictions imposed by those terms. Likewise, contracts possess certain qualities that prohibit parties from acting in certain ways, unless those qualities are expressly waived. This section identifies common properties of contracts, as well as commonly used elements of contracts. If you are negotiating a contract and you do not like a term, then you should not agree to it. In law, there is a presumption that you have read, understood, and agreed to each and every term of any contract to which you are a party. Arguing that you did not understand or that you did not approve of a particular term in the contract will not be a valid excuse to performance. You should know what you can expect when you enter into a contract. Are you getting the band that you wanted to hire to play in your nightclub, or are you really getting any band that the original band happens to transfer its duties to?
As a preliminary matter, it is important to realize that contracts are, by law, assignable and delegable. This means that the rights conveyed by the contract may be transferred to another party by assignment, unless an express restriction on assignment exists within the contract, or unless an assignment would violate public policy. Likewise, the duties imposed on a party may be transferred to another party by delegation, unless the contract expressly restricts delegation, or there is a substantial interest in personal performance by the original party to the contract, or if delegation would violate public policy. In the case of a band hired to perform at a nightclub, an argument could be made that the original band cannot delegate its duties under the contract because there was a substantial interest in personal performance by the original band. This would render the contract nondelegable. To be on the safe side, your contract with that band should have had a clause expressly prohibiting delegation.
Many students have seen restrictions on assignment in the form of no-sublease clauses in leases with landlords. Do you have a no-sublease clause in your lease? If so, that is a restriction on assignment. This clause is necessary to prevent you from assigning your rights under the lease—your rights to inhabit the premises—to another party. It is necessary for the landlord to include that provision expressly if she wishes to prevent you from subleasing the unit, because there is a presumption in law that assignment is permitted unless it is expressly prohibited by the contract or unless the assignment would violate public policy. Since it is unlikely that letting someone else live in your housing unit in your absence would violate public policy, then the landlord must expressly prohibit the assignment within the original contract if she wishes to prevent tenants from subleasing. A landlord may have a very good reason to wish to prevent subleasing; she may wish to ensure that each tenant is creditworthy prior to allowing the tenant to live in the property.
Note that in delegation and in assignment, the original contracting party is not “off the hook” if it transfers its duties or rights to another party. For instance, if subleasing was not prohibited, and the new tenant assumed the rights and duties imposed by the original contract, the original party to the contract is still liable for the payment of rent. If the subleasing tenant does not pay the rent, the original party to the lease is still liable. The way to excuse oneself from this liability is to form a three-way novation with the original party and the new party, thereby excusing the exiting party from future liability arising under the contract. A novation is essentially a new contract that transfers all rights and duties to the new party to the contract and releases the previous party from any further obligation arising from the original contract.
Restrictions on assignment or delegation are not the only common elements that can be found in contracts. For example, you have probably encountered exculpatory clauses. An exculpatory clause is an express limitation on potential or actual liability arising under the subject matter of the contract. In short, exculpatory clauses are often employed when risk of injury exists. They seek to limit one party’s liability to another. You most certainly have signed exculpatory agreements or contracts containing exculpatory clauses if you have participated in any potentially dangerous activity at a club or with an organized group that could incur liability from injuries suffered by its patrons or members. For example, if you join a kayaking club, you will most likely be asked to sign such an agreement to “hold harmless” the club in the event of any accident or injury. However, despite the existence of an exculpatory clause, liability will not be limited (that is, the liability limitations will be unenforceable) when the party who would benefit from the limitation on liability acted with gross negligence, committed an intentional tort, or possessed greatly unequal bargaining power, or if the limitation on liability violates public policy. Imagine that you signed an agreement to engage in kayaking activities with a kayaking group, but the leader of the group battered you with her oar because she was angry with you for mishandling your kayak. Since battery is an intentional tort, the exculpatory clause will not protect the kayaking organization from liability it incurred through the actions of its employee.
Another common contract element that you may have encountered is a noncompete clause. A noncompete clause attempts to restrict competition for a specified period of time, within a certain geographic region, and for specified activities. Noncomplete clauses are generally valid against the party who signed it if the time, place, and scope are reasonable. These are very common clauses in employment contracts, particularly where the duties involved in employment are likely to involve trade secrets or other proprietary information that the company wishes to protect.
A mandatory arbitration clause is very common in consumer contracts and employment contracts. You have certainly subjected yourself to the restrictions imposed by these clauses if you have signed a contract for a credit card. Mandatory arbitration clauses require parties to a contract that contains such a clause to submit to mandatory arbitration in the event of a dispute arising under the contract. Mandatory arbitration clauses frequently foreclose any possibility of appealing arbitration awards in court.
An acceleration clause commonly exists in contracts where periodic payments are contemplated by the agreement. For example, if you signed a lease for your housing unit, then you most likely pay rent on a month-to-month basis. If you breached your lease, you would still owe rent for each subsequent month contemplated by the lease agreement. This means that your landlord would have new injury every month that you did not pay. An acceleration clause accelerates all payments due under the contract on breach. This allows the injured party—in this case, the landlord—to sue for all damages due for unpaid rent under that contract at once, rather than having to bring a new suit each month to seek monthly unpaid rent.
A liquidated damages clause allows parties to set the amount of damages in the event of breach. Agreeing to a damage amount before any breach occurs can save money and time spent litigating. Providing that the liquidated damages clause does not look like a penalty, the clause will be valid and enforced by a court that hears a dispute arising under the contract. For example, imagine that you entered into a contract for the sale of your car. If the liquidated damages clause provided for two thousand dollars of damages in the event of breach, that will probably be a valid liquidated damages clause, providing that your car is an “average” car. However, if the liquidated damages clause provided for one million dollars of damages payable by the breaching party, then that would not be enforceable by the court because it looks like a penalty. The proposed liquidated damages far exceed the value of the car that is the subject of the agreement.
Of course, there are additional common elements to contracts. This is not an exhaustive study of possible provisions, though it is a list of commonly encountered elements. For example, time of performance is often included as a separate provision. However, time for performance is an essential element in common-law contract formation, and without it, the contract may fail due to lack of definite and certain terms in formation.
A major assumption made about a written contract is that it is integrated, which means that it contains the entire expression of the parties’ agreement. That means that any statements made before the parties signed the contract are not part of the contract, unless those statements are memorialized in the contract itself. In fact, any statements or actions that are not captured within the four corners of the contract are considered parol evidence, and they will not be used to interpret the meaning of the contract.
Key Takeaways
Parties to contracts must not only take care to form the agreement so that it is legally enforceable, but they must also be aware of the properties of contracts in general, as well as specific provisions contained within contracts to which they are a party. Properties of contracts include ability to assign, delegate, and exclude parol evidence. Several types of contracts clauses are commonly used to restrict rights and limit liability.
Exercise \(1\)
1. Think of an example of an exculpatory clause that you have signed. For what type of activity would you be unwilling to sign an exculpatory clause? If your refusal to sign the exculpatory clause or agreement prevented you from participating in that activity, would you still refuse to sign it?
2. Do you think that too many limitations and restrictions can be placed on parties in a contract? Should there be more government regulation and standardization of contract terms between private parties? Why or why not?
6.05: Concluding Thoughts
Contracts are an integral part of business. Without contracts, promises would not be enforceable, which would wreak havoc on our financial stability, both individually and professionally.
The law presumes that people who sign contracts have read the contract and understood its terms. Of course, contract language includes many terms of art, and simply reading a contract alone may not be enough to fully understand its implications. Contracts for important matters should be reviewed and explained by attorneys, so that parties who enter into contracts do not do so without understanding the agreement.
It’s important to understand the implications of making promises. If those promises carry legal duties, then, barring a defense, the promise will need to be performed so that the obligation or duties arising under that promise can be discharged. If the promise is not performed, and if there are no defenses, then the contract has been breached. Breach is an actionable claim, with the goal of recovering the loss and placing the nonbreaching party back to the position that he or she would have been in if the contract had not been breached.
Recognizing fundamental elements of contracts and how to incorporate considerations important to you when entering into them can go far toward ensuring business success. Likewise, the failure to recognize the traps and tricks that can be incorporated into contracts can derail a good business idea. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/06%3A_Contracts/6.04%3A_Assignment%2C_Delegation%2C_and_Commonly_Used_Contracts_Clauses.txt |
Learning Objectives
Whenever a company or individual acts unreasonably and causes injury, that person or company may be liable for a tort. In some cases it doesn’t matter how careful or reasonable the company or individual is—they may be liable for any injury resulting from their actions. Torts are an integral part of our civil law, and in this chapter, you’ll learn about what kinds of torts exist and how to defend yourself or your company from potential tort liability. Specifically, you should be able to answer the following questions:
• What are torts?
• What are intentional torts, and how does one defend against an accusation of one?
• What is negligence and how does it affect virtually all human activity?
• What is strict liability and how does it affect businesses engaged in making and selling products?
• What are the arguments for and against tort reform?
Look at the picture in Figure \(1\). You’ve probably seen a similar picture of a construction site near where you live, with multiple orange traffic cones (with reflective stripes so they can be seen at night) and a large sign warning vehicles not to attempt to drive on the road. Now imagine the picture without the traffic cones, warning signs, or caution tape. If you were driving, would you still attempt to drive on this road?
Most of us would probably answer no, since the road is obviously under construction and attempting to drive on it may result in severe damage to property (our vehicles) and personal injury. Similarly, pedestrians, skateboarders, and bicyclists will likely steer clear of this road even if it wasn’t clearly marked or roped off. So if the dangers associated with this construction are obvious, why would the construction workers go through the time and expense of setting up the traffic cones, sign, and tape?
The answer has to do with tort law. A tort can be broadly defined as a civil wrong, other than breach of contract. In other words, a tort is any legally recognizable injury arising from the conduct (or nonconduct, because in some cases failing to act may be a tort) of persons or corporations. The other area of civil law that corporations have to be concerned about is contract law. There are several key differences between torts and contracts.
First is the realm of possible plaintiffs. In contract law, only persons that you have a contract with, or you are a third-party-beneficiary to (such as when you are named the beneficiary to a life insurance policy and the company refuses to pay the claim), can possibly sue you for breach of contract. In tort law, just about anyone can sue you, as long as they can establish that you owe them some sort of legally recognized duty. The second key difference is damages, or remedies. In contract law, damages are usually not difficult to calculate, as contract law seeks to place the parties in the same position as if the bargain had been performed (known as compensatory damages). Compensatory damages also apply in tort law, but they are much more difficult to calculate. Since money cannot bring the dead back to life or regrow a limb, tort law seeks to find a suitable monetary equivalent to those losses, which as you can imagine is a very difficult thing to do. Additionally, tort law generally allows for the award of punitive damages, something never permitted in contract law.
There is also some intersection between tort law and criminal law. Often, the same conduct can be both a crime and a tort. If Claire punches Charlie in the gut, for example, without provocation and for no reason, then Claire has committed the tort of battery and the crime of battery. In the tort case, Charlie could sue Claire in civil court for money damages (typically for his pain, suffering, and medical bills). That case would be tried based on the civil burden of proof—preponderance of the evidence. That same action, however, could also lead Charlie to file a criminal complaint with the prosecutor’s office. Society is harmed when citizens punch each other in the gut without provocation or justification, so the prosecutor may file a criminal case against Claire, where the people of the state would sue her for the crime of battery. If convicted beyond a reasonable doubt, Claire may have to pay a fine to the people (the government) and may lose her liberty. Charlie gets nothing specifically from Claire in the criminal case other than the general satisfaction of knowing that his attacker has been convicted of a crime.
You might recall from Chapter 3 "Litigation" that the standard of proving a criminal case (beyond a reasonable doubt) is far higher than the standard for proving a civil case (a preponderance of evidence). Therefore, if someone is convicted of a crime, he or she is also automatically liable in civil tort law under the negligence per se doctrine. For that reason, criminal defendants who wish to avoid a criminal trial are permitted to plead “no contest” to the criminal charges, which permits the judge to sentence them as if they were guilty but preserves the right of the defendant to defend a civil tort suit.
Perhaps more than any other area of law, tort law is a reflection of American societal values. Contracts are enforced because they protect our expectation that our promises are enforced. Criminal law is the result of elected legislatures prohibiting behavior that the community finds offensive or immoral. Tort law, on the other hand, is generally not the result of legislative debate or committee reports. Each tort case arises out of different factual situations, and a jury of peers is asked to decide whether or not the tortfeasor (the person committing the tort) has violated a certain societal norm. Additionally, we expect that when an employee is working for the employer’s benefit and commits a tort, the employer should be liable. Under the respondeat superior doctrine, employers are indeed liable, unless they can demonstrate the employee was on a frolic and detour at the time he or she committed the tort.
The norms that society protects make up the basis for tort law. For example, we have an expectation that we have the right to move freely without interference unless detained pursuant to law. If someone interferes with that right, he or she commits the tort of false imprisonment. We have an expectation that if someone spills a jug of milk in a grocery store, the store owners will promptly warn other customers of a slippery floor and clean up the spill. Failure to do so might constitute the tort of negligence. Likewise, we expect that the products we purchase for everyday use won’t suddenly and without explanation injure us, and if that happens then a tort has taken place.
It has been said many times that tort law is a unique feature of American law. In Asian countries that follow a Buddhist tradition, for example, many people have a belief that change is a constant part of life and to resist that change is to cause human suffering. Rather than seeking to blame someone else for change (such as an injury, death, or damage to personal property), a Buddhist may see it as part of that person’s or thing’s “nature” to change. In countries with an Islamic tradition, virtually all events are seen as the will of God, so an accident or tragedy that leads to injury or death is accepted as part of one’s submission to God. In the United States, however, the tradition is one of questioning and inquiry when accidents happen. Indeed, it can be said with some truth that many Americans believe there is no such thing as an accident—if someone is injured or killed unexpectedly, we almost immediately seek to explain what happened (and then often place blame).
Torts can be broadly categorized into three categories, depending on the level of intent demonstrated by the tortfeasor. If the tortfeasor acted with intent to cause the damage or harm that results from his or her action, then an intentional tort has occurred. If the tortfeasor didn’t act intentionally but nonetheless failed to act in a way a reasonable person would have acted, then negligence has taken place. Finally, if the tortfeasor is engaged in certain activities and someone is injured or killed, then under strict liability the tortfeasor is held liable no matter how careful or careless he or she may have been. In this chapter, we’ll explore these three areas of torts carefully so that by the end of the chapter, you’ll understand the responsibilities tort law imposes on both persons and corporations. The chapter concludes with a brief discussion of other issues that affect torts, including tort reform.
Key Takeaways
A tort is a civil wrong (other than breach of contract) arising out of conduct or nonconduct that violates societal norms as determined by the judicial system. Unlike contracts and crimes, torts do not require legislative action. Torts protect certain expectations we cherish in a free society, such as the right to travel freely and to enjoy our property. There are three primary areas of tort law, classified depending on the level of intent demonstrated by the tortfeasor. | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/07%3A_Torts/7.01%3A_Introduction.txt |
Learning Objectives
• Explore what constitutes an intentional tort.
• Study various intentional torts in detail.
• Examine the defenses to intentional torts.
In an intentional tort, the tortfeasor intends the consequences of his or her act, or knew with substantial certainty that certain consequences would result from the act. This intent can be transferred. For example, if someone swings a baseball bat at you, you see it coming and duck, and the baseball bat continues to travel and hits the person standing next to you, then the person hit is the victim of a tort even if the person swinging the bat had no intention of hitting the victim.
In addition to the physical pain that accompanies being strangled by a coworker, the victim may also feel a great deal of fear. That fear is something we expect to never have to feel, and that fear creates the basis for the tort of assault. An assault is an intentional, unexcused act that creates in another person a reasonable apprehension or fear of immediate harmful or offensive contact. Note that actual fear is not required for assault—mere apprehension is enough. For example, have you ever gone to sit down on a chair only to find out that one of your friends has pulled the chair away, and therefore you are about to fall down when you sit? That sense of apprehension is enough for assault. Similarly, a diminutive ninety-pound woman who attempts to hit a burly three-hundred-pound police officer with her bare fists is liable for assault if the police officer feels apprehension, even if fear is unlikely or not present. Physical injuries aren’t required for assault. It’s also not necessary for the tortfeasor to intend to cause apprehension or fear. For example, if someone pointed a very realistic-looking toy pistol at a stranger and said “give me all your money” as a joke, it would still constitute assault if a reasonable person would have perceived fear or apprehension in that situation. The intentional element of assault exists here, because the tortfeasor intended to point the realistic-looking toy pistol at the stranger.
A battery is a completed assault. It is any unconsented touching, even if physical injuries aren’t present. In battery, the contact or touching doesn’t have to be in person. Grabbing someone’s clothing or cane, swinging a baseball bat at someone sitting in a car, or shooting a gun (or Nerf ball, for that matter, if it’s unconsented) at someone is considered battery. Notice that assault and battery aren’t always present together. Shooting someone in the back usually results in battery but not assault since the victim didn’t see the bullet coming and therefore did not feel fear or apprehension. Similarly, a surgeon who performs unwanted surgery or a dentist who molests a patient while the patient is sedated has committed battery but not assault. Sending someone poisoned brownies in the mail would be battery but not assault. On the other hand, spitting in someone’s face, or leaning in for an unwanted kiss, would be assault and possibly battery if the spit hit the victim’s face, or the kiss connected with any part of the victim’s body.
When someone is sued for assault or battery, several defenses are available. The first is consent. For example, players on a sports team or boxers in a ring are presumed to have consented to being battered. Self-defense and defense of others are also available defenses, bearing in mind that any self-defense must be proportionate to the initial force.
A battery must result in some form of physical touching of the plaintiff. When that physical touching is absent, courts sometimes permit another tort to be claimed instead, the tort of intentional infliction of emotional distress (IIED). In a sense, IIED can be thought of as battery to emotions, but a great deal of caution is warranted here. Many people are battered emotionally every day to varying degrees. Someone may cut you off in traffic, leading you to curse at him or her in anger. A stranger may cut in line in front of you, leading you to exclaim in indignation. A boyfriend or girlfriend may decide to break off a relationship with you, leading to hurt feelings and genuine grief or pain. None of these situations, nor any of the normal everyday stresses of day-to-day living, are meant to be actionable in tort law. The insults, indignities, annoyances, or even threats that we experience as part of living in modern society are to be expected. Instead, IIED is meant to protect only against the most extreme of behaviors. In fact, for a plaintiff to win an IIED case, the plaintiff has to demonstrate that the defendant acted in such a manner that if the facts of the case were told to a reasonable member of the community, that community member would exclaim that the behavior is “outrageous.” Notice that the standard here is objective; it’s not enough for the plaintiff to feel that the defendant has acted outrageously. In some states, the concern that this tort could be abused and result in frivolous litigation has led to the additional burden that the plaintiff must demonstrate some physical manifestation of the psychological harm (such as sleeplessness or depression) to win any recovery.
Hyperlink: Does Picketing a Fallen Soldier's Funeral Constitute IIED or Constitutionally Protected Speech?
http://www.npr.org/templates/story/story.php?storyId=5192571
The Westboro Baptist Church is a small (approximately seventy-member) fundamentalist church based in Topeka, Kansas. Members of the church, led by their pastor, Fred Phelps, believe that American soldier deaths in Iraq and Afghanistan are punishment from God for the country’s tolerance of homosexuality. Church members travel around the country to picket at the funerals of fallen soldiers with large bold signs. Some of the signs proclaim “Thank God for Dead Soldiers.” In 2006 members of the church picketed the funeral of Marine Lance Corporal Matthew Snyder, and Snyder’s father sued Phelps and the church for IIED and other tort claims. The jury awarded Snyder’s family over \$5 million in damages, but on appeal, the U.S. Court of Appeals for the Fourth Circuit overturned the verdict. The court found the speech “distasteful and repugnant” but pointed out that “judges defending the Constitution must sometimes share their foxhole with scoundrels of every sort, but to abandon the post because of the poor company is to sell freedom cheaply. It is a fair summary of history to say that the safeguards of liberty have often been forged in controversies involving not very nice people.”Snyder v. Phelps, 580 F.3d 206 (4th Cir. 2009), pacer.ca4.uscourts.gov/opinion.pdf/081026.P.pdf (accessed September 27, 2010). Adding insult to injury, the Court of Appeals ordered Snyder’s family to pay over \$16,000 in legal fees to the church, which led to an outpouring of support for Snyder on Facebook.“I Support Al Snyder in His Fight against Westboro Baptist Church,” Facebook. www.facebook.com/group.php?v=wall&ref=ts&gid=355406162379 (accessed September 27, 2010). The U.S. Supreme Court has accepted the case.
Although the standard for outrageous conduct is objective, the measurement is made against the particular sensitivities of the plaintiff. Exploiting a known sensitivity in a child, the elderly, or pregnant women can constitute IIED. A prank telephone call made by someone pretending to be from the army to a mother whose son was at war, telling the mother her son has been killed, would most certainly be IIED.
Companies must be careful when handling sensitive employment situations to avoid potential IIED liability. This is especially true when terminating or laying off employees. Such actions must be taken with care and civility. Similarly, companies involved in a lot of public interactions should be careful of this tort as well. Bill collectors and foreclosure agencies must be careful not to harass, intimidate, or threaten the people they deal with daily. In one foreclosure case, for example, Bank of America was sued by a mortgage borrower when the bank’s local contractor entered the home of the borrower, cut off utilities, padlocked the door, and confiscated her pet parrot for more than a week, causing severe emotional distress. James Hagerty, “Bank Sorry for Taking Parrot,” Wall Street Journal, March 11, 2010, A1. In 2006, Walgreens was sued for IIED when pharmacists accidentally stapled a form to patient drugs that was not meant to be seen by patients. The form was supposed to annotate notes about patients, but some pharmacists filled in the form with comments such as “Crazy! She’s really a psycho! Do not say her name too loud; never mention her meds by name.”“Walgreens Pharmacists Mock You behind Your Back,” The Consumerist, March 8, 2006, consumerist.com/2006/03/walgreens-pharmacists-mock-you-behind-your-back.html (accessed September 27, 2010).
Another intentional tort is the invasion of privacy. There are several forms of this tort, with the most common being misappropriation. Misappropriation takes place when a person or company uses someone else’s name, likeness, or other identifying characteristic without permission. For example, in 1986 model Russell Christoff posed for a photo shoot for Nestlé Canada for Taster’s Choice coffee. He was paid \$250 and promised \$2,000 if Nestlé used his photo on its product. In 2002 he discovered Nestlé had indeed used his photo on Taster’s Choice coffee without his permission (Figure 7.2.1 "Russell Christoff"), and he sued Nestlé for misappropriation. A California jury awarded him over \$15 million in damages. Jaime Holguin, “\$15.6M Award for Coffee ‘Mug,’” CBSnews.com, February 2, 2005, www.cbsnews.com/stories/2005/02/01/national/main670754.shtml (accessed September 27, 2010). Misappropriation can be a very broad tort because it covers more than just a photograph or drawing being used without permission—it covers any likeness or identifying characteristic. For example, in 1988 Ford Motor Company approached Bette Midler to sing a song for a commercial, which she declined to do. The company then hired someone who sounded just like Midler to sing one of Midler’s songs, and asked her to sound as much like Midler as possible. The company had legally obtained the copyright permission to use the song, but Midler sued anyway, claiming that the company had committed misappropriation by using someone who sounded like her to perform the commercial. An appellate court held that while Ford did not commit copyright infringement, it had misappropriated Midler’s right to publicity by hiring the sound-alike, Midler v. Ford Motor Company, 849 F.3d 460 (9th Cir. 1988). and a jury awarded her over \$400,000 in damages.
In addition to someone’s voice, an identifying characteristic can be the basis for misappropriation. For example, Samsung Electronics ran a series of print advertisements to demonstrate how long-lasting their products can be. The ads featured a common item from popular culture along with a humorous tagline. One of the ads featured a female robot dressed in a wig, gown, and jewelry posed next to a game show board that looked exactly like the game show board from Wheel of Fortune (Figure 7.2.2 "Samsung Advertisement"). The tagline said, “Longest-running game show. 2012 A.D.” An appellate court held that Vanna White’s claim for misappropriation was valid, writing “the law protects the celebrity’s sole right to exploit [their identity] value whether the celebrity has achieved her fame out of rare ability, dumb luck, or a combination thereof.”White v. Samsung Electronics America, 971 F.2d 1395 (9th Cir. 1992). The lesson for companies is that in product marketing, permission must be carefully obtained from all persons appearing in their marketing materials, as well as any persons who might have a claim to their likeness or identifying characteristic in the materials.
Video Clip: Is a Single Name a Likeness or Identifying Characteristic?
(click to see video)
Invasion of privacy can also take the form of an invasion of physical solitude. Actions such as window peeping, eavesdropping, and going through someone’s garbage to find confidential information such as bank or brokerage statements are all examples of this form of tort. Media that are overly aggressive in pursuing photos of private citizens may sometimes run afoul of this tort.
Another important intentional tort for businesses is false imprisonment. This tort takes place when someone intentionally confines or restrains another person’s movement or activities without justification. The interest being protected here is your right to travel and move about freely without impediment. This tort requires an actual and present confinement. If your professor locks the doors to the classroom and declares no one may leave, that is false imprisonment. If the professor leaves the doors unlocked but declares that anyone who leaves will get an F in the course, that is not false imprisonment. On the other hand, a threat to detain personal property can be false imprisonment, such as if your professor grabs your laptop and says, “If you leave, I’ll keep your laptop.” Companies that engage in employee morale-building activities should bear in mind that forcing employees to do something they don’t want to do raises issues of false imprisonment. False imprisonment is especially troublesome for retailers and other businesses that interact regularly with the public, such as hotels and restaurants. If such a business causes a customer to become arrested by the police, for example, it may lead to the tort of false imprisonment. In one case, a pharmacist who suspected a customer of forging a prescription deliberately caused the customer to be detained by the police. When the prescription was later validated, the pharmacist was sued for false imprisonment. Businesses confronted with potential thieves are permitted to detain suspects until police arrive at the establishment; this is known as the shopkeeper’s privilege. The detention must be reasonable, however. Store employees must not use excessive force in detaining the suspect, and the grounds, manner, and time of the detention must be reasonable or the store may be liable for false imprisonment.
Intentional torts can also be committed against property. Trespass to land occurs whenever someone enters onto, above, or below the surface of land owned by someone else without the owner’s permission. The trespass can be momentary or fleeting. Soot, smoke, noise, odor, or even a flying arrow or bullet can all become the basis for trespass. A particular trespass problem takes place in suburban neighborhoods without clearly marked property lines between homes. Children are often regular trespassers in this area, and even if they are trespassing, homeowners are under a reasonable duty of care to ensure they are not harmed. When there is an attractive nuisance on the property, homeowners must take care to both warn children about the attractive nuisance and protect them from harm posed by the attractive nuisance. This doctrine can apply to pools, abandoned cars, refrigerators left out for collection, trampolines, piles of sand or lumber, or anything that might pose a danger to children and that they cannot understand or appreciate. There may be times, however, when trespass is justified. Obviously, someone invited by the owner is not a trespasser; such a person is considered an invitee until the owner asks him or her to leave. Someone may have a license to trespass, such as a meter reader or utility repair technician. There may also be times when it may be necessary to trespass—for example, to rescue someone in distress.
Trespass to personal property is the unlawful taking or harming of another’s personal property without the owner’s permission. If your roommate borrowed your vehicle without your permission, for example, it would be trespass to personal property. The tort of conversion takes place when someone takes your property permanently; it is the civil equivalent to the crime of theft. If you gave your roommate permission to borrow your car for a day and he or she stole your car instead, it would be conversion rather than trespass. An employer who refuses to pay you for your work has committed conversion.
Another intentional tort is defamation, which is the act of wrongfully hurting a living person’s good reputation. Oral defamation is considered slander, while written defamation is libel. To be liable for defamation, the words must be published to a third party. There is no liability for defamatory words written in a secret diary, for example, but there is liability for defamatory remarks left on a Facebook wall. Issues sometimes arise with regard to celebrities and public figures, who often believe they are defamed by sensationalist “news” organizations that cover celebrity gossip. The First Amendment provides strong protection for these news organizations, and courts have held that public figures must show actual malice before they can win a defamation lawsuit, which means they have to demonstrate the media outlet knew what it was publishing was false or published the information with reckless disregard for the truth. This is a much higher standard than that which applies to ordinary citizens, so public figures typically have a difficult time winning defamation lawsuits. Of course, truth is a complete defense to defamation.
Defamation can also take place against goods or products instead of people. In most states, injurious falsehood (or trade disparagement) takes place when someone publishes false information about another person’s product. For example, in 1988 the influential product testing magazine Consumer Reports published a test of the Suzuki Samurai small SUV, claiming that it “easily rolls over in turns.” Product sales dropped sharply, and Suzuki sued Consumers Union, the publisher, for trade disparagement. The case was settled nearly a decade later after a long and expensive legal battle.
Businesses often make claims about their products in marketing their products to the public. If these claims are false, then the business may be liable for the tort of misrepresentation, known in some states as fraud. Fraud requires the tortfeasor to misrepresent facts (not opinions) with knowledge that they are false or with reckless disregard for the truth. An “innocent” misrepresentation, such as someone who lies without knowing he or she is lying, is not enough—the defendant must know he or she is lying. Fraud can arise in any number of business situations, such as lying on your résumé to gain employment, lying on a credit application to obtain credit or to rent an apartment, or in product marketing. Here, there is a fine line between puffery, or seller’s talk, and an actual lie. If an advertisement claims that a particular car is the “fastest new car you can buy,” then fraud liability arises if there is in fact a car that travels faster. On the other hand, an advertisement that promises “unparalleled luxury” is only puffery since it is opinion. Makers of various medicinal supplements and vitamins are often the target of fraud lawsuits for making false claims about their products.
Finally, an important intentional tort to keep in mind is tortious interference. This tort, which varies widely by state, prohibits the intentional interference with a valid and enforceable contract. If the defendant knew of the contract and then intentionally caused a party to break the contract, then the defendant may be liable. In 1983 oil giant Pennzoil made a bid for a smaller oil rival, Getty Oil. A competitor to Pennzoil, Texaco, found out about the deal and approached Getty with another bid for a higher amount, which Getty then accepted. Pennzoil sued Texaco, and a jury awarded over \$10 billion in damages.
Key Takeaways
Assault is any intentional act that creates in another person a reasonable fear or apprehension of harmful or offensive contact. A battery is a completed assault, when the harmful or offensive contact occurs. The intentional infliction of emotional distress (IIED) is extreme and outrageous conduct that intentionally causes severe emotional distress to another person. In some states, IIED requires a demonstration of physical harm such as sleeplessness or depression. This is a difficult tort to win because of its inherent clash with values embodied by the First Amendment. Misappropriation is the use of another person’s name, likeness, or other identifying characteristic without permission. False imprisonment occurs when someone intentionally confines or restrains another person’s movement without justification. Trespass is the entry onto land without the owner’s permission, while conversion is the civil equivalent of the theft crime. Defamation is the intentional harm to a living person’s reputation, while trade disparagement takes place when someone publishes false information about someone else’s product. Fraudulent misrepresentation is any intentional lie involving facts. Tortious interference is the intentional act of causing someone to break a valid and enforceable contract.
Exercise \(1\)
1. Members of the Westboro Baptist Church claim that the First Amendment protects them from IIED lawsuits since they are expressing a political opinion by picketing at soldier funerals. The pickets take place on public property and in compliance with local picketing laws. If the plaintiffs win the case, the church is unlikely to have the money to satisfy the judgment and may seek bankruptcy. Do you believe that this conduct is extreme and outrageous enough to constitute a tort? Why or why not?
2. In 1983 Hustler magazine (owned by publisher Larry Flynt) ran a print advertisement patterned after a Campari liquor ad campaign. The real ad campaign featured celebrities “talking about their first time” in a question-and-answer interview format, slowly revealing that the celebrities were speaking about their first time drinking Campari. The Hustler advertisement featured fundamentalist preacher Jerry Falwell, who was running a campaign against pornography at the time, and insinuated that Falwell had lost his virginity to his mother. Falwell sued Flynt and the magazine, and a jury awarded Falwell \$150,000 in damages. The Supreme Court overturned the verdict on appeal on grounds of the First Amendment, holding that as a public figure, Falwell had to endure the advertisement. Hustler Magazine v. Falwell, 485 U.S. 46 (1988). Do you believe that celebrities and public figures should have a harder time winning IIED lawsuits? Why or why not?
3. Do you believe that an “identifying characteristic” should be protected by the tort of misappropriation, or do you believe that society has gone too far in recognizing property rights? A First Amendment exception exists for comedians who engage in satire and comedy (think of Tina Fey’s impersonation of Sarah Palin during the 2008 presidential campaign, for example). Does it make sense to you that comedians like Fey and John Stewart can make money through misappropriation, but other businesses cannot?
4. Look at the advertisement featured in "Video Clip: Is a Single Name a Likeness or Identifying Characteristic?". Do you think that the ad is referring to Lindsay Lohan? Has the name “Lindsay” become so linked to Lohan that companies run the risk of being sued if they use the name Lindsay in advertisements? What if the advertisement had used a name like “Oprah” or “Cher”?
5. Defamation law only protects the living. Some legal commentators believe that defamation should also protect the dead. See, for example, law professor Jonathan Turley’s opinion in the Washington Post here: www.washingtonpost.com/wp-dyn/content/article/2006/09/15/AR2006091500999_pf.html. Turley points out examples of how the dead have been defamed, such as the character of William Murdoch in the 1997 movie Titanic, where he was portrayed as a murderous nut. In reality, survivors reported he took heroic actions to save passengers. Do you believe defamation should be extended to protect the dead as well as the living? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/07%3A_Torts/7.02%3A_Intentional_Torts.txt |
Learning Objectives
• Learn about whom we owe duties to under the tort of negligence.
• Explore how those duties can be legally breached.
• Discuss how causation, both actual and proximate, can affect liability.
• Examine the requirement to demonstrate damages to win a negligence suit.
• Understand various defenses to negligence.
Video Clip: The Crash of Continental Flight 3407
(click to see video)
Ordinarily, we don’t expect perfectly good airplanes to fall out of the sky for no reason. When it happens, and it turns out that the reason was carelessness or a failure to act reasonably, then the tort of negligence may apply. All persons, as established by state tort law, have the duty to act reasonably and to exercise a reasonable amount of care in their dealings and interactions with others. Breach of that duty, which causes injury, is negligence. Negligence is distinguished from intentional torts because there is a lack of intent to cause harm. If a pilot intentionally crashed an airplane and harmed others, for example, the tort committed may be assault or battery. When there is no intent to harm, then negligence may nonetheless apply and hold the pilot or the airline liable, for being careless or failure to exercise due care.
Note that the definition of negligence is purposefully broad. Negligence is about breaching the duty we owe others, as determined by state tort law. This duty is often broader than the duties imposed by law. Colgan Air, for example, may have been fully compliant with applicable laws passed by Congress while still being negligent. In a way, the law of negligence is an expression of democracy at the community and local level, because ultimately, citizen juries (as opposed to legislatures) decide what conduct leads to liability.
To prove negligence, plaintiffs have to demonstrate four elements are present. First, they have to establish that the defendant owed a duty to the plaintiff. Second, the plaintiff has to demonstrate that the defendant breached that duty. Third, the plaintiff has to prove that the defendant’s conduct caused the injury. Finally, the plaintiff has to demonstrate legally recognizable injuries. We’ll address each of these elements in turn.
First, the plaintiff has to demonstrate that the defendant owed it a duty of care. The general rule in our society is that people are free to act any way they want to, as long as they don’t infringe on the freedoms or interests of others. That means that you don’t owe anyone a special duty to help them in any way. For example, if you’re driving along a deserted rural highway at night in a snowstorm, and you see a car ahead of you fishtail and drive into a ditch, you are entitled to keep driving and do nothing, not even report the accident, because you don’t owe that driver any special duty. On the other hand, if you ran a stop sign, which then caused the other driver to drive into a ditch, you would owe that driver a duty of care.
Another way to look at duty is to consider whether or not the plaintiff is a foreseeable plaintiff. In other words, if the risk of harm is foreseeable, then the duty exists. Take, for instance, the act of littering with a banana peel. If you carelessly throw away a banana peel, then it is foreseeable that someone walking along may slip on it and fall, causing injuries. Under tort law, by throwing away the banana peel you now owe a duty to anyone who may be walking nearby who might walk on that banana peel, because any of those persons might foreseeably step on the peel and slip.
An emerging area in tort law is whether or not businesses have a duty to warn or protect customers for random crimes committed by other customers. By definition, crimes are random and therefore not foreseeable. However, some cases have determined that if a business knows about, or should know about, a high likelihood of crime occurring, then that business must warn or take steps to protect its customers. For example, in one case a state supreme court held that when a worker at Burger King ignored a group of boisterous and loud teenagers, Burger King was liable when those teenagers then assaulted other customers. Iannelli v. Burger King Corp., 145 N.H. 190 (2000). In another case, the Las Vegas Hilton was held liable for sexual assault committed by a group of naval aviators because evidence at trial revealed that the hotel was aware of a history of sexual misconduct by the group involved.
The concept of duty is broad and extends beyond those in immediate physical proximity. In a famous case from California, for example, a radio station with a large teenage audience held a contest with a mobile DJ announcing clues to his locations as he moved around the city. The first listener to figure out his location and reach him earned a cash prize. One particular listener, a minor, was rushing toward the DJ when the listener negligently caused a car accident, killing the other driver. During a negligence trial, the radio station argued that hindsight is not foreseeability and that the station, therefore, did not owe the dead driver a duty of care. The California Supreme Court held that when the radio station started the contest, it was foreseeable that a young and inexperienced driver may drive negligently to claim the prize and that therefore a duty of care existed. Weirum v. RKO General, 15 Cal.3d 40 (1975). Radio stations should, therefore, be very careful when running promotional contests to ensure that foreseeable deaths or injuries are prevented. This lesson apparently eluded Sacramento station KDND, which in 2007 held a contest titled “Hold Your Wee for a Wii” where contestants were asked to drink a large amount of water without going to the bathroom for the chance of winning a game console. An otherwise healthy twenty-eight-year-old mother died of water intoxication hours after the contest, which led to a lawsuit and a \$16 million jury verdict.
The general rules surrounding when a duty exists can be modified in special situations. For example, landowners owe a duty to exercise reasonable care to protect persons on their property from foreseeable harm, even if those persons are trespassers. If you are aware of a weak step or a faucet that dispenses only scalding hot water, for example, you must take steps to warn guests about those known dangers.
Businesses owe a duty to exercise a reasonable degree of care to protect the public from foreseeable risks that the owner knew or should have known about. There are many foreseeable ways for customers to be injured in retail stores, from falling objects improperly placed on high shelves, to light fixtures exploding or falling due to improper installation, to customers being injured by forklifts in so-called warehouse stores. One particular area of concern for businesses is liquid on walking surfaces, which can be very dangerous. Spilled product (milk, orange juice, wine, etc.), melted ice or snow, or rain can cause slick situations, and if a store knows about such a condition, or should have known about it, then the store must quickly warn customers and remedy the situation.
Business professionals such as doctors, accountants, dentists, architects, and lawyers owe a special duty to act as a reasonable person in their profession. Professional negligence by these professionals is known as malpractice. The government estimates that between forty-four thousand and ninety-eight thousand people die each year in hospitals due to medical mistakes, the vast majority of them preventable.U.S. Department of Health and Human Services, Agency for Healthcare Research and Quality, “Reducing Errors in Health Care: Translating Research Into Practice,” April 2000, http://www.ahrq.gov/qual/errors.htm (accessed September 27, 2010).
Once duty has been established, negligence plaintiffs have to demonstrate that the defendant breached that duty. A breach is demonstrated by showing the defendant failed to act reasonably, when compared with a reasonable person. It’s important to keep in mind that this reasonable person is hypothetical and does not actually exist. This reasonable person is never tired, sleepy, angry, or intoxicated. He or she is reasonably careful—not taking every single precaution to prevent accidents but considering his or her actions and consequences carefully before proceeding. In reality, once a duty has been established, the presence of injury or harm is usually enough to satisfy the “breach of duty” requirement.
The third element of negligence is causation. In deciding whether there is causation, courts have to consider two questions. First, courts query as to whether there is causation in fact, also known as but-for causation. This form of causation is fairly easy to prove. But for the defendant’s actions, would the plaintiff have been injured? If yes, then but-for causation is proven. For example, if you are texting while driving and you hit a pedestrian because your attention was diverted, then but-for causation is easily met, because “but for” your actions of texting while driving, you would not have hit the pedestrian.
The second question is tougher to establish. It asks whether the defendant’s actions were the proximate cause of the plaintiff’s injury. In asking this question, courts are expressing a concern that causation-in-fact can be taken to a logical but extreme conclusion. For example, if a speeding truck driver crashes his or her rig and causes the interstate highway to be shut down for several hours, causing you to become stuck in traffic and miss an important interview, you could argue that but for the truck driver’s negligence, you may have landed a new job. It would not be fair, however, to hold the truck driver liable for all the missed appointments and meetings caused by a subsequent traffic jam after the crash. At some point, the law has to break the chain of causation. The truck driver may be liable for injuries caused in the crash, but not beyond the crash. This is proximate causation.
Video Clip: Palsgraf v. Long Island Railroad Company
(click to see video)
In determining whether proximate cause exists, we once again use the foreseeability test, already used for determining whether duty exists. If an injury is foreseeable, then proximate cause exists. If it is unforeseeable, then it does not.
In some cases, it can be difficult to pinpoint a particular source for a product, which then makes proving causation difficult. This is particularly true in mass tort cases where victims may have been exposed to dangerous substances from multiple sources over a number of years. For example, assume that you have been taking a vitamin supplement for a number of years, buying the supplement from different companies that sell it. After a while, the government announces that this supplement can be harmful to health and orders sales to stop. You find out that your health has been affected by this supplement and decide to file a tort lawsuit. The problem is that you don’t know which manufacturer’s supplement caused you to fall ill, so you cannot prove any specific manufacturer caused your illness. Under the doctrine of joint and several liability, however, you don’t have to identify the specific manufacturer that sold you the drug that made you ill. You can simply sue one, two, or all manufacturers of the supplement, and any of the defendants are then liable for the entirety of your damages if they are found liable. This doctrine has been used in cases involving asbestos production and distribution.
The final element in negligence is legally recognizable injuries. If someone walks on a discarded banana peel and doesn’t slip or fall, for example, then there is no tort. If someone has been injured, then damages may be awarded to compensate for those injuries. These damages take the form of money, as there is nothing tort law can do to bring back the dead or regrow lost limbs, and tort law does not allow for incarceration. Money is therefore the only appropriate measure of damages, and it is left to the jury to decide how much money a plaintiff should be awarded.
There are two types of award damages in tort law. The first, compensatory damages, seeks to compensate the plaintiff for his or her injuries. Compensatory damages can be awarded for medical injuries, economic injuries (such as loss of a car, property, or income), and pain and suffering. They can also be awarded for past, present, and future losses. While medical and economic damages can be calculated using available standards, pain and suffering is a far more nebulous concept. Juries are often left to their conscience to decide what amount of money can compensate for pain and suffering, based on the severity and duration of the pain as well as its impacts on the plaintiff’s life.
The second type of damage award is known as punitive damages. Here, the jury is awarded a sum of money not to compensate the plaintiff but to deter the defendant from ever engaging in similar conduct. The idea behind punitive damages is that compensatory damages may be inadequate to deter future bad conduct, so additional damages are necessary to ensure the defendant corrects its ways to prevent future injuries. Punitive damages are available in cases where the defendant acted with willful and wanton negligence, a higher level of negligence than ordinary negligence. Bear in mind, however, that there are constitutional limits to the award of punitive damages.
A defendant being sued for negligence has three basic affirmative defenses. An affirmative defense is one that is raised by the defendant essentially admitting that the four elements for negligence are present, but that the defendant is nonetheless not liable for the tort. The first defense is assumption of risk. If the plaintiff knowingly and voluntarily assumes the risk of participating in a dangerous activity, then the defendant is not liable for injuries incurred. For example, if you decide to bungee jump, you assume the risk that you might be injured during the jump. It’s common for bungee jumpers to experience burst blood vessels in the eye, soreness in the back and neck region, and twisted ankles, so these injuries are not compensable. On the other hand, you can only assume risks that you know about. When a person bungee jumps, one of the first steps is for the jump operator to weigh the jumper, so that the length of the bungee can be adjusted accordingly. If this is not done properly, the jumper may overshoot or undershoot the expected bottom of the jump. While you can assume known risks from bungee jumping, you cannot assume unknown risks, such as the risk that a jump operator may negligently calculate the length of the bungee rope.
A related doctrine, the open and obvious doctrine, is used to defend against suits by persons injured while on someone else’s property. For example, if there is a spill on a store’s floor and the store owner has put up a sign that says “Caution—Slippery Floor,” yet someone decides to run through the spill anyway, then that person would lose a negligence lawsuit if he or she slips and falls because the spill was open and obvious. Use of the open and obvious doctrine varies widely by state, with some states allowing it to be used in a wide variety of premises liability cases and other states circumventing its usefulness.
Both the assumption of risk and open and obvious defenses are not available to the defendant who caused a dangerous situation in the first place. For example, if you negligently start a house fire while playing with matches and evacuate the house with your roommates, if one of your roommates decides to reenter the burning house to rescue someone else, you cannot rely on assumption of risk as a defense since you started the fire.
The second defense to negligence is to allege that the plaintiff’s own negligence contributed to his or her injuries. In a state that follows the contributory negligence rule, a plaintiff’s own negligence, no matter how minor, bars the plaintiff from any recovery. This is a fairly harsh rule, so most states follow the comparative negligence rule instead. Under this rule, the jury is asked to determine to what extent the plaintiff is at fault, and the plaintiff’s total recovery is then reduced by that percentage. For example, if you jaywalk across the street during a torrential thunderstorm and a speeding car strikes you, a jury may determine that you are 20 percent at fault for your injuries. If the jury decides that your total compensatory damage award is \$1 million, then the award will be reduced by \$200,000 to account for your own negligence.
Finally, in some situations, the Good Samaritan law may be a defense in a negligence suit. Good Samaritan statutes are designed to remove any hesitation a bystander in an accident may have to providing first aid or other assistance. They vary widely by state, but most provide immunity from negligent acts that take place while the defendant is rendering emergency medical assistance. Most states limit Good Samaritan laws to laypersons (i.e., police, emergency medical service providers, and other first responders are still liable if they act negligently) and to medical actions only.
Key Takeaways
Negligence imposes a duty on all persons to act reasonably and to exercise due care in dealing and interacting with others. There are four elements to the tort of negligence. First, the plaintiff must demonstrate the defendant owed the plaintiff a duty. If the risk of injury is foreseeable, then the defendant owes the plaintiff a duty. Second, there must be a breach of that duty. A breach occurs when the defendant fails to act like a reasonable person. Professional negligence is known as malpractice. Third, the plaintiff must demonstrate that the defendant caused the plaintiff’s injuries. Both causation-in-fact and proximate causation must be proven. Finally, the plaintiff must demonstrate legally recognizable injuries, which include past, present, and future economic, medical, and pain and suffering damages. Defendants can raise several affirmative defenses to negligence, including assumption of risk, comparative or contributory negligence, and in some cases, Good Samaritan statutes.
Exercise \(1\)
1. Does a private investigator owe a duty of care to potential victims of crime if their clients use information obtained by the investigator to commit the crime? In 2003 a court held the answer is yes. In that case, an Internet-based investigative firm charged fees to a client to find out the Social Security number, place of employment, and home and work addresses of a third party. The client then used the information to stalk and kill the third party. The court held that since the risk of harm is foreseeable, the company owed the third party a duty of care. See Remsburg v. Docusearch, Inc., 816 A.2d 1001 (N.H. 2003).
2. In January 2001 a New York man attended a family birthday party at a Benihana restaurant, where chefs, while cooking at the table, routinely throw pieces of food for diners to catch with their mouths. The man wrenched his neck while ducking a piece of flying shrimp, requiring treatment by several doctors. By that summer, doctors determined surgery was necessary to treat numbness in his arm. Five months after surgery, he checked into the hospital with a high fever and died. The family sued Benihana for \$10 million in damages, claiming that the fever was the result of surgery, which in turn was the result of the chef’s actions in throwing food at diners. Do you believe that Benihana should be liable for the man’s death? Why or why not?
3. What kind of duty of care do cities that own and operate public transportation systems owe to the paying and traveling public? On February 4, 2010, Shaun Mills was traveling home on a public bus in Jacksonville Beach, Florida. He missed his regular stop, so he got off at the next stop. The sidewalk at this bus stop was closed, so he crossed the street and was hit by a car. The remarkable accident was captured on video. See http://today.msnbc.msn.com/id/36310494. Mills survived and is suing the bus company. In this case, what defenses are available to the defendant bus company?
4. Medical malpractice claims tens of thousands of lives per year, leaving victims and their families little recourse except through the tort system. Most doctors purchase medical malpractice insurance policies to pay a claim in case they are sued, but in some cases, these premiums can be exorbitantly high. The fear of medical malpractice suits also drives some doctors to practice “defensive medicine,” which further increases the price of health care for everyone. How do you think the legal system can best balance these two competing interests? | textbooks/biz/Civil_Law/The_Legal_and_Ethical_Environment_of_Business/07%3A_Torts/7.03%3A_Negligence.txt |
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