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51 of 430 DOCUMENTS

CITY OF PHILADELPHIA, TRUSTEE UNDER THE WILL OF STEPHEN


GIRARD, DECEASED, ACTING BY THE BOARD OF DIRECTORS OF CITY
TRUSTS, Appellant v. CUMBERLAND COUNTY BOARD OF ASSESSMENT
APPEALS, Appellee

No. 102 MAP 2011

SUPREME COURT OF PENNSYLVANIA

622 Pa. 581; 81 A.3d 24; 2013 Pa. LEXIS 2547

May 9, 2012, Argued


October 30, 2013, Decided

PRIOR HISTORY: [***1]


Appeal from the Order of Commonwealth Court dated April 4, 2011 at No. 1725 CD 2010 which Reversed the order of
the Court of Common Pleas, Cumberland County, Civil Division, dated July 28, 2010 at No. 07-6943 Civil Term.
Appeal allowed November 2, 2011 at 461 MAL 2011. Trial Court Judge: Merle L. Ebert, Jr., Judge. Intermediate Court
Judges: Dan Pellegrini, Kevin P. Brobson, JJ, James R. Kelley, Senior Judge. 18 A.3d 421 (Pa. Cmwlth. 2011).
City of Philadelphia v. Cumberland County Bd. of Assessment Appeals, 18 A.3d 421, 2011 Pa. Commw. LEXIS 155
(Pa. Commw. Ct., 2011)

CASE SUMMARY:

OVERVIEW: HOLDINGS: [1]-The Pennsylvania Supreme Court held that the Girard Trust, College and Board of
City Trusts (Board) and, by extension, the real estate holdings of the Girard Trust (the property), owned by the City of
Philadelphia, Pennsylvania, as trustee, retained immunity from local property taxation as, collectively, part of the
sovereignty of the Commonwealth of Pennsylvania; [2]-The trial court had correctly concluded that the property was
both immune and exempt from local real estate taxation; [3]-The Court held that the Girard Trust was the beneficiary of
the rental income generated by the property, the City was trustee and held legal title, and the Board was a
Commonwealth agency acting on behalf of the City as administrator of the property, thus, the property was public, used
for public purposes and exempt from local real estate taxation.

OUTCOME: Decision and order reversed; order of the trial court reinstated on grounds of tax immunity.

CORE TERMS: girard, taxation, entity, immunity, orphan, real estate, municipal, exempt, public purposes, bequest,
sovereign, charitable, exemption, immune, appointment, leased, administer, charity, tenant's, administered, private
individual, public charity, instrumentality, municipality, appointed, rental, tax exemptions, common pleas, enabling,
street

LexisNexis(R) Headnotes

Evidence > Procedural Considerations > Burdens of Proof > Allocation


Tax Law > State & Local Taxes > Real Property Tax > Exemptions
[HN1] The Supreme Court of Pennsylvania has defined the concepts of immunity and exemption from local property
taxation as follows: Tax immunity precludes a locality from imposing taxes upon the Commonwealth and its agencies.
Tax exemption, on the other hand, carves out specified property from taxation that the taxing body otherwise has the
authority to tax. Practically speaking, if an entity is immune, the taxing authority bears the burden of establishing why
taxation is permissible; if the entity is exempt, the entity bears the burden of establishing why it should not be subject to
taxation.
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Governments > Local Governments > Administrative Boards


[HN2] 53 Pa. Stat. Ann. §§ 16365-16370 direct that the Philadelphia, Pennsylvania Board of City Trusts members are
to be citizens of Philadelphia appointed by a board of appointment comprised of the judges of the supreme court,
together with the judges of the district court, since abolished, and the court of common pleas of the city and county of
Philadelphia. 53 Pa. Stat. Ann. § 16366. Board members are to serve indefinitely, during good behavior, but could be
removed by two-thirds agreement of the judicial board of appointment. 53 Pa. Stat. Ann. § 16366. Later legislation and
constitutional amendment vests the power of appointment exclusively in the judges of the Court of Common Pleas of
Philadelphia County. Pa. Const. art. V, § 21 (1874) states that the appointment powers of Supreme Court justices were to
be limited; and pursuant to the Constitution's disqualification of Supreme Court justices from appointment of, inter alia,
directors of public boards, such as the Board of City Trusts, such appointments were to be made, going forward, by
county courts of common pleas.

Estate, Gift & Trust Law > Trusts > Administration


Governments > Local Governments > Administrative Boards
Governments > Local Governments > Duties & Powers
[HN3] The Philadelphia v. Fox Court holds that the 53 Pa. Stat. Ann. §§ 16365-16370 is constitutional, emphasizing
that whatever power the City of Philadelphia, Pennsylvania exercises over the Girard assets as trustee was revocable
and subject to alteration, modification, and even dissolution by the sovereign Commonwealth of Pennsylvania, which is
empowered to create municipal corporations like the City, as well as boards of municipal sewerage, streets, and police,
in much the same manner as it had created the Board of City Trusts. If the Pennsylvania Legislature could vest power
in a municipal corporation, the Legislature could also remove or reshape that power; as such, any argument that the
Commonwealth did not retain sovereign power over the City of Philadelphia and, by extension, the Board and the
Girard entities, would fail. The directors of city trusts are a department of the municipality which the Legislature had a
constitutional right to establish. A man who constitutes such a municipality his trustees does so subject to all the
changes which the sovereign power may make in its character and organization.

Governments > Local Governments > Administrative Boards


Governments > State & Territorial Governments > Legislatures
[HN4] The Pennsylvania legislature may alter, modify, or even annul the franchises of a public municipal corporation,
although it may not impose burdens on it without its consent.

Estate, Gift & Trust Law > Trusts > Trustees > Appointment
Governments > Local Governments > Duties & Powers
[HN5] A municipal corporation may be a trustee, under the grant or will of an individual or private corporation, but only
as it seems for public purposes, germane to its objects. The trusts held by the city of Philadelphia, Pennsylvania are
germane to its objects. They are charities, and all charities are in some sense public. If a trust is for any particular
persons, it is not a charity. Indefiniteness is of its essence. The objects to be benefited are strangers to the donor or
testator. The widening and improvement of streets and avenues, planting them with ornamental and shade trees, the
education of orphans, the building of school-houses, the assistance and encouragement of young mechanics, rewarding
ingenuity in the useful arts, the establishment and support of hospitals, the distribution of soup, bread or fuel to the
necessitous, are objects within the general scope and purposes of the municipality. The king himself may be a trustee,
though he cannot be reached by the process of any court without his consent and so may the state, though only for
objects germane to the purposes of government.

Constitutional Law > Bill of Rights > State Application


[HN6] The Fourteenth Amendment, U.S. Const. amend. XIV, applies only to agencies of the state or municipalities
within a state; it is not directed against private, individual actions.

Governments > Local Governments > Administrative Boards


Governments > State & Territorial Governments > Claims By & Against
[HN7] The United States Supreme Court has held that: The Board which operates Girard College is an agency of the
State of Pennsylvania.

Estate, Gift & Trust Law > Trusts > Administration


Estate, Gift & Trust Law > Trusts > Charitable Trusts
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Governments > Local Governments > Duties & Powers


[HN8] See 20 Pa.C.S. § 5116.

Tax Law > State & Local Taxes > Real Property Tax > Exemptions
[HN9] Pa. Const. art. VIII, § 2(a)(iii) provides that the Pennsylvania General Assembly may by law exempt from
taxation that portion of public property which is actually and regularly used for public purposes. 72 Pa. Stat. Ann. §
5020-204(a)(7) provides that the following property shall be exempt from all county, city, borough, town, township,
road, poor and school tax, to wit: All other public property used for public purposes nor shall the act or any other act be
construed to exempt from taxation any privilege, act or transaction conducted upon public property by persons or
entities which would be taxable if conducted upon nonpublic property regardless of the purpose or purposes for which
such activity occurs, even if conducted as agent for or lessee of any public authority.

Civil Procedure > Summary Judgment > Appellate Review > Standards of Review
Civil Procedure > Summary Judgment > Standards > Legal Entitlement
Civil Procedure > Appeals > Standards of Review > De Novo Review
[HN10] The question of whether summary judgment is warranted is one of law, and thus the appellate court's standard
of review is de novo and its scope of review is plenary. Summary judgment may be entered only where the record
demonstrates that there remain no genuine issues of material fact, and it is apparent that the moving party is entitled to
judgment as a matter of law.

Governments > Local Governments > Property


Tax Law > State & Local Taxes > Real Property Tax > Exemptions
[HN11] An arm, agency, subdivision, or municipality of the Commonwealth of Pennsylvania enjoys sovereign
immunity from local real estate taxation. Tax immunity precludes a locality from imposing taxes upon the
Commonwealth and its agencies. Immunity in that context derives from the Commonwealth's sovereign right to be free
of taxation unless some statutory authorization or concession to the contrary exists; that has been long settled. The
Pennsylvania Legislators did not intend to upset the orderly processes of government by allowing the sovereign power
to be burdened by being subjected to municipal taxes. Property owned by the Commonwealth and its agencies and
instrumentalities is presumed to be immune, with the burden on the local taxing body to demonstrate taxability. The
immunity of the Commonwealth from local taxation is mirrored by the parallel tax immunity of property of the federal
government. The doctrine of sovereign immunity is so embedded in constitutional history and practice that the United
States Supreme Court cannot subject the Government or its official agencies to state taxation without a clear
congressional mandate.

Governments > Local Governments > Property


Tax Law > State & Local Taxes > Real Property Tax > Exemptions
[HN12] In Southeastern Pennsylvania Transportation Authority v. Board of Revision of Taxes, the Pennsylvania
Supreme Court has determined that even if an entity is clearly a governmental agency or instrumentality, it may not
automatically claim immunity from local real estate taxation for property leased to third-party commercial entities.

Governments > Local Governments > Administrative Boards


Governments > Local Governments > Property
Tax Law > State & Local Taxes > Real Property Tax > Exemptions
[HN13] The Pennsylvania Supreme Court has concluded that the Penn State cases, which dealt with the unique and
idiosyncratic relationship between the Commonwealth of Pennsylvania and the University of Pennsylvania, did not alter
the long-standing rule that property owned by a municipal authority is immune in the same manner as the sovereign
Commonwealth. The Municipal Authorities Act, 53 Pa.C.S. § 5620 provides: The effectuation of the authorized
purposes of authorities created under the chapter shall be for the benefit of the people of the Commonwealth. Since
authorities will be performing essential governmental functions in effectuating these purposes, authorities shall not be
required to pay taxes or assessments upon property acquired or used by them for such purposes.

Governments > Local Governments > Administrative Boards


Governments > Local Governments > Property
Tax Law > State & Local Taxes > Real Property Tax > Exemptions
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[HN14] In the context of immunity from local real estate taxation based on status as an agency or instrumentality of the
Commonwealth, it is helpful, but not essential, to have an express declaration of Commonwealth status in enabling
legislation. But, some entities may be square pegs that simply do not fit easily into recognized, categorical round holes;
they are sui generis, having neither clear ancestors in law or history, nor contemporary analogs. When those
circumstances arise, existing precedent and authority may be less helpful than usual.

Governments > Local Governments > Property


Governments > State & Territorial Governments > Property
Tax Law > State & Local Taxes > Real Property Tax > Exemptions
[HN15] The Pennsylvania legislators did not intend to upset the orderly processes of government by allowing the
sovereign power to be burdened by being subjected to municipal taxes.

COUNSEL: For Public Financial Management, Inc., AMICUS CURIAE: Sarah Chadwick Cocke, Esq., PFM Group.

For City of Philadelphia, Trustee Under the Will of S. Girard, Deceased, Acting By the Board of Directors,
APPELLANT: Christopher Anil Amar, Esq.; James G. Colins, Esq., Stephen A. Cozen, Esq., Sara Anderson Frey, Esq.,
Cozen O'Connor; Gary Dean Fry, Esq., Archer & Greiner, P.C.; Charles B. Gibbons, Esq., Jack Mentzer Stover, Esq.,
Buchanan Ingersoll & Rooney P.C.; Joseph T. Kelley Jr., Esq., Kelley & Murphy; Howard A. Rosenthal, Esq.

For Cumberland County Board of Assessment Appeals, APPELLEE: Stephen Doublas Tiley, Esq., Frey & Tiley.

For County Commissioners Association of Pennsylvania, APPELLEE AMICUS CURIAE: Robert L. Knupp, Esq.,
Knupp Law Offices, LLC; Anthony T. McBeth, Esq.

JUDGES: BEFORE: CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ. MR.
CHIEF JUSTICE CASTILLE. Former Justice Orie Melvin did not participate in the decision of this case. Mr. Justice
Eakin, Madame Justice Todd and Mr. Justice McCaffery join the opinion. Mr. Justice Saylor files a concurring opinion
in which Mr. Justice Baer joins.

OPINION BY: CASTILLE

OPINION
[*583] [**25] MR. CHIEF JUSTICE CASTILLE
The issue in this appeal is whether certain property (the "property") in Cumberland County, which is owned by the City
of Philadelphia as trustee of the Stephen Girard Trust and leased by the Board of Directors of City Trusts (colloquially
and hereinafter "the Board of City Trusts" and, [*584] where the context is clear, "the Board") to the Pennsylvania
Office of Attorney General ("OAG"), is subject to local real estate taxation in Cumberland County. The trial court held,
in a grant of summary judgment, that the property was both immune and exempt from local real estate [***2] taxation.1
The Commonwealth Court reversed in a published opinion. For the reasons set forth below, we reverse the
Commonwealth Court and reinstate the order of the trial court, on grounds of tax immunity.

1 [HN1] This Court has defined the concepts of immunity and exemption from local property taxation as follows: "Tax immunity precludes
a locality from imposing taxes upon the Commonwealth and its agencies. Tax exemption, on the other hand, carves out specified property
from taxation that the taxing body otherwise has the authority to tax." Lehigh-Northampton Airport Auth. v. Lehigh County Bd. of
Assessment Appeals, 585 Pa. 657, 889 A.2d 1168, 1172 n.2 (Pa. 2005) (internal quotation marks omitted). Practically speaking, if an entity is
immune, the taxing authority bears the burden of establishing why taxation is permissible; if the entity is exempt, the entity bears the burden
of establishing why it should not be subject to taxation.

[**26] I. Background
Stephen Girard's Will and the entwined nature and status of the Girard entities 2 have produced nearly two centuries of
litigation in multiple contexts. Girard was a unique person and the Girard Trust is a unique legal entity. Born in
Bordeaux, France, on May 20, [***3] 1750, Stephen Girard died on December 26, 1831 at eighty-one years of age; his
life reflects [*585] the early history of the nation and of his chosen home, Philadelphia, Pennsylvania. 3
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2 Collectively, the "Girard entities" are: the Girard Trust, which represents the assets from the Girard Estate that Stephen Girard left in trust
to the City of Philadelphia; Girard College, the school envisioned in Girard's will and sustained by the Trust; and the Board of Directors of
City Trusts, known colloquially and hereinafter as the Board of City Trusts, which since its creation by the General Assembly in 1869 has
administered the Trust and managed the College, with the exception of a ten-year period, discussed infra. At times in this Opinion, the
entities are addressed individually when the role of one or another entity is at issue; at times they will be addressed collectively when the
interconnectedness that characterizes them is at issue. Also in this Opinion, "the Board of City Trusts" (or "Board" where the context is
clear) indicates the party appealing to this Court, which is fully designated as the "City of Philadelphia, Trustee Under the Will of Stephen
Girard, Deceased, Acting by the [Board of [***4] City Trusts]."

3 Historical material in this Opinion derives from prior decisions involving Girard's will (including the Pennsylvania Supreme Court
opinions in Soohan v. City of Philadelphia, 33 Pa. 9, 1 Grant 494 (Pa. 1859), Philadelphia v. Fox, 64 Pa. 169 (Pa. 1870), and two decisions in
the 1950s involving Fourteenth Amendment challenges to the College's segregated student body; and multiple 19th century decisions in the
U.S. Supreme Court), as well as a narrative by the longtime archivist of the Girard Collection and Archives, which includes Stephen Girard's
business and personal papers. See Thomas J. DiFilippo, Stephen Girard, the Man, His College and Estate (1999), available at
http://www.girardweb.com/girard/welcome.htm (last visited Aug. 19, 2013). The chapter on Girard in James D. McCabe, Jr.'s "Great
Fortunes and How They Were Made" (E. Hannaford & Co. 1872) has also been a useful resource.

Girard was born into a family that had established a lucrative business trading in the West Indies in the Caribbean Sea;
he began working in his father's counting house at ten years old, went to sea for the first time at age fourteen in 1764,
and received little if any formal education. Girard left France [***5] permanently in 1773 and ultimately settled in
Philadelphia in 1777 after several years as a trading sea captain; he became a citizen of Pennsylvania in 1778. During
the American Revolution and the years after, he maintained and augmented his growing commercial fortune, becoming
a ship owner and builder in 1789. In the following decades, Girard traded within what is now the United States, to ports
including Charleston, South Carolina, and New Orleans, Louisiana, and all over the globe: the West Indies, Europe, the
Mediterranean, the Baltic and Russia, South America, the East Indies, India, and China. His trading wares included
grain, wine, fruit, hemp, iron, coffee, tea, and silk. Anticipating the War of 1812 with England and its likely effect on
international maritime commerce, Girard shrewdly reduced his trading activity, liquidated his overseas holdings,
collected outstanding foreign debts owed to him, and invested in the First Bank of the United States. Girard became the
foremost banker in Philadelphia and the nation when he acquired the bank itself in 1812 after the federal government
declined to renew the bank's charter, which expired in 1811, twenty years after its [*586] 1791 inception [***6] at the
behest of Alexander Hamilton, the first Secretary of the U.S. Treasury.
[**27] Girard's second career as a banker flourished. He served as a primary financier of the nation during the War of
1812 and on the board of the Second Bank of the United States, which was established after the war, in 1816.4 Having
renounced international trade, Girard invested in land, primarily in Philadelphia (including a working farm located on
the site of the present-day historic district of Girard Estate in South Philadelphia), but also throughout Pennsylvania and
in Kentucky and Louisiana. Some of the Pennsylvania lands Girard acquired, in Columbia County and Schuylkill
County (which includes the borough of Girardville, established in 1832), contained abundant coal; after Girard's death,
coal royalties produced hundreds of thousands of dollars each year, sustaining the Trust in the process.

4 The Second Bank of the United States existed until 1841, but was debilitated in the early 1830s when President Andrew Jackson, long an
opponent, vetoed legislation to renew its charter and subsequently withdrew all federal deposits. In 1836, the bank became a private
corporation. It suspended payments in 1839 and was [***7] liquidated in 1841.

Girard's endeavors were not limited to private enterprise; he was also a selfless public citizen of Philadelphia. The
Pennsylvania Supreme Court described his public service over a century and a half ago in Soohan v. City of
Philadelphia, 33 Pa. 9, 1 Grant 494, 1859 WL 8661 (Pa. 1859):

In the great yellow fever of 1793, which broke out in Water street, within a square of his residence, Mr. Girard distinguished
himself by visiting and attending upon the sick, and by his invaluable services as an active manager of the hospital at Bush Hill.
Seventeen thousand persons left the city, and of the remainder, upwards of four thousand, or nearly a fifth, died. At a meeting of the
citizens of Philadelphia, the Northern Liberties, and district of Southwark, assembled on Saturday, the 22d day of March 1794, and
presided over by Thomas McKean, a signer of the Declaration of Independence, and then chief justice, and afterwards governor of
[*587] the state, their most cordial, grateful, and fraternal thanks were presented to their fellow-citizens named in the proceedings,
"for their benevolent and patriotic exertions in relieving the miseries of suffering humanity on the late occasion." One of these
[***8] citizens, thus gratefully remembered, was Stephen Girard, under whose "meritorious exertions and peculiar care," at the
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Bush Hill hospital, in conjunction with Peter Helm, "every possible comfort was provided for the sick, and decent burial for those
whom their efforts could not preserve from the ravages of the prevailing distemper."
In 1797 and 1798, the fever again prevailed in Philadelphia with fearful violence, and again Mr. Girard exhibited the same enlarged
philanthropy, and the same disregard of danger, by liberal contributions, and personal services to the sick and dying.
In 1802, Mr. Girard was elected a member of the city councils, and so continued for several years. Upon the expiration of the
charter of the first Bank of the United States, he established his own private bank, in the building occupied by the late national
institution, and his first cashier was Mr. George Simpson, the cashier of the late bank.

33 Pa. 9, 1859 WL 8661 at **9-10.


At the time of Girard's death in 1831, his estate was valued at nearly $7 million, making him (it is believed) the
wealthiest man in the nation at that time. The estate included ships, land, stock in the public debts of Philadelphia,
Pennsylvania [***9] and the United States, and shares in insurance [**28] companies, Pennsylvania turnpikes and a
bridge, the Franklin Institute, the Schuylkill Navigation Company, the Chesapeake and Delaware Canal, and the
Danville & Pottsville Railroad.
Girard married, but outlived his wife and had no surviving children. In 1830, the year before he died, he met with his
counsel and created what became his last Will and testament, subject to two later codicils; the Will was reprinted and
published in 1874. See WILL AND CODICIL OF THE LATE STEPHEN GIRARD, ESQ. (James B. Chandler 1874) ("Girard
Will" or "the [*588] Will") (cites infra are to specific provisions of the Will, followed by the corresponding page
numbers in the published version). The Girard Will left specific sums to relatives, including Girard's brother and each of
his brother's six children and four other nieces, as well as bequests to friends, life incomes to his maid and to his farm
housekeeper and her family, and bequests to persons indentured to him. The vast majority of his considerable fortune,
however, was left to support charitable and public causes in and about Philadelphia. Thus, Girard left sums to
Pennsylvania Hospital, asylums for orphans [***10] and the deaf and mute, a society for relief of impoverished
shipmasters and their families, and amounts to be invested so as to provide housing fuel for the poor of Philadelphia.
Girard also left specific bequests to establish a public school in Philadelphia, and a neighborhood school just outside the
then-boundaries of the City, in Passyunk Township.5 Girard Will, Clauses I-XVIII, at 3-14.

5 The City of Philadelphia was not enlarged to become the entire County of Philadelphia (including Passyunk Township) until the Act of
Consolidation in 1854; at the time of Girard's death, the city was considerably smaller, encompassing the narrowest point between the
Delaware and Schuylkill Rivers. See Taggart v. Commonwealth, 102 Pa. 354, 1883 WL 13317, *9, 12 Week. Notes Cas. 465, 40 Legal Int.
78 (Pa. 1883) ("The first section of the Act of 2d February 1854 extended the boundaries of the city of Philadelphia so as 'to embrace' the
whole of the territory of the county of Philadelphia."). In a legal challenge to Girard's Will premised upon the alteration and enlargement of
the City effected by the Act of Consolidation, the U.S. Supreme Court in Girard v. City of Philadelphia, 74 U.S. 1, 19 L. Ed. 53, 1868 WL
11147 (1868), described the City's growth, [***11] as follows:

The city of Philadelphia, as originally laid out in 1683, and as incorporated in 1701, was situated upon a rectangular plot
of ground, bounded in one direction by two streets called Vine and South, a mile apart, and in the other by two rivers (the
Delaware and Schuylkill), two miles apart; the corporate title of the city being "the Mayor, Aldermen, and Citizens of
Philadelphia." Upon the neck of land above described the corporate city continued to be contained until 1854; the
inhabitants outside or adjoining it being incorporated at different times, and as their numbers extended, into bodies politic,
under different names, by the State legislature, and with the city, forming the county of Philadelphia. In 1798, the
Revolution having dissolved the old corporation, the legislature incorporated the city with larger powers; and prior to
1854, nearly twenty acts had been passed altering that law, and forming, the whole of them, what was popularly called the
charter of the city; but as already said, from 1683 to 1854, the city limits were the same.

74 U.S. 1, [WL] at *1 (syllabus).

[*589] The residual portion and great majority of Girard's estate, estimated to be worth about $5 million at the time
[***12] of his death, was also left to further public purposes in the city he called home. The Will stated plainly: "I have
sincerely at heart the welfare of the City of Philadelphia." Girard Will, Clause XX, at 18. The directives Girard included
in his Will corroborated this point. Thus, Girard left $500,000 to the "Mayor, Aldermen, and Citizens" of Philadelphia to
remove and to prohibit all buildings made of wood or other combustible materials in the city and to create Delaware
Avenue in place of the former [**29] Water Street, where Girard had kept his riverfront offices, so as to improve the
eastern half of the City. His specifications for these public improvements were set forth in minute detail. Girard
explained that by all of these improvements, "it is my intention to place and maintain the section of the City, above
referred to, in a condition which will correspond better with the general cleanliness and appearance of the whole City,
and be more consistent with the safety, health, and comfort of the Citizens." Girard Will, Clause XXII, ¶¶ 1-3, at 35-40.
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Girard also left $300,000 to the Commonwealth of Pennsylvania to improve canal navigation and to enact laws that
would permit Philadelphia [***13] to improve its port. Notably, each of these civic bequests was conditioned upon the
passage of the laws necessary to enable completion of the public projects Girard envisioned. Girard Will, Clause XXIII,
at 40-41. The remainder of Girard's fortune was left to the City in trust with instructions to establish, build, and
maintain a residential school for "poor male white orphans" -- Girard College -- on a large lot Girard owned, with the
cost of construction not to exceed $2 million. Girard Will, Clause XXI, at 20. However, the residuary portion of the
estate was also to be used for other civic purposes, i.e., to provide a competent police force for the City and to improve
the property and general appearance of the City. Girard noted that his intention in this regard [*590] was "in effect to
diminish the burden of taxation, now most oppressive especially on those, who are the least able to bear it." Girard Will,
Clause XXIV, at 41-42.
Girard's Will made clear that the civic endeavors to be funded from the residuary estate were subject to the "primary
object" that the College be adequately provided for. He expressed this context for the residuary bequests as follows: "To
all which objects, the [***14] prosperity of the City, and the health and comfort of its inhabitants, I devote the said fund
as aforesaid, and direct the income thereof to be applied yearly and every year for ever -- after providing for the College
as hereinbefore directed, as my primary object." Girard also provided for public-works contingencies if his designated
trustee, the City, were to "knowingly and willfully violate" any conditions of the Will: in that instance, the remainder of
the residue would be distributed to the Commonwealth for purposes of internal navigation -- excepting that income from
his Pennsylvania real estate was to be forever applied to maintenance of the College. If the Commonwealth, in turn,
failed to abide by the contingent restrictions placed upon it, the Will further provided, that portion of the remainder of
the Estate was left to the United States for purposes of internal navigation. Girard Will, Clause 24, ¶ 3, at 42-43.
Respecting the purpose of the College, Girard made clear that he desired to provide "a better education as well as a
more comfortable maintenance" than such orphans "usually receive from the application of the public funds." The Will
is replete with meticulous detail [***15] concerning the College, which Girard envisioned as an institution able to step
in where public assistance had not, or could not. Girard noted, for example, that preference was to be given first to
Philadelphia-born orphans, then to those born elsewhere in Pennsylvania, then to those born in New York City, and
finally to those born in New Orleans.6 [**30] The Will also addressed the design of the buildings, [*591] food and
clothing for the students, exercise and recreation, the subjects to be taught, etc. Girard Will, Clauses XX; XXI, including
¶¶ 6 & 7, at 18-31.

6 At his death in 1831, Girard owned nearly 300,000 acres of land in Louisiana and about thirty slaves; these were left in Clause XIX of his
Will to the City of New Orleans, which today has both a Stephen Girard Street and a Stephen Girard Avenue.

In addition to designating the City as Trustee of the College, Girard's Will obliged the City and the Commonwealth, if
they were to accept his generosity, to pass the laws necessary to effectuate his various bequests. Thus, respecting the
bequests to improve the City's physical infrastructure, the Will stated that funds would be disbursed: "as soon as such
laws shall have been enacted by the constituted [***16] authorities of the said Commonwealth as shall be necessary,
and amply sufficient to carry into effect, or to enable the constituted authorities of the City of Philadelphia to carry into
effect, the several improvements above specified[.]" Girard directed that the legislation was to be passed expediently,
within one year, or the funds would be redirected. Girard Will, Clause XXIII, at 40-41. Both the City and the
Commonwealth responded quickly; indeed, within three months of Girard's death, the General Assembly adopted
special legislation in the form of the Act of March 24, 1832, P.L. 176, which authorized and directed the City of
Philadelphia to carry the Will into effect.7 Less than two weeks later, by the Act of April 4, 1832, P.L. 275, the General
Assembly authorized the select and common councils of the City to provide for the election or appointment of such
officers as deemed essential to duly execute "the duties and trusts enjoined and created by" Girard's Will. In
Commonwealth v. Brown, 392 F.2d 120 (3d Cir. 1968), cert. denied, 391 U.S. 921, 88 S. Ct. 1811, 20 L. Ed. 2d 657
(1968), the U.S. Court of Appeals for the Third Circuit described some of the ensuing developments:

[*592] Philadelphia accepted the bequests and [***17] by ordinance set up a plan to administer the College by a Trusts Board. In
1833 a building committee of the City Council was appointed, a president of the College was chosen under an ordinance created for
that purpose and the cornerstone of the main building laid. Construction was concluded in 1847 and the College opened the first of
the following year. Down to 1869 the City Council operated the College directly, first by way of the trustees until 1851 when the
latter offices were abolished, and the Council again took over direct management. In 1869 the Commonwealth enacted a law which
gave Philadelphia a local Board of Trusts to take over the control of Girard College. . . . Broadly summing up the Commonwealth
and City's intimate association with Girard College the District Court, with full justification in the record, found as fact that:
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Beginning in 1831 and continuing to date [1968], the Commonwealth of Pennsylvania and the City of
Philadelphia, by the enactment of statutes and ordinances, by the use and supervision of public officials,
appointed by legislative and judicial bodies, by rendering services and providing tax exemptions, perpetual
existence and exemption [**31] from tort liability [***18] have given aid, assistance, direction and
involvement to the construction, maintenance, operation and policies of Girard College.

Id. at 121.

7 The Pennsylvania Constitution in effect at the time, the Constitution of 1790, did not contain a proscription against special laws. That
limitation was first adopted in the Constitution of 1874, and is found in the current Constitution in Article III, Section 32. See Pennsylvania
Turnpike Comm'n v. Commonwealth, 587 Pa. 347, 899 A.2d 1085, 1094 (Pa. 2006) (describing history and noting that "main purpose" of
special law restriction was to "'put an end to the flood of privileged legislation for particular localities and for private purposes, which was
common in 1873'"; and quoting Haverford Township v. Siegle, 346 Pa. 1, 28 A.2d 786, 788, 34 Mun. L Rep. 101 (Pa. 1942)).

When the College opened in 1848 it housed approximately 200 orphan students who were about eight years old, under
the aegis of the City Council. Notably, prior to that time, the City had made use of Girard's residuary bequest to support
the other public endeavors which Girard had subsidized in his Will "to diminish the burden of taxation, now most
oppressive especially on those, who are the least able to bear it." Thus, as [***19] the Soohan Court noted: "Until 1847,
annual appropriations were made out of the residuary estate, for the support of the police, the improvement of the city
property, and the general appearance of the city, and in effect to diminish the burden of taxation, but they ceased of
course with the completion [*593] of the college -- the erection of which had entirely exhausted the special fund of
two millions." 33 Pa. 9, 1859 WL 8661, at *14.8

8 The value of Girard's residuary bequest was diminished significantly by the financial panic of 1837. In re Estate of Girard, 386 Pa. 548,
127 A.2d 287, 289 (Pa. 1956).

Additional special legislation was adopted to satisfy other stipulations in Girard's Will respecting the College and
obligations placed upon the City as his trustee. For example, the Will required that the City or its appointees be
authorized to ensure that an orphan's relatives could not interfere with or withdraw a child from the College once the
child was admitted, while another paragraph in the same Clause provided that when orphan students arrived at ages 14-
18, they were to be "bound out" by the City to various "suitable occupations." Girard Will, Clause XXI, ¶¶ 5 & 9, at 30,
32. The General Assembly responded [***20] in 1847, passing a "Special Act"9 by which guardians of prospective
Girard College orphans were authorized to bind such children by indenture, as the Will indicated, to the City as trustee,
effectively making the City the guardian of every Girard College orphan, prohibiting interference by the child's
relatives, and authorizing the City to bind the students out until they reached their majority. See Soohan, 33 Pa. 9, 1859
WL 8661, at **1-2, *14; see also In re Estate of Girard, 386 Pa. 548, 127 A.2d 287, 321-22 (Pa. 1956) (Musmanno, J.,
dissenting) (describing state and local implementing legislation; noting that "between September 15, 1832 and
December 18, 1869, the Council enacted 48 different ordinances devoted exclusively to the Girard College").

9 Act of February 27, 1847, P.L. 178, 53 P.S. §§ 6792-6797. These provisions were ultimately repealed. See Act of November 19, 1959, P.L.
1526, § 10.

In March 1869, the General Assembly responded to an apparent crisis in the management of the Trust and College. The
Pennsylvania Senate heard testimony and discussed the state of affairs. Under the leadership of the City and Council, as
described in the legislative record, "the college, like Noah's ark, has been 'drifting [***21] along' and 'tiding along,'
without pilot or helmsman, upon the great deep, for a long time past." Pa. Senate Legislative Record, March 31, 1869, at
849-59. The [*594] solution was an Act of June 30, 1869, which ousted the existing directors, removed the Girard
Trust assets from the control of the city council, a political body subject to political influences, and created the Board of
City Trusts; the legislation is currently at 53 P.S. §§ 16365-16370.10 The statutes [HN2] directed that Board of City
Trusts members were to be citizens of Philadelphia [**32] appointed by a "board of appointment" comprised of "the
judges of the supreme court, together with the judges of the district court [since abolished] and the court of common
pleas of the city and county of Philadelphia." 53 P.S. § 16366.11 Board members were to serve indefinitely, "during
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[*595] good behavior," but could be removed by two-thirds agreement of the judicial board of appointment. 53 P.S. §
16366.

10 In addition to Girard's bequest, other trusts administered by the Board of City Trusts have included legacies from Benjamin Franklin, the
Freemasons, Mary Shields, who bequeathed $10,000 to the City upon her death in 1880 "to distribute coal to indigent [***22] widows,
single women and men, without respect to color," and John Scott, a chemist and druggist who left, at his death in 1815, a fund of $4,000, the
interest on which would fund awards to "ingenious men and women who make useful inventions." 53 P.S. § 16365 (historical and statutory
notes). Early Scott awardees invented or improved relatively prosaic items characteristic of the Industrial Revolution: the washing machine,
the cash register, the chemical fire extinguisher, and the typewriter; in 1889, Thomas Edison won for his invention of the mimeograph. Since
then, a number of recipients have been scientists of world renown, including a number of Nobel laureates. These include physicist Marie
Curie (1921), aviation pioneer Orville Wright (1925), Thomas Edison (who won again in 1929), radio pioneer Guglielmo Marconi (1931),
electricity innovator Nikola Tesla (1934), penicillin discoverer Alexander Fleming (1944), nuclear chemist and Manhattan Project participant
Glenn Seaborg (1952), John Bardeen (1954), who won the Nobel Prize in Physics twice (for development of transistor technology in 1956
and again in 1972 for work on the theory of superconductivity), polio vaccine discoverer [***23] Jonas Salk (1957), and internet technology
pioneer David J. Farber (1996). The 2011 recipients were neurochemist David E. Kuhl and cancer researcher Jenny P. Glusker; and the 2012
recipients were physicist Paul J. Steinhardt and medical researchers Dr. John Q. Trojanowski & Dr. Virginia Man-Yee Lee. See
http://www.garfield.library.upenn.edu/johnscottaward(full).html (last visited Aug. 19, 2013).

11 Later legislation and constitutional amendment vested the power of appointment exclusively in the judges of the Court of Common Pleas
of Philadelphia County. Article V, Section 21 of the 1874 Pennsylvania Constitution stated that the appointment powers of Supreme Court
justices were to be limited; and the Act of May 25, 1874, P.L. 228, provided that pursuant to the Constitution's "disqualification" of Supreme
Court justices from appointment of, inter alia, directors of public boards, such as the Board of City Trusts, such appointments were to be
made, going forward, by county courts of common pleas.

As a result of administration of the Trust being left to the City, changes in the City itself as reflected in the 1854 Act of
Consolidation, and then changes in the administration of the Trust, [***24] as effected by the 1869 Act, extensive
litigation involving the Girard entities ensued during the nineteenth century. In 1956, this Court summarized the
nineteenth century litigation in In re Estate of Girard, supra, as follows:

The Supreme Court held in Vidal v. Girard's Executors, 2 How. 127, 43 U.S. 127, 11 L.Ed. 205 [(1844)], in an elaborate opinion by
Mr. Justice Story, that the city was legally capable of taking the bequest of the estate for the erection and support of the college
upon the trusts designated in the will, and that these were valid charitable trusts and capable of being carried into legal effect.
In Girard v. City of Philadelphia, 7 Wall. 1, 74 U.S. 1, 19 L.Ed. 53 [(1868)], the decision in the Vidal case was affirmed, and it was
held that the Consolidation Act had not changed the identity of the city so as to affect in any way its administration of the trust.
The Court stated . . . : "Now, if this were true, [that the city had become unable to administer the trust] the only consequence would
be, not that the charities or trust should fail, but that the chancellor should substitute another trustee." In City of Philadelphia v.
Heirs of Stephen Girard, 45 Pa. 9 [(Pa. 1863)], [***25] our own Court likewise held that the trusts created [**33] in the will were
valid, and pointed out that the distinction must carefully be observed between the purposes and provisions of the trust itself and
any problems or difficulties arising from the mode of its administration, the former not being affected by the latter; attention was
called to the important fact that Girard stated that it was his "primary object" to construct and maintain the college. In City of
Philadelphia v. Fox, 64 Pa. 169 [Pa. 1870], it was once again held that Philadelphia could act as a trustee to carry out the trusts
under Girard's will, and that the Act of June 30, 1869, P.L. 1276, 53 P.S. §§ 6481-6486, providing for the administration by a Board
[*596] of Directors of City Trusts of the trusts confided to the city, the Board being "dissociated from the general government of
the city," was a valid enactment. And finally, in Girard's Appeal, 4 Penny. 347 [ (Pa. 1880)], dealing with another attack on the will
by Girard's heirs, it was held that they were concluded by the decree of the United States Supreme Court in the Vidal case, and that
the establishment of the Board of Directors of City Trusts was legal and proper. [***26] . . .

Id. at 290.
The 1870 decision in Philadelphia v. Fox, at 64 Pa. 169, is of particular interest to the inquiry before us. The challenge
in Fox, by the City through its Solicitor (Mayor Daniel M. Fox and City Council were the ostensible defendants), was to
the power of the General Assembly to replace the City as Trustee with the Board of City Trusts, a new municipal entity
of the Legislature's creation that was "dissociated from the general government of the city." 64 Pa. 169, 1870 WL 8678,
at *13. [HN3] The Fox Court held the legislation to be constitutional, emphasizing that whatever power the City
exercised over the Girard assets as trustee was revocable and subject to alteration, modification, and even dissolution by
the sovereign Commonwealth, which was empowered to create municipal corporations like the City, as well as boards
of municipal sewerage, streets, and police, in much the same manner as it had created the Board of City Trusts. And, if
the Legislature could vest power in a municipal corporation, the Legislature could also remove or reshape that power; as
such, any argument that the Commonwealth did not retain sovereign power over the City of Philadelphia and, by
extension, the Board [***27] and the Girard entities, would fail.12 Id.; see also Appeal of Girard, 4 Pennyp. 347, [*597]
*10 (Pa. 1880) ("The directors of city trusts are a department of the municipality which the Legislature had a
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constitutional [**34] right to establish. A man who constitutes such a municipality his trustees [sic], does so subject to
all the changes which the sovereign power may make in its character and organization.").

12 The Fox Court's explication of the relationship of the Commonwealth to the City was consistent with the U.S. Supreme Court's
interpretation two years earlier in Girard v. Philadelphia, 74 U.S. 1, 19 L. Ed. 53 (1868). In that case, heirs of Stephen Girard claimed in
essence that when the Legislature consolidated and expanded the City to encompass the County by the Act of Consolidation of 1854, the
original municipal entity responsible for administering the Trust ceased to exist, with the consequence that the assets should revert to
Girard's heirs. The High Court disagreed, noting:

[HN4] The legislature may alter, modify, or even annul the franchises of a public municipal corporation, although it may
not impose burdens on it without its consent. In this case the corporation has assented to accept the changes, [***28]
assume the burdens, and perform the duties imposed upon it . . . . If the trust be not rightly administered, the cestui que
trust [beneficiary], or the sovereign may require the courts to compel a proper execution. . . . Charity never fails; and it is
the right, as well as the duty of the sovereign, by its courts and public officers, as also by legislation (if needed), to have
the charities properly administered.

74 U.S. at 15 (citations omitted).

Notably, in deciding the issue concerning the authority to shift the trusteeship from the City to the Board of City Trusts,
the Fox Court also addressed the foundational question of the propriety of a municipal entity undertaking to manage the
estate of a private person at all:

Such [HN5] a municipal corporation may be a trustee, under the grant or will of an individual or private corporation, but only as it
seems for public purposes, germane to its objects. I am aware that it has been said by high authority in England that it may take and
hold in trust for purposes altogether private. But the administration of such trusts, and the consequent liabilities incurred, are
altogether inconsistent with the public duties imposed upon the municipality. . [***29] . . It certainly is not compellable to execute
such trusts, nor does it seem competent to accept and administer them. The trusts held by the city of Philadelphia, which are
enumerated in the bill before us, are germane to its objects. They are charities, and all charities are in some sense public. If a trust
is for any particular persons, it is not a charity. Indefiniteness is of its essence. The objects to be benefited are strangers to the donor
or testator. The widening and improvement of streets and avenues, planting them with ornamental and shade trees, the education of
orphans, the [*598] building of school-houses, the assistance and encouragement of young mechanics, rewarding ingenuity in the
useful arts, the establishment and support of hospitals, the distribution of soup, bread or fuel to the necessitous, are objects within
the general scope and purposes of the municipality. The king himself may be a trustee, though he cannot be reached by the process
of any court without his consent . . . and so may the state, though as I take it under the Constitution, only for objects germane to the
purposes of government.

64 Pa. 169, 1870 WL 8678 at *12 (citations omitted).


After 1870, with the validity of [***30] the Trust reaffirmed, and more stable governance through the Board of City
Trusts and ample revenue from Girard's coal lands and other properties, Girard College flourished. At the turn of the
twentieth century, the school had over 1500 students, with hundreds more on a waiting list.
In the mid-twentieth century, however, further litigation arose. In 1954, a lawsuit challenged the racial segregation of
the College arising from the Will's stipulation that the pupils be "poor male white orphans," after two otherwise
qualified applicants were denied admission by the Board of City Trusts solely on account of their race. The rejected
applicants sued, alleging that the race restriction violated the Fourteenth Amendment to the U.S. Constitution. The
ensuing legal battle over segregation at Girard College would last over a decade.
The City and the Commonwealth agreed with the applicants, but the Board defended the policy. The Orphans' Court of
Philadelphia County rejected the claim, and refused to order that the applicants be admitted. On appeal, the
Pennsylvania Supreme Court affirmed in a divided opinion. In re Estate of Girard, 386 Pa. 548, 127 A.2d 287 (Pa.
1956). The majority noted that the Fourteenth Amendment [***31] [HN6] applies only to agencies of the state or
municipalities within the state; it is not directed against private, individual actions. The majority then rejected the
applicants' claim that state action was implicated in [**35] the decisions enforcing the Will's race restriction [*599]
because the City was appointed trustee by Girard and had thereafter accepted the duties he imposed and administered
the Trust. The majority reasoned, in central part, that:

It is true that Girard appointed the City of Philadelphia as the trustee to administer the trust according to the terms of his will, but
he certainly did not intend thereby to empower it to conduct such administration in its public or governmental capacity, or to bring
into play any of its proprietary rights since it is merely the title holder of Girard's property and not its beneficial owner. As a trustee
it was to act and could act only in a fiduciary capacity, exercising no State or governmental function or power in the slightest
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degree, but being limited to the same rights, powers and duties, no more and no less, as those of any private individual or trust
company acting as trustee. . . . All provisions of the will show that it was not intended to [***32] be a public school . . . . The
situation, therefore, is not to be confused with the so-called de-segregation cases which dealt with public schools where no
discrimination in respect to race, creed or color, as the United States Supreme Court has decided, is permissible under the
Fourteenth Amendment. . . . The college has been supported and maintained for now over a century by Girard's estate; not a penny
of State or city money has ever gone into it; no taxpayer has ever been called upon to contribute to it; true, it is exempt from local
taxation, but so are all other charities even though restricted as to their beneficiaries and managed by private trustees.

127 A.2d at 293-94 (footnote omitted). The majority added that, even if the Board of City Trusts were deemed to be
engaged in state action, the remedy would not be to strike the racial restriction, but to appoint a different, private trustee.
Id. at 295-96.
Justice Michael A. Musmanno dissented in a lengthy opinion. After noting the many provisions in the Will designed to
improve the City, the dissent opined that "[i]t is difficult to imagine a testamentary disposition more completely
interwoven with the public's welfare and responsibilities [***33] than the Girard will." The dissent further observed
that Girard's [*600] dream of a college for the education of the poor would have "died a-borning without State action,"
describing the various acts required to be adopted by the General Assembly before many of the testamentary bequests
could be made effective. The dissent stressed that the General Assembly "could have refused to accept [Girard's]
largesse," but it instead accepted every proposition and condition advanced in his Will. Id. at 321-24 (Musmanno, J.,
dissenting).
The dissent further suggested that the question of whether the Trust was a public institution (and thus subject to the
Fourteenth Amendment), in fact was resolved by the Fox decision of 1870, in passages that the Court majority had
failed to acknowledge when it discussed Fox. The dissent stressed the observations in Fox that a municipal corporation
may act as a trustee under the grant or will of a private individual or corporation "only as it seems for public purposes,
germane to its objects." 127 A.2d at 325 (Musmanno, J., dissenting) (quoting Fox, 64 Pa. 169, 1870 WL 8678 at *12).
The dissent also emphasized that, in effectuating his bequests, Girard had called upon the General [***34] Assembly,
the City Council of Philadelphia, its mayor and its treasurer to implement his intentions; the Commonwealth then
"added for his benefit" the services of the Court of Common Pleas in appointing the members of the Board of City
Trusts, all in order to [**36] effectuate the directives of the Will. Id. at 326.
The dissent next addressed the majority's reasoning that Girard's appointment of the City to administer the trust did not
mean that he had empowered it "in its public or governmental capacity." The dissent responded, again along the lines of
the Fox decision: "how else can a City act except in its public or governmental capacity?" Id. at 332. The dissent
responded to the majority's statement that the City was acting only in a fiduciary capacity by similarly noting that:

The City does not have a fiduciary existence. It has only a municipal existence. The fact that it owns and operates a golf course
does not make it a country club; the fact that it stages open air light opera does not make it a recreation park promoter. There is not
a private school in the whole [*601] State of Pennsylvania which is controlled and managed by a City or any municipality as is
the Girard College.

Id. at 332.
Finally, [***35] responding to the majority's claim that there was no relevant distinction between Girard College and
the smallest of private schools, the dissent rejoined:

The Girard College has a board of directors made up of the Mayor of Philadelphia, the President of City Council, and twelve
members appointed by the Courts of Common Pleas. This Board thus represents the body politic, the public, the citizenry of the
County of Philadelphia, a sovereign subdivision of the sovereign State. Since our judges are elected by the people, as are the Mayor
and President of City Council, the Board of City Trusts is therefore an expression of the people themselves. The private school, on
the other hand, is strictly a private commercial enterprise run for profit. The legal principles which control Girard College are
separated by a chasm as wide as the constitution itself from a private school owned by private individuals, and run by private
individuals, all for the monetary advantage of private individuals. Private schools receive no tax exemption. For that reason alone
the legal principles which guide their destiny are quite different from those which apply to Girard College which enjoys a tax
exemption annually [***36] of $550,700. In re Ogontz School Tax Exemption Case, 361 Pa. 284, 65 A.2d 150, 41 Mun. L Rep. 5
[(1949)]. No private school in the State can boast the governmental direction, control, and privileges which are as much a part of
Girard College as the buildings themselves.

Id. at 332-33.13

13 The citation to Ogontz apparently referenced the following analysis:


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In its argument Appellee stresses the fact that the [Ogontz] School was chartered "as a non-profit corporation" and that
"no one receives directly or indirectly any profit from the school." These facts do not clothe the School with exemption
from taxation. Those who establish and conduct an institution may declare that in doing so they do not intend to make a
profit from anyone and they may conduct it without pecuniary profit to anyone, and yet it may not be "an institution of
purely public charity." In determining an institution's status in this respect it must be viewed from the standpoint of the
public. Can the public look upon Ogontz School as an institution where each year three hundred students or the vast
majority of them can obtain lodging, food and instruction for nothing (as, for example, 1800 orphan boys do at Girard
College), or for a charge [***37] so far below the value of the things they get that what they get are charitable gifts? The
answer is, "No." The vast majority of those three hundred students who attend the Ogontz School pay not only for all they
get, but they pay for more than they get, at least to an extent sufficient to enable the School to provide what is equivalent
to free board, lodging and instruction to about 10% of its students.

In re Ogontz School, 361 Pa. 284, 65 A.2d 150, 163-64, 41 Mun. L Rep. 5 (Pa. 1949).

The applicants sought further review in the U.S. Supreme Court, which summarily [**37] reversed and remanded in a
unanimous [*602] per curiam decision. Commonwealth v. [Board of City Trusts], 353 U.S. 230, 77 S. Ct. 806, 1 L.
Ed. 2d 792 (1957). The High Court noted that Girard's Will named the City as Trustee; that the provisions of the Will
were carried out by the Commonwealth and the City; and that "[s]ince 1869, by virtue of an act of the Pennsylvania
Legislature, the trust has been administered and the college operated by the 'Board of Directors of City Trusts of the
City of Philadelphia.'" Id. at 231. On these undisputed facts, [HN7] the Court held that:

The Board which operates Girard College is an agency of the State of Pennsylvania. Therefore, even though the Board was acting
[***38] as a trustee, its refusal to admit [the student applicants] to the college because they were Negroes was discrimination by the
State. Such discrimination is forbidden by the Fourteenth Amendment. Brown v. Board of Education, 347 U.S. 483, 74 S.Ct. 686,
98 L.Ed. 873 [(1954)]. Accordingly, the judgment of the Supreme Court of Pennsylvania is reversed and the case is remanded for
further proceedings not inconsistent with this opinion.

353 U.S. at 231.


In turn, the Supreme Court of Pennsylvania remanded to the Orphans' Court, which construed the U.S. Supreme Court's
determination as meaning no more than that the Board of City Trusts was constitutionally incapable of administering
the College in accordance with Girard's racial restriction. [*603] The lower court's solution was not to admit the
applicants, but to remove the Board as trustee of Girard College, as per the alternative dictum in the 1956 majority
opinion in In re Estate of Girard, and to replace the Board with thirteen private citizens who, it was presumed, could
enforce the racial restriction in the Will. The applicants again appealed to the Pennsylvania Supreme Court, with the
dispositive question being narrowly framed by the Court [***39] as "whether the action of the Orphans' Court is
consistent with the opinion of the Supreme Court of the United States." In re Girard College Trusteeship, 391 Pa. 434,
138 A.2d 844, 846 (Pa. 1958).
In a 4-1 decision (two Justices did not participate), the Court majority answered that question in the affirmative,
reasoning that:

As we read the Supreme Court's opinion, what it holds, and all that it was presumably intended to hold, in view of what was then
before the Court, is that the [Board of City Trusts], being a State agency, is incapable of administering Girard College in strict
compliance with the founder's prescribed racial restriction on admissions without being guilty of a violation of the Fourteenth
Amendment. However, the Supreme Court did not say that there is any Constitutional or other legal barrier to the removal of the
Board of City Trusts as trustee of Girard College in order that the Orphanage can be administered in accordance with all of the
testator's express directions including the qualifications for admission to the student body. On the other hand, there is high authority
for such procedure where a trustee is either unable or fails or refuses to administer a trust in accordance [***40] with the lawful
directions of the settlor.

[**38] Id. at 847. The majority added that the "inability" of the Board of City Trusts to "apply constitutionally" the
racial criterion in the will "affects the trustee and not the trust." In so concluding, the Court majority approved the
Orphans' Court's opinion, which had stated: "'It is a universally accepted rule of law that the disqualification or
incompetency of a trustee shall not be permitted to defeat the purposes of a charitable trust, nor to impeach its validity,
nor to derogate [*604] from its enforcement -- the trustee must be fitted to the trust and not the trust to the trustee.'"
Id. at 847-48.
Justice Musmanno again dissented, beginning by stressing again the many civic improvements provided for in Girard's
Will, and then noting:
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It is difficult to visualize the will of a private individual more dedicated to public business than Stephen Girard's. Schools, streets,
docks, canals, river distribution, public hospitals, and asylums are items which one finds in the budget of nations, states, and
municipal corporations, not private householders. These are matters for the consideration of the State, and indeed the State of
Pennsylvania recognized that [***41] fact at once.

Id. at 855 (Musmanno, J., dissenting). The dissent opined that, "[b]y law and the provisions of the Girard will, the status
of Girard College has been one of constant state and municipal responsibility," and added that "[f]or 126 years Girard
College has been administered as a public institution by public officials in their public capacities for the benefit of the
public." The dissent also questioned the authority of the courts to negate the 1869 Act, which created the Board of City
Trusts to manage the Trust and College, as well as the other four statutes and forty-eight City ordinances that had been
adopted to address issues specific to the College. The dissent further noted that the City's status as trustee was a specific
directive by Girard; and if the City failed to accept the duty, the trusteeship would pass on to the Commonwealth,
another public entity. Id. at 858.
The dissent supported its point concerning the essentiality of the City's role by quoting Clause XXI, Paragraph 9 of the
Will, which noted that Girard left "many details" respecting the College to the Mayor, Aldermen and Citizens of
Philadelphia and that he did so with "more confidence" precisely because: [***42] "from the nature of my bequests and
the benefit to result from them, I trust that my fellow citizens of Philadelphia will observe and evince special care and
anxiety in selecting members for their City Councils and other agents." From this language, the dissent concluded that
Girard had [*605] made clear that his underlying purpose in creating the Trust was to benefit Philadelphia and its
people, and the "best sentinels to stand guard over his bequeathed treasures were the representatives of those who would
enjoy his largess." For all of these reasons, the dissent disagreed with the majority's notion that the court could simply
substitute private trustees for the public trustee actually named by Girard, particularly where the municipal trustee was
capable, competent, and willing to continue acting as trustee. Id. at 863-65.
The applicants, again with the concurrence of the Commonwealth and the City, sought a writ of certiorari, which was
denied. See Commonwealth v. [Board of City Trusts], 357 U.S. 570, 78 S. Ct. 1383, 2 L. Ed. 2d 1546 (1958). However,
after more than a decade of litigation and pressure, including an appearance by Rev. Dr. Martin Luther King, Jr. at an
August 1965 protest rally, the continuing segregation at [***43] the College was finally deemed unconstitutional
[**39] by the Third Circuit, notwithstanding the state judicial substitution of "private" trustees for the municipal trustee
provided for by Girard (and later implemented by the General Assembly by the Act of November 19, 1959, P.L. 1526).
See Commonwealth v. Brown, 392 F.2d 120, supra.
The Brown court recounted the relevant provisions of Girard's Will respecting the role of the City as trustee; the City's
acceptance of the role; the implementing legislation by the General Assembly; the creation of the Board of City Trusts
to manage the Trust in 1869; and the City's successful management of the College up until the ouster of the Board by
the Orphans' Court in 1958, and the appointment by that court of trustees of its own selection. At the end of this
recitation, the Brown court noted the obvious: that "the Orphans' Court of Philadelphia County has been substantially
involved with the supervision of the Girard Estate." The Brown court further noted that the Board trustees had taken no
appeal from their ouster by the Orphans' Court following remand, but instead the appeal was pursued by the child
plaintiffs to the Supreme Court of Pennsylvania; [***44] that, as we have already noted, our Court affirmed the
Orphans' Court's decision to substitute [*606] private trustees in 1958; and that certiorari review was sought and
denied. Id. at 120-23.
In defending against the claim that the continuing segregation of the College violated the Fourteenth Amendment, the
court-appointed trustees relied upon, inter alia, our Court's 1958 decision. The Third Circuit was unpersuaded:

What the State [Supreme] Court did was turn the matter over to its Orphans' Court which eliminated the City as trustee and
installed its own group, sworn to uphold the literal language of the Girard will, a move effectively continuing the very segregation
which had been condemned by the United States Supreme Court. True, the latter had denied the application for certiorari. Times
without number that Court has plainly ruled that there is no inference permissible from its denial of application for certiorari,
favorable or unfavorable to either side of a litigation. Certainly in the whole muddy situation flowing from the State excision of the
City Board, thereby taking away the linchpin of the Girard will, the then existing state litigation picture did not bring into the
necessary [***45] sharp focus, the set piece maneuver which had completely circumvented the Supreme Court's directive. We,
however, as above seen, do have all of that amazing effort to maintain Girard's discriminatory status before us in its true
perspective.

Id. at 123. The court then stressed the "self-evident" and "close, indispensable relationship" between the College, the
City and the Commonwealth "intended by Mr. Girard, meticulously set out in his will and faithfully followed" for 127
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years, until the Orphans' Court substituted new trustees of its own choosing. The court further noted that the "ironic
result" of the judicial removal of the Board of City Trusts was that Pennsylvania's involvement with Girard College had
become more powerful than provided for by Girard, given the role devised and played out by the Orphans' Court. Id.
After citing decisions of the U.S. Supreme Court issued before and after this Court's Girard decisions in the 1950s --
High Court cases that were deemed clearly dispositive of the equal protection question -- the Brown court noted that the
[*607] Girard entities' "definitive position in this period of being more than ever operated by an agency of the state
does not simply emanate [***46] from the momentum" of legitimate [**40] participation by the City and the
Commonwealth in the management of the Trust and College over the years. Rather, that position as a state agency also
arose as "the obvious net consequence of the displacement of the City Board by the Commonwealth's agent and the
filling of the Girard Trusteeships with persons selected by the Commonwealth and committed to upholding the letter of
the will," which Pennsylvania state courts enabled in the 1950s. Id. at 125. In the Brown court's view:

Those radical changes pushed the College right back into its old and ugly unconstitutional position. Had the City Trustees been left
undisturbed it is inconceivable that this bitter dispute before us would not have been long ago lawfully and justly terminated. It is
inconceivable that those City Trustees would not have with goodwill opened the College to all qualified children. Given everything
we know of Mr. Girard, it is inconceivable that in this changed world he would not be quietly happy that his cherished project had
raised its sights with the times and joyfully recognized that all human beings are created equal.

Id. at 125.14

14 Far less litigious was the school's decision [***47] to admit female students in 1982; the first coed class entered in 1984. See
http://www.girardcollege.edu/page.cfm?p=358. Also, the school gradually admitted fewer and fewer actual "orphans" in favor of "functional
orphans," who were defined as children from inadequate means, regardless of their parental status. See In re Long's Estate, 5 Pa. D. & C.3d
602, 614 (Pa. Com. Pl. 1978) (defining "functional orphans" as "boys whose natural parent or parents, in the judgment of the trustee, are not
furnishing them proper maintenance, care or supervision, and who, being of good character and behavior, and having the potential for
scholastic achievement, would benefit from the programs offered at Girard College . . . ." ). By the mid-1980s, all but one of the incoming
Girard College class of 77 students were "functional orphans."

The U.S. Supreme Court denied certiorari in Brown in late May of 1968. Within weeks thereafter, the private board of
trustees filed a petition in the Orphans' Court to dissolve the private board and restore the responsibility and authority
for the Trust and College assets in the Board of City Trusts; the [*608] first black students entered Girard College that
fall. And, one [***48] year later, the General Assembly legally restored the Board and, effective immediately, repealed
the legislation that had acquiesced in and implemented this Court's 1958 decision allowing for installment of the private
board of trustees. See Act of July 18, 1969, P.L. 163 (three subsections: section 1 is a positive statement of law
effectively returning responsibility for city trusts to the Board of City Trusts; section 2 repeals the 1959 legislation;
and section 3 provides for immediate effectiveness); this legislation was originally codified at 20 P.S. § 3301. Section
3301 was repealed by the Act of June 30, 1972, P.L. 508. Concurrently, subsection (1) of 20 P.S. § 3301, the positive
statement of law restoring the Board, was enacted, and ultimately became codified at 20 Pa.C.S. § 5116; the provision
was amended in 1978 to lower the age at which an "orphan" was no longer subject to or protected by the legislation,
from 21 to 18 years of age.15

15 The current legislation reads as follows:

[HN8] Whenever any city of the first class of this Commonwealth shall be charged with the administration of any
charitable use or trust for both the maintenance and education of orphans, it shall, without [***49] application to any
court, act as guardian of the person and estate of each of such orphans, through the same agency that administers the
charitable use or trust. In case any such orphan child, at or before the time said city is charged with the administration of
such a charitable use or trust, or during the remaining time it acts as guardian of his estate, shall possess or become
entitled to any effects or property, the said city shall be entitled, in like manner as other guardians, to demand and receive
the same from any person having possession thereof, or owning the same, and to give acquittance therefor; and it shall be
the duty of the said city to take care of the same as guardians, and to make the same productive as far as reasonably can
be, and to deliver and pay over the same with the increase, less expenditures made in the exercise of a reasonable
discretion, to the said orphan, on his attaining the age of 18 years, or to his legal representatives if he shall die before
attaining that age.
Page 16
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[**41] II. The Litigation Below


The ongoing attempts of the Board of City Trusts to fulfill Girard's vision, maintain the Trust and College, and secure
its continuing ability to provide high quality [***50] residential and tuition-free education for low-income students,
nearly 80% of whom come from Philadelphia, sets the stage for this appeal.
[*609] In November 2001, the Board purchased the Property in Cumberland County's Borough of Lemoyne for nearly
$4 million. When it acquired the Property, the Board also acquired a tenant: the OAG had been leasing the building on
the Property for office space since 1999; the rent was set at $42,677 per month, or $512,130 per year. The ensuing rental
income is used by the Board solely to fund the Trust and maintain the College. In March 2002, the County began
billing the Board for real estate taxes of $6,275 and school district taxes of $18,217 on the Property. The Board paid, but
sought relief from the taxes, arguing that as an instrumentality of the Commonwealth, it was immune from local real
estate taxation; it also asserted that as an agency of the City of Philadelphia, which owns the Property, it is exempt from
local real estate taxation because the Property is leased to the OAG for a public purpose. Application for Exemption,
8/28/02. For reasons not disclosed in the record, the matter remained unresolved for five years, during which time the
Board [***51] continued to pay the annual taxes under protest; the total amount paid was $242,580.
In October 2007, the County's Board of Assessment Appeals ("County") denied the application of the Board of City
Trusts, which sought relief from local real estate taxation on the Property, and in November 2007, the Board of City
Trusts filed a petition for review with the Cumberland County Court of Common Pleas, which was granted. The County
answered in timely fashion, and in April 2010, the Board of City Trusts filed a motion for summary judgment renewing
its two alternative arguments: that it is immune from local real estate taxation as a Commonwealth agency and that it is
also exempt from local taxation because the Property is used by the OAG for a public purpose. The Board of City
Trusts sought a declaration of non-taxability and reimbursement of taxes paid since 2002, which by then exceeded
$300,000. In response, the County maintained that neither immunity nor exemption from local real estate taxation was
warranted.
After argument, the trial court granted the Board of City Trusts' motion for summary judgment in an order dated July
[*610] 30, 2010. In an accompanying opinion, the court credited both alternative [***52] arguments forwarded by the
Board. On the question of tax exemption, which it examined first, the court looked to the common law of trusts, noting
that trusts are characterized by a division of legal (trustee) and equitable (beneficiary) interests in trust property. The
court found that the Girard Trust is the beneficiary of the rental income generated by the property, the City is trustee
and holds legal title, and the Board [**42] is a Commonwealth agency acting on behalf of the City as administrator of
the Property. The court stated that because the City holds clear legal title to the Property, it is "public property." The
court added that because the Property is rented to the OAG, it is "public property used for public purposes" and exempt
from local real estate taxation under the Pennsylvania Constitution and the County Assessment Law. 16 The key indicator,
the court continued, was not that the Property generated rental income, but that the "primary use of the Property is office
space for the Attorney General which is clearly public in nature." Trial Ct. Op., 7/28/10, at 5-7.

16 PA. CONST. art. VIII, § 2(a)(iii) [HN9] ("The General Assembly may by law exempt from taxation . . . [t]hat portion of [***53] public
property which is actually and regularly used for public purposes . . . ."); 72 P.S. § 5020-204(a)(7) ("The following property shall be exempt
from all county, city, borough, town, township, road, poor and school tax, to wit: . . . All other public property used for public purposes . . .
nor shall this act or any other act be construed to exempt from taxation any privilege, act or transaction conducted upon public property by
persons or entities which would be taxable if conducted upon nonpublic property regardless of the purpose or purposes for which such
activity occurs, even if conducted as agent for or lessee of any public authority . . . .").

On the question of immunity from taxation, the court concluded that the Board of City Trusts properly could assert
immunity as a Commonwealth agency. The court acknowledged the "long and colorful history" of the Girard Trust, and
the difficulty courts have had in ascertaining the precise nature of the Board. The court looked first to the entity's
enabling legislation of 1869. Although the statute did not expressly state that the Board was a Commonwealth agency,
in the court's view, the statutory scheme revealed a legislative intent [***54] that the Board exercise "some
governmental function" by stepping into the shoes of the City to administer property [*611] held by the City in trust.
The court then cited the U.S. Supreme Court's 1957 finding in Commonwealth v. [Board of City Trusts] that "the Board
which operates Girard College is an agency of the Commonwealth." The court added that other courts have recognized
the Board as a Commonwealth agency in various contexts. For example, the Commonwealth Court held in Moore v.
[Board of City Trusts], 809 A.2d 420 (Pa. Cmwlth. 2001) (decided Jan. 18, 2001; publication ordered Oct. 28, 2002),
Page 17
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that the Board may claim sovereign immunity from negligence causes of action. Even more emphatic, according to the
trial court, was the Third Circuit's 1968 desegregation decision in Brown, which is discussed above. The trial court
stressed that the Brown court found multiple ties and links between the Board and various Commonwealth agencies and
entities, emphasized Commonwealth control through the statutory supervision and reporting requirements to which the
Board of City Trusts is subject, and specified tax exemptions as one of the probable goals of the "special relationship"
between the Board [***55] and the Commonwealth that Girard's Will contemplated. The trial court also found it
compelling that other counties had agreed or accepted that Board-administered property is immune or exempt from
local real estate taxation. The trial court thus concluded that the Board is a Commonwealth agency and, as a matter of
law, is immune (as well as exempt) from local real estate taxation. Trial Ct. Op., 7/28/10, at 7-10.
On appeal by the County, a Commonwealth Court panel reversed in a published opinion. City of Philadelphia v.
Cumberland Cty. Bd. of Assessment Appeals, 18 A.3d 421 (Pa. Cmwlth. 2011). Like the trial court, the panel traced the
difficulty courts have had in pinpointing the legal status of the College and the Board of City Trusts. [**43] The panel
declined to hold that either the Girard Trust or the Board is a Commonwealth agency merely because the manner of
selection of Board of City Trusts members was provided for by the General Assembly. The panel decided that it is the
nature of a trust, and not the manner in which its trustees are installed, that determines proper classification. The panel
also concluded that although the legislative scheme creating the Board [*612] ensured annual reporting [***56] to the
General Assembly, the Board members otherwise have no duty to or ongoing functional relationship with the
Commonwealth, and other than creating the Board, the General Assembly has no oversight or say in how the Board
operates and conducts its affairs, carries out the intentions of Girard's Will, and supports and sustains the Trust and
College. 18 A.3d at 426-27.
Nor, according to the panel, are the Board of City Trusts or the Girard Trust local agencies of the City of Philadelphia,
since those entities would have to have been the creation of the City and be subject to City oversight, laws, and officials,
which they are not. Aside from annual reporting, the panel stated, the Board operates independently of and without
compensation from the City, even though the City is legally the trustee of the Girard Trust. According to the panel,
because the Trust and the Board are neither Commonwealth nor City agencies, they must be private entities and there is
therefore no basis for immunity from local real estate taxation. In support of this reasoning, the panel cited generally to
the analysis and "last pronouncement" of this Court, in the second of the desegregation cases decided in the [***57]
1950s, stating that the Girard Trust was a private, not a public charity. See id. at 427-28 (describing In re Girard
College Trusteeship, 391 Pa. 434, 138 A.2d 844 (Pa. 1958)).
The panel then turned to the question of whether the Property is exempt from local real estate taxation because the
Trust and the Board of City Trusts are components of an institution of purely public charity consonant with the
Institutions of Purely Public Charity Act of 1997. See 10 P.S. § 376. The statutory criteria for determining purely public
charity status include fulfilling a charitable purpose, an entirely non-profit motive, gratuitous provision of services or
products to legitimate subjects of charity, and that the entity seeking exemption relieves the government of some
burden, such as public education. The panel concluded that the Trust, as owner of the Property, qualifies as a purely
public charity, but noted that even a purely public charity must ensure that its property is actually and regularly used to
advance the institution's [*613] charitable purpose in order to maintain eligibility for the statutory exemption. 18 A.3d
at 428-29.
According to the panel, the Board's leasing of the Property to the OAG in order to [***58] generate income for the
Trust was not a legitimate basis for tax exemption. The panel looked to a test articulated in Appeal of Archdiocese of
Philadelphia, 151 Pa. Commw. 480, 617 A.2d 821, 823 (Pa. Cmwlth. 1992), which required proof: "(1) that the
premises are not the source 'from which any income or revenue is derived' by the Lessor [here, the Board of City
Trusts]; (2) that any rent paid was merely nominal; and (3) that the Lessee [here, the OAG] was itself the recipient of
the Lessor's charity." To the panel, because the property arrangement here did not meet those criteria, exemption was not
warranted. 18 A.3d at 429.
In a footnote, the panel added that even if the Girard Trust is a local agency of the City of Philadelphia, the
arrangement at issue -- rental of the Property to generate income to fund the College -- did not [**44] amount to
"public property used for public purposes." Even though the OAG is a Commonwealth agency, the panel found that the
nature of the tenant did not alter the non-public essence of the underlying arrangement. Id. at 429 n.15. The
Commonwealth Court denied the Board's application for reargument.
The City, as Girard trustee acting through the Board of City Trusts, filed a petition [***59] seeking discretionary
review in this Court, which we granted, accepting the twin issues of immunity and exemption, as stated in the petition:
Page 18
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2013 Pa. LEXIS 2547, ***

(1) Is the [Board of City Trusts], created in 1869 by the Pennsylvania Legislature to exercise and discharge duties and powers of
the City of Philadelphia, a governmental agency as the United States Supreme Court and numerous federal and state court decisions
have previously held, and thus entitled to immunity from local taxes?
(2) Is the property at issue, title to which is held by the City of Philadelphia, administered by the [Board of City [*614] Trusts]
and leased to the [OAG], exempt from local property taxation as public property used for a public purpose?

612 Pa. 481, 31 A.3d 654 (Pa. 2011).


[HN10] The question of whether summary judgment is warranted is one of law, and thus our standard of review is de
novo and our scope of review is plenary. Summary judgment may be entered only where the record demonstrates that
there remain no genuine issues of material fact, and it is apparent that the moving party is entitled to judgment as a
matter of law. Chepkevich v. Hidden Valley Resort, L.P., 607 Pa. 1, 2 A.3d 1174, 1182 (Pa. 2010). This Court's inquiry
is therefore confined to whether [***60] the Girard entities are entitled to judgment as a matter of law, i.e., whether the
Property is either immune to, or exempt from, local real estate taxation.

III. The Parties' Arguments


The parties proceed with arguments tracking those made below. On immunity, the Board of City Trusts notes that, even
before it came into existence, the General Assembly had recognized and intended that management of the Girard assets
was to be a public and governmental endeavor powered by state legislation, beginning with General Assembly
legislation enacted within months after Girard's death that enabled the directives of his Will to take effect under City
control. When the City's initial approach to administering the Trust faltered and the College suffered, as we have
detailed in Part I above, the General Assembly stepped in again and by the Act of June 30, 1869, created the Board of
City Trusts and vested it with broad rights and powers to perform its work on behalf of the City, subject to annual
reporting to both the General Assembly and the Philadelphia City Council. Board of City Trusts Brief at 8-11.
The Board avers that the plain language of its enabling legislation reflects its status as an "alter [***61] ego" of the
City, as it is specifically granted all of the "duties, rights, and powers" necessary to administer all charitable assets
vested in the City, including the specific power to "make all leases, contracts [*615] and agreements whatsoever" that
may be necessary to do so. The Board posits that it was acting within its capacity as a special government agency
undertaking a statutorily authorized activity, as well as carrying out the terms of Girard's Will, when it merely leased a
City-owned property and managed the ensuing rental income for the benefit and continued endowment and maintenance
of Girard College. The Board adds that transcripts of the General Assembly debate preceding adoption of the 1869 Act
that created the Board reveal that the goal [**45] was to remove management of the Girard assets from City
appointees, who had succumbed to political corruption and mismanagement, and place authority instead, including
appointment power, in the hands of Commonwealth judicial officials. It was believed, the Board relates, that
Commonwealth personnel would be less likely to allow the Girard entities to fall victim to local City influence
peddling, to the detriment of the Trust assets. The Board [***62] remarks that its composition remains subject to
Commonwealth control because the judges of the Court of Common Pleas of Philadelphia County maintain statutory
authority over appointment, approval, and removal of Board members, as set forth in 53 P.S. §§ 16365-16370. Board of
City Trusts Brief at 11-14.
Next, the Board of City Trusts points to decisions from the U.S. Supreme Court, the Third Circuit, and the
Commonwealth Court that have treated it as a Commonwealth agency. Most notably, the Board quotes the High Court's
1957 per curiam reversal of this Court's initial desegregation decision. After noting that Girard's Will named the City as
trustee, the Board stresses that the pertinent provisions of the Will were, in fact, carried out by the City and the
Commonwealth, that the Board had administered the Trust and College since 1869 by virtue of an Act of the General
Assembly, and that the High Court held that: "the Board which operates Girard College is an agency of the State of
Pennsylvania." , Commonwealth v. [Board of City Trusts] 353 U.S. at 231. The Board also cites the 1968 Brown case,
where the Third Circuit noted that Girard "deliberately and specially involved [*616] the State in the [***63]
designated use of his testamentary property," as well as the Commonwealth Court's Board of City Trusts sovereign
immunity decision in Moore. Board of City Trusts Brief at 15-18.
As a practical matter, the Board continues, the negative impact of a first-time determination that Girard Trust-owned
property is subject to local property taxation will be substantial and will fall upon entities that serve the public in
numerous ways. The Board notes that an estimated $110 million in tax-exempt bonds were issued in reliance upon the
status of the Board as a governmental entity pursuant to the federal Internal Revenue Code. This agency status has also
Page 19
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2013 Pa. LEXIS 2547, ***

been accepted by the Internal Revenue Service ("IRS"). According to the Board, upholding the decision below could
lead to mandatory redemption obligations, termination fees, and conversion to private activity bonds subject to taxation,
all of which would undermine the financial capacity and capability of the Girard entities. 17 The Board adds that its
employees, as well as employees of Girard College and other associated entities have long been deemed to be public
employees subject to Pennsylvania's Public Employee Relations Act. If the Board is [***64] now held not to be a
governmental agency, the labor relations and practices governing the Girard entities will be rendered unstable during a
very difficult economic situation. And, if Board-managed property is deemed subject to local real estate taxation in
Cumberland County, the Board expects that all similar property, wherever located in the Commonwealth, will almost
surely be taxed as well, posing a danger to the Trust funds currently devoted solely to operating and sustaining the
College in fulfillment of Stephen Girard's testamentary wishes and instructions. Board of City Trusts Brief at 18-20.

17 The amicus brief filed by Public Financial Management, Inc., in support of the Board of City Trusts, which is summarized infra, provides
greater detail on this argument.

[**46] Under trust law as well, the Board of City Trusts adds, the Girard Trust is not private, but a public nonprofit
charitable entity created by Stephen Girard's Will as an educational [*617] resource to help lift disadvantaged children
of the City and Commonwealth out of poverty, while relieving some of the public burden of educating those very same
children. The Board heralds Girard's bequest as providing that future needy individuals [***65] -- eligible students not
designated, named, or identified in the Will itself -- would receive a quality education fully funded by scholarship,
which continues to benefit the community and the public. The Board cites as support the Restatement (Third) of Trusts
(2003), which distinguishes public and charitable trust purposes, in part, as those created for the benefit of the public at
large or "indefinite members thereof," whereas private trusts benefit "identified or identifiable beneficiaries."
According to the Board, the Girard Trust is clearly a public charity and continued immunity from local real estate
taxation is therefore warranted. Board of City Trusts Brief at 20-24 (citing Restatement (Third) of Trusts (2003), §§ 27,
28 & cmts.).
Finally, turning to tax exemption, the Board alternatively asserts that the "public property/public purpose" exemption set
forth in the Pennsylvania Constitution at Article VIII, § 2(a)(iii) and the General County Assessment Law at 72 P.S. §
5020-204(a)(7) applies here. The Board cites cases where this Court has indicated that this particular exemption is not
negated when a property generates rental income, so long as the purpose and character of [***66] the use remains
public in nature. Board of City Trusts Brief at 24 (citing Appeal of Twp. of Moon, 387 Pa. 144, 127 A.2d 361 (Pa.
1956) and Appeal of Mun. Auth. of Borough of West View, 381 Pa. 416, 113 A.2d 307 (Pa. 1955)). The Board also cites
Commonwealth Court cases holding that property leased to various agencies and governmental bodies, both federal and
Commonwealth, has been deemed exempt, such as Dauphin County General Authority v. Dauphin County Board of
Assessments, 768 A.2d 895, 899 (Pa. Cmwlth. 2000) ("[B]oth properties acquired by the Authority . . . are used
exclusively for public purposes, namely, to house federal and Commonwealth agencies and offices. Hence, both
properties are exempt from taxation."). The Board asserts that the Property, which is leased to OAG, is no [*618]
different. As such, the Board concludes, the Property falls squarely within the public property/public purpose exemption
from local real estate taxation. Board of City Trusts Brief at 24-25.
The Board of City Trusts' amicus is Public Financial Management, Inc. ("PFM"), a national firm headquartered in
Philadelphia that has been the Board of City Trusts' financial advisor since 2008. PFM warns that if property
throughout the Commonwealth [***67] managed by the Board is suddenly deemed subject to local real estate taxation,
the negative impact on the ability of the Board to fund Girard College and other entities under its aegis, like the Wills
Eye Institute, would be significant. PFM states that the Board currently maintains approximately $110 million in debt in
the form of tax free bonds, which were issued at times when the IRS determined that the Board is exempt from taxation
as a governmental entity and political subdivision of the Commonwealth. According to PFM, the IRS has consistently
upheld the Board's governmental status, dating at least back to 1942 and as recently as 2008. To maintain and grow the
value of the Girard Trust assets, these bonds are sold, transferred, and acquired in the public market in reliance on their
remaining tax free. PFM states that if the Commonwealth Court's determination [**47] stands, the IRS could well
revoke the entity's tax exempt status, with the result that income received by those holding the bonds could become
subject to taxation and those debt holders, in turn, could call for redemption of the bonds and seek penalties or other
retributive action. PFM further notes that the uncertainty created [***68] by the current litigation has already stifled the
ability of the Board to take advantage of improving market conditions in order to refinance its debt and secure longer-
termed letters of credit. PFM Brief at 5-12.
Page 20
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2013 Pa. LEXIS 2547, ***

The County responds that the Property is subject to local real estate taxation because it is not owned by the Board of
City Trusts, but by the Girard Trust, a private nongovernmental entity; the County posits that the Property may not
simply be claimed on behalf of the Board in order to take advantage [*619] of the entity's asserted status as a
governmental entity or agency. The County argues that while the Girard Trust is a charitable trust that serves public
interests by funding and operating Girard College, it is not a public trust, and it is also not a governmental entity. The
County views the cases cited by the Board as inapposite because those cases did not establish specifically that the
Girard Trust or Girard College were governmental entities or arms or agencies of the Commonwealth for the specific
purpose of local real estate taxation. According to the County, the cases prove only that the Board was deemed a state
actor in its capacity as administrator of the Girard Trust [***69] and that, for Fourteenth Amendment purposes,
impermissible state action occurred in the 1950s when the Orphans' Court replaced the sitting Board trustees with
private individual trustees in order to keep the College segregated. County Brief at 7-13
[**48] The County's position is that it is necessary to retain some distinction between the Girard Trust and Girard
College, which are not governmental entities, and the Board of City Trusts. The County relies upon In re Milton
Hershey School, 590 Pa. 35, 911 A.2d 1258 (Pa. 2006) (alumni of school funded by charitable trust did not have
standing to sue for rescission of agreement made by trust, school, and Attorney General regarding management of trust
assets and school) for the premise that the nature of a trust alone determines whether the trust is private or public, and
not the nature of its trustees. The County echoes the Commonwealth Court's analysis that the City, as trustee of the
Girard Trust, may have legal title to the assets held in trust, but this is not the same as the City actually owning the
assets; equitable title to the assets, as well as any beneficial interest therein, remains with its beneficiaries: the Girard
Trust and Girard College. And, [***70] the County continues, when real estate taxation is at issue, immunity or
exemption determinations depend upon the real owner. The County thus cites cases that focus on ownership and control
versus title or registration in the context of local taxation, including Appeal of Board of School Directors of Owen J.
Roberts School District, 500 Pa. 465, 457 A.2d 1264 (Pa. [*620] 1983) (mere registration of title in name of
Commonwealth not always sufficient to establish ownership and exemption from local real estate taxation). Here, the
County asserts, neither the Board of City Trusts nor the City, both of which are bound by the terms of Stephen Girard's
Will, has the level of ownership and control over the Girard Trust assets to satisfy the rule the County derives from the
Roberts School District case: any power the Board and the City may exercise over the Property is circumscribed by the
instructions and conditions in Girard's Will limiting use and control of the Trust assets to the funding and operation of
Girard College. County Brief at 13-20.
The County further argues that even if the Property were owned and controlled by the Board of City Trusts, immunity
would still not be appropriate because the Board [***71] of City Trusts is not a Commonwealth agency. The County
stresses a difference between a true Commonwealth agency and a local agency or other entity that is merely or partially
"governmental in nature" and not immune. According to the County, although the Board was created by the General
Assembly, and its members are appointed by the judiciary, the Board has nothing to do with either the executive or
administrative government of Pennsylvania and is therefore not a Commonwealth agency. The County adds that the
mere fact that the General Assembly provided the statutory method by which appointments to the Board are made does
not make the Board itself a Commonwealth agency. County Brief at 21-24.
Moreover, the County asserts that the fact that the Board of City Trusts is a state actor for Fourteenth Amendment
purposes or in other regards does not necessarily mean it is an immune agency in the context of local real estate
taxation. This "shifting" status, the County states, is not unusual, and was addressed by this Court in a real estate
taxation case involving Penn State University. See Pennsylvania State Univ. v. Derry Twp. Sch. Dist., 557 Pa. 91, 731
A.2d 1272, 1274 (Pa. 1999) ("The difficulty in [***72] determining the status of PSU arises from the fact that it is not
merely funded by the Commonwealth, but in certain very limited respects it has governmental [*621] characteristics,
while in other regards it is plainly non-governmental. . . . [A]n entity's status as an agency or instrumentality varies,
depending on the issue for which the determination is being made."). According to the County, the Board enjoys a
greater degree of autonomy from legislative oversight than this Court described as characteristic in the Penn State case:
the Commonwealth does not fund the Board and has no actual or direct representation on it, the Board members and
directors are not public officers, and the property at issue is not functionally controlled by the Commonwealth. If
anything, the County asserts, the 1869 statutory scheme established the Board as an arm of the City of Philadelphia, not
of the Commonwealth. County Brief at 24-30.
Finally, the County states that even if the Board of City Trusts is viewed as a Commonwealth agency, the Property does
not function as Commonwealth property and is not controlled by the Commonwealth. The Property is used as an
investment to generate rental income to support [***73] the private Girard charity, the County asserts, and is not being
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used for the sort of governmental purpose that immunizes it from local real estate taxation. The County distinguishes the
"state agency" conclusions of the Third Circuit and the U.S. Supreme Court in the desegregation cases, arguing that the
constitutional question in that litigation is inapposite. The County also critiques the reliance of the Board on the
tort/sovereign immunity case of Moore. The County asserts that even if a finding of immunity for one purpose
(protection from tort liability) is deemed applicable to another purpose (relief from local property taxation), Moore was
overruled by Burcik v. Caplen, 805 A.2d 21 (Pa. Cmwlth. 2002). County Brief at 30-38.
The County also disagrees with the Board of City Trusts' alternative assertion that the property should be deemed
exempt from taxation. The County asserts that even if the Board and the City are local government entities, the use of
the Property as an investment to generate rental income for Girard College is not the type of "public purpose" eligible
for [*622] exemption. To the County, the fact that the [**49] tenant is the OAG does not turn the private investment
and [***74] income-generation ownership use of the Property by the Board into a public purpose. Only if the tenant
function is related to the owner's function and rent is purely incidental, the County asserts, will the "public property for
public purposes" exemption apply. Such "singularity of purpose with unity of consort" is not present here, the County
avers, where the OAG is an outside party, of no relation to the Board, Girard Trust, or Girard College, and the rent is
over $40,000 per month, which clearly is not incidental. County Brief at 39-42 (quoting Wesleyville Borough v. Erie
Cty. Bd. of Assessment Appeals, 676 A.2d 298 (Pa. Cmwlth. 1996)).
Turning to the available legislative history, the County notes that the General Assembly's goal in creating the Board of
City Trusts was to remove control of the Girard Trust and College from corruptive urban political and government
influence that had resulted in a dark era for the College, but not necessarily to relocate that control in the hands of the
Commonwealth. Instead, the County posits that the Board was established to operate more like the private boards of
trustees that manage other charitable entities. Other than appointing directors [***75] of the Board, the County adds,
the Commonwealth has never been involved; nor is the City so involved. The County also avers that the Property is not
exempt from taxation as the property of a "purely public charity," since it is not used solely by or in furtherance of the
Girard Trust's charitable purposes. Finally, the County dismisses the Board's concerns with substantial adverse effects,
arguing that it merely seeks to place the Girard Trust on equal footing with other private charitable entities. The County
concludes by discounting the concerns of the Board and its amicus PFM that subjecting the Property to local real estate
taxation will harm the Trust's ability to support and fund the College; to the County, favoring the Trust and the College
affects the ability of counties and localities to provide for publicly educated students. County Brief at 42-47.
[*623] The County's amicus, the County Commissioners Association of Pennsylvania, echoes the County's position
that although the Board of City Trusts is a "state actor" in the context of Fourteenth Amendment racial discrimination
analysis, it is not thereby an agency of the Commonwealth for all purposes. The Commissioners also restate [***76]
the County's point that a trust may not be characterized by the nature of its trustee; hence, even though the City is the
trustee and the Board was created and empowered by the General Assembly to act for the City, the Girard Trust is
essentially a private entity. County Commissioners' Brief at 8-18.
In reply, the Board of City Trusts reasserts that while it may be uniquely structured and empowered under the terms of
its enabling legislation, it is clearly an instrumentality of the Commonwealth, and numerous courts have agreed with
that determination rather than cabin the Board within narrow categorical limits. The Board points out that in the Penn
State case, the university board of trustees was constituted mainly of private individuals, with only six of thirty-two
trustees appointed by the Governor. By contrast, the Board asserts, through the power vested in the Philadelphia
judiciary to appoint Board members, the Commonwealth retains control over the governance of the Board. The Board
defends the Girard Trust as a charitable entity that is public, not private, and adds that the Girard Trust and the Board
are not distinct entities having different ownership interests, but maintain [***77] "legal unity" such that the public
charitable nature of the overall enterprise [**50] is shared. Board of City Trusts Reply Brief at 1-9.

IV. Immunity From Local Real Estate Taxation

A. Decisional Law Background


[HN11] An arm, agency, subdivision, or municipality of the Commonwealth enjoys sovereign immunity from local real
estate taxation. "Tax immunity precludes a locality from imposing taxes upon the Commonwealth and its agencies."
Lehigh-Northampton Airport Auth. v. Lehigh County Bd. of Assessment, 585 Pa. 657, 889 A.2d 1168, 1172 n.2 (Pa.
2005). [*624] Immunity in this context derives from the Commonwealth's sovereign right to be free of taxation unless
some statutory authorization or concession to the contrary exists; this has been long settled. Id. at 1175; see also
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Commonwealth v. Dauphin Cty., 335 Pa. 177, 6 A.2d 870, 872 (Pa. 1939) ("The legislators did not intend to upset the
orderly processes of government by allowing the sovereign power to be burdened by being subjected to municipal
taxes.").18 Property owned by the Commonwealth and its agencies and instrumentalities is presumed to be immune, with
the burden on the local taxing body to demonstrate taxability. Id. at 1180 n.9.

18 The immunity of the Commonwealth from local [***78] taxation is mirrored by the parallel tax immunity of property of the federal
government. See Kern-Limerick v. Scurlock, 347 U.S. 110, 122, 74 S. Ct. 403, 98 L. Ed. 546 (1954) ("The doctrine of sovereign immunity is
so embedded in constitutional history and practice that this Court cannot subject the Government or its official agencies to state taxation
without a clear congressional mandate.").

This Court has considered taxation immunity questions several times in recent decades, albeit none of the cases involve
an entity remotely like the Girard Trust and College. In Delaware County Solid Waste Authority v. Berks County Board
of Assessment, 534 Pa. 81, 626 A.2d 528 (Pa. 1993), the Court addressed whether a solid waste authority in one county
could claim immunity from taxation for property the authority owned in another county and maintained as a landfill.
The Court concluded that the authority was an "independent agency" of the Commonwealth through analysis of its
enabling legislation, the Municipal Authority Act of 1945, 53 P.S. §§ 301-322, and exercised sufficient control or
"incidents of ownership" over the property, which was used for an "authorized governmental purpose," that immunity
was not defeated. 626 A.2d at 531-33.
In [***79] Pennsylvania State University v. County of Centre, 532 Pa. 142, 615 A.2d 303 (Pa. 1992) "(Penn State I"),
the Court considered the status of the university for immunity purposes. The Court noted how the university had
changed and grown since its modest origins in 1855 as a state-created institution to prepare youths to pursue
occupations in agriculture; the [*625] school became a federal land grant college in 1863 and by the second half of the
twentieth century derived most of its funding from the federal government, tuition, and other private sources. The Court
concluded that, although the Centre County Court of Common Pleas had held in Pennsylvania State College v. County
of Centre, (No. 2 Equity November Term 1937, filed August 24, 1939) that the university was a Commonwealth agency,
that status was not etched in stone. Rather, the Court found that the immunity question presented a genuine issue of
material fact to be determined at trial on remand.
Although that particular litigation did not result in a subsequent reported opinion, the question of Penn State's status as
an agency or instrumentality of the Commonwealth [**51] entitled to local tax immunity arose again in Pennsylvania
State University v. Derry Township School District, 557 Pa. 91, 731 A.2d 1272 (Pa. 1999) (for convenience, "Penn State
II") [***80] . At issue was immunity from taxation by Dauphin County of the university-owned Hershey Medical
Center, which encompasses the university's medical school and teaching hospital, medical research facilities, and a
children's hospital. Relying heavily on Penn State I, the Penn State II Court found that although the university remained
"state-related," and was once easily a Commonwealth agency, it had become so autonomous in so many regards that it
could no longer be seen as part of or controlled by the Commonwealth. The Court stressed that for certain quasi-public
entities, status as an agency or instrumentality could vary, and that Commonwealth funding alone (the university then
received hundreds of millions of dollars in state funds each year) did not confer agency status. The Court noted that, like
regular state agencies, the university's employees were state employees who participate in the state pension plan, but
unlike state agencies, the university was not subject to full compliance with the Right to Know Act. The Court reasoned
that the "pivotal factor" should be "whether the institution's real property is so thoroughly under the control of the
[***81] Commonwealth that, effectively, the institution's property functions as Commonwealth property." The Court
[*626] then noted that the university's real property was controlled by a board of thirty-two trustees, of which only ten
represented "government" seats either held or appointed by the Commonwealth's executive branch. The Court opined
that the Commonwealth did not have either functional or legal control over the university's real property, and thus, no
basis existed on which the university could be deemed immune from taxation of its medical school and hospital
properties. 731 A.2d at 1273-75.
[HN12] In Southeastern Pennsylvania Transportation Authority [SEPTA] v. Board of Revision of Taxes, 574 Pa. 707,
833 A.2d 710 (Pa. 2003), the Court determined that even if an entity is clearly a governmental agency or
instrumentality, it may not automatically claim immunity from local real estate taxation for property leased to third-
party commercial entities. The Court noted that SEPTA is part of the Commonwealth sovereign and entitled to
presumed immunity; its enabling legislation also authorizes it to lease real estate in order to raise revenue and reduce
expenses. Nevertheless, to the extent that SEPTA was acting [***82] as a "commercial landlord" at its headquarters
building in Philadelphia, the Court held that leasing real estate to commercial tenants who were not part of or associated
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with SEPTA, "solely to raise revenue," was outside the scope of SEPTA's immunity because the activity was not
sufficiently connected to SEPTA's stated purpose of providing a metropolitan public transportation system. Although the
lease arrangements raised revenue and lessened the need for public funding, they were still commercial ventures not
eligible for immunity: "In that respect, SEPTA is like any other commercial landlord with which it competes as a
landlord." 833 A.2d at 716-20.
Two years later, in Lehigh-Northampton Airport Authority, supra, the Court concluded that the regional airport authority
at issue was immune from local real estate taxation even though, unlike SEPTA, the authority's enabling legislation did
not expressly confer Commonwealth sovereign status. The authority owned twenty-one properties: the airport itself,
plus hangars, airplane parking aprons, cargo processing and [*627] air courier facilities, federal customs and postal
service facilities, and [**52] various areas used for training, maintenance, and [***83] storage. The trial court,
following Penn State II, held that because the Commonwealth did not exercise ownership-style control over the
authority's property, the authority was not immune; the Commonwealth Court affirmed. [HN13] This Court reversed,
however, concluding that the Penn State cases, which dealt with the unique and "idiosyncratic" relationship between the
Commonwealth and the university, did not alter the longstanding rule expressed in Delaware County that property
owned by a municipal authority is immune in the same manner as the sovereign Commonwealth. The Lehigh-
Northampton Court observed that the airport authority was a creature of the Municipality Authorities Act of 1945, and
expressly entitled to immunity under that legislation. 889 A.2d at 1177-80 (quoting Municipal Authorities Act, 53
Pa.C.S. § 5620: "The effectuation of the authorized purposes of authorities created under this chapter shall be for the
benefit of the people of this Commonwealth . . . . Since authorities will be performing essential governmental functions
in effectuating these purposes, authorities shall not be required to pay taxes or assessments upon property acquired or
used by them for such purposes.").
From [***84] the foregoing, it is evident that [HN14] in the context of immunity from local real estate taxation based
on status as an agency or instrumentality of the Commonwealth, it is helpful, but not essential, to have an express
declaration of Commonwealth status in enabling legislation. But, some entities may be "square pegs" that simply do not
fit easily into recognized, categorical round holes; they are sui generis, having neither clear ancestors in law or history,
nor contemporary analogs. When these circumstances arise, existing precedent and authority may be less helpful than
usual. See In re Gower's Estate, 445 Pa. 554, 284 A.2d 742, 743 (Pa. 1971) ("We believe that this particular case is [s]ui
generis and that it is difficult to derive much guidance from the particular facts of cases previously decided by this
Court.").

[*628] A. The Girard Trust and College


In Part I of this Opinion, we reviewed: the specifics of Stephen Girard's Will, Trust, and resulting College for orphans;
the fact that the City and the Commonwealth accepted Girard's public bequests and the conditions attached to them; the
nature of the ensuing and enabling legislation, both at the local and state level, that followed to accommodate the
[***85] conditions of the Will; and the extensive decisional law arising in connection with the Girard entities
explaining, inter alia, why it was appropriate for municipal government to administer such a trust, and the relationship
of the Commonwealth to the City in that administration. We did so in detail because the nature and history of the Trust
and College provides essential background in properly identifying the Girard entities for purposes of local tax immunity
and exemption. This Court's most recent decisions concerning the Girard entities are now over half a century old, and
involved Fourteenth Amendment-based desegregation challenges. The majority decisions in those cases went to great
lengths -- over strong dissents from Justice Musmanno -- to describe the entities as purely private. The first decision
was summarily reversed by the U.S. Supreme Court, which held, unequivocally, that the Board of City Trusts was an
agency of the Commonwealth. In the second decision, the Court majority affirmed a remarkable substitution by the
Orphans' Court of "private" trustees in place of the ready, willing and able public trustees designated by Girard himself,
and embodied, by virtue of a 1869 [***86] Act of the General [**53] Assembly, in the Board of City Trusts. The
effect of that second decision, though not reviewed directly by the U.S. Supreme Court, was disapproved by the Third
Circuit ten years later in Brown, supra, which held in essence that the Orphans' Court's substitution of private trustees,
and this Court's affirmance of that action as against a renewed equal protection challenge, was an effort to avoid
compliance with the U.S. Supreme Court's initial summary reversal. The practical effect of the Third Circuit's decision,
and responsive legislation by the General Assembly effectively readopting the Act of 1869, has been to restore the
status quo ante with [*629] respect to the Board; it is a Commonwealth agency, at least for Fourteenth Amendment
purposes.
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In light of the history we have outlined, it is safe to say that the Court's majority decisions in the 1950s segregation
challenges did not represent the Court's finest hour. Moreover, given the U.S. Supreme Court's summary reversal, and
the eventual legislative restoration of the Board of City Trusts, we believe an assessment of the proper status of the
Girard entities is not constrained by the analyses in the disapproved majority [***87] decisions in the desegregation
cases.
Bringing our own independent judgment to bear, we think that the nature of the Girard entities was more accurately
grasped and described in Justice Musmanno's dissenting opinions. By any measure, Stephen Girard's Will represented a
remarkable act of public largesse, providing for numerous civic projects to improve the City and the Commonwealth,
including but by no means limited to establishing the College. Girard's bequests helped to: develop the eastern half of
the City, improve navigation, finance the police, remove buildings that were fire hazards, and establish support for the
poor and infirm; all in an effort to defray some of the important costs of government. Girard's bequests addressed core
municipal functions. Furthermore, Girard made clear that he named the City as trustee precisely because the
government was answerable to the citizenry: "from the nature of my bequests and the benefit to result from them, I
trust that my fellow citizens of Philadelphia will observe and evince special care and anxiety in selecting members of
their City Councils and other agents." Girard Will, Clause XXI, ¶ 9.
Neither the City nor the Commonwealth was obliged [***88] to accept the manifold duties envisioned as a condition of
Girard's public generosity, and it was not initially clear whether they properly could do so -- but both governmental
entities freely and immediately accepted the charge. Acquiescing in those conditions did not just entail accepting the
duties of trusteeship, but the conditions also required the passage of special state legislation and city ordinances to
satisfy specific conditions of the Will, including legislation -- unusual, to say [*630] the least -- that made the City the
guardian of the orphans attending Girard College (so as to preclude relatives from interference), and authorized the City
to bind the students out as apprentices until they reached majority. Moreover, as the Fox Court stressed in reviewing the
constitutionality of the Act creating the Board of City Trusts -- a point of precedent appreciated by Justice Musmanno,
but overlooked by the Court majority in both desegregation decisions -- municipal entities are not empowered to accept
duties of trusteeship to administer private trusts. Rather, as Fox noted, municipal corporations may undertake such
duties of administration, and the liabilities they incur, "only as it seems [***89] for public purposes, germane to its
objects." The Fox Court stressed that Girard's Trust, like other trusts then also managed by the City and subject to the
Board of City Trusts, were appropriate for municipal [**54] management precisely because they were "germane" to
the objects of municipal government: "The widening and improvement of streets and avenues, planting them with
ornamental and shade trees, the education of orphans, the building of school-houses, the assistance and encouragement
of young mechanics, rewarding ingenuity in the useful arts, the establishment and support of hospitals, the distribution
of soup, bread or fuel to the necessitous, are objects within the general scope and purposes of the municipality." 64 Pa.
169, 1870 WL 8678 at *12.
The Board of City Trusts maintains that the properties it manages are immune from taxation because the General
Assembly's intention in 1869 was to establish an instrumentality of the Commonwealth that would be Philadelphia-
oriented and would oversee charitable assets on behalf of the City of Philadelphia, while remaining subject to
Commonwealth oversight through annual reporting requirements and judicial authority over appointments to the Board.
Given [***90] the intense legislative involvement of the General Assembly in providing for the operation of the Trust,
culminating in its creation of the Board, we have little doubt that this is so; but that fact does not necessarily answer the
question of whether the Board [*631] was intended to be an agency of the Commonwealth for purposes of municipal
tax immunity.
The simple answer to that distinct question is that the legislation creating the Board of City Trusts was not addressing
tax immunity, nor has any subsequent legislation specifically addressed the matter. Part of the difficulty in this appeal
arises from the fact that it is argued to us, in large part, in the usual manner of common law advocacy: the parties invoke
other cases and entities, and then quite ably reason by analogy and distinction. But, the terms of the Girard Will and
Trust, the acceptance of those terms by the Commonwealth and the City, the legislation passed to satisfy the terms and
conditions of Girard's bequests, and the creation of the Board itself, all predate by many decades Pennsylvania
decisional law respecting tax immunity for Commonwealth agencies. Indeed, the parties have cited no reported
appellate cases, and our [***91] research has revealed none, involving sovereign immunity from local real estate
taxation until the first half of the twentieth century. See Commonwealth v. Dauphin County, 6 A.2d at 872 (Pa. 1939)
[HN15] ("The legislators did not intend to upset the orderly processes of government by allowing the sovereign power
to be burdened by being subjected to municipal taxes."). There was no particular reason for the General Assembly in
1869 to directly address "agency" status for purposes of municipal taxation; such taxation was simply not an issue.
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2013 Pa. LEXIS 2547, ***

In this historical and legal landscape, it would seem to be a fool's errand to attempt to determine whether the Girard
entities comprise a Commonwealth agency in the modern sense by squeezing a sui generis creature of the nineteenth
century -- when the Commonwealth itself was in its infancy -- into a twentieth century (and largely late twentieth
century, at that) decisional paradigm deriving from disputes concerning waste disposal sites, airports, and evolving land
grant universities. It is enough, we believe, to recognize the quintessentially public nature of the bequests and the
intimate, immediate, and ongoing Commonwealth governmental relationship with [***92] the Girard Entities,
including the Board of City Trusts. Part [*632] of this history also includes the facts, which are not disputed or
rebutted by the County, that the Girard entities historically have not been subject to local real estate taxation, and that
the Board has been deemed a Commonwealth agency for purposes of the Internal Revenue Code. We recognize, of
[**55] course, that the fact that a prior challenge has not been made to the status quo does not mean that a challenge,
once made, must fail. See Commonwealth v. Gilmour Manuf. Co., 573 Pa. 143, 822 A.2d 676, 681-82 (Pa. 2003). But,
the historical status of the Girard entities properly gives us pause before stepping in, as a judicial matter, and rendering a
decision that may well upset reliance interests and cause severe economic dislocation.
What is plainly apparent, however, is that any disruption in the status of the Girard entities, for purposes of local real
estate taxation, is a matter posing questions of policy more properly assessed by the General Assembly. There is no
denying that there are competing interests here. As the County notes, every dollar of property tax not paid by an entity
such as Girard, which owns property within Cumberland [***93] County for the benefit of a charity operating in
Philadelphia County, is a dollar that must be found elsewhere to educate the students within Cumberland County. But,
this is true of all property deemed that of the Commonwealth sovereign and its agencies. Whether a Commonwealth
agency such as the Board of City Trusts should properly continue to share in the immunity of the Commonwealth
government is a matter that the General Assembly obviously can address and announce affirmatively. And, given the
General Assembly's historical interest in, and concern with the Girard Entities, we believe it better that that policy
decision be considered and decisively rendered by that body, rather than by a Court attempting to apply new doctrines to
old, and rather unique, relationships.
We conclude, therefore, that the Trust, College and Board of City Trusts and, by extension, the real estate holdings of
the Girard Trust, retain immunity from local property taxation as, collectively, part of the sovereignty of the
Commonwealth of Pennsylvania. We therefore reverse the decision and order [*633] of the Commonwealth Court and
reinstate the order of the trial court.

V. Exemption From Local Taxation


Our grant of [***94] allowance of appeal also included the Board of City Trusts' alternate argument that it is exempt
from local real estate taxation. Given our holding above concerning sovereign immunity, we need not reach this
question, and we offer no view upon it.

VI. Conclusion
For the foregoing reasons, we reverse the decision and order of the Commonwealth Court and reinstate the order of the
trial court.
Former Justice Orie Melvin did not participate in the decision of this case.
Mr. Justice Eakin, Madame Justice Todd and Mr. Justice McCaffery join the opinion.
Mr. Justice Saylor files a concurring opinion in which Mr. Justice Baer joins.

CONCUR BY: SAYLOR

CONCUR
MR. JUSTICE SAYLOR
The majority opinion is noteworthy in terms of its scope, thoroughness, and thoughtfulness concerning the creation,
history, and sui generis character, of the Girard Trust. I find it persuasive, as well, to the degree it sets forth the basis for
considering the Trust to be a Commonwealth entity, and I ultimately agree that the Commonwealth Court's order should
be reversed under the circumstances.
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Nevertheless, I cannot join the opinion in full, as I see no reason to depart from this Court's precedent concerning the
scope of tax immunity that a [***95] Commonwealth body enjoys. Although, as the majority recognizes, the Trust was
created before much of our tax-immunity and tax-exemption [**56] case law was developed, it does not follow -- to
my mind at least -- that this circumstance provides the Trust with a blanket protection from any kind of tax-immunity
analysis or any type of limitation [*634] on the scope of its immunity based on the principles that have emerged from
this Court's cases.
In Leigh-Northampton Airport Authority v. Lehigh County Board of Assessment Appeals, 585 Pa. 657, 889 A.2d 1168
(2005), the Court observed that, although a public entity may be immune from local taxation, the scope of that
immunity is limited where the entity leases some of its property "to unrelated organizations or otherwise . . . acquire[s]
or use[s] it for some purpose not related to the operation of the [owner's] facility." Id. at 673, 889 A.2d at 1178. In
discussing SEPTA v. Board of Revision of Taxes, 574 Pa. 707, 833 A.2d 710 (2003), and Delaware County Solid Waste
Authority v. Berks County Board of Assessment Appeals, 534 Pa. 81, 626 A.2d 528 (1993), moreover, the Leigh-
Northampton Airport Authority Court likewise explained that "immunity is assumed unless [***96] the agency acts
outside of its authorized governmental purposes." Lehigh-Northampton Airport Auth., 585 Pa. at 675, 889 A.2d at 1179
(emphasis added). As a matter of sound logic, this restriction -- the emphasized language in the above-quoted sentence
-- should apply to any Commonwealth entity (including the Trust) regardless of when that entity came into being.
SEPTA is even closer to this case because it involved a Commonwealth body, the Southeastern Pennsylvania
Transportation Authority, that leased part of its office space to tenants whose activities were unrelated to the
performance of SEPTA's purposes. The Court determined that such leased space was taxable, reasoning that the
property "is being used for something other than as part of SEPTA's operation. Very simply, SEPTA is acting as a
commercial landlord, which is clearly distinct from acting as a metropolitan transportation authority[.]" SEPTA, 574 Pa.
at 719, 833 A.2d at 717 (internal quotation marks omitted). Presently, the Girard Trust is also acting as a commercial
landlord insofar as the subject property in Cumberland County is concerned. Although the tenant, unlike in SEPTA, is
public and not commercial in nature, the [***97] public-versus-private character of the tenant is immaterial to the
immunity issue since that question hinges on whether the [*635] agency, in thus renting out the property, is acting
within or outside of its own authorized purposes. Accord Lehigh-Northampton Airport Auth., 585 Pa. at 675, 889 A.2d
at 1179.
Here, the tenant's activities are entirely unrelated to the Girard Trust or Girard College. As such, the Trust is using the
property solely to raise revenue. It follows that, pursuant to the principles set forth in this Court's precedent, the property
is excluded from the scope of the Trust's immunity. Indeed, to hold otherwise, as the majority does, gives the Trust and
its tenants an unfair competitive advantage, as the Trust may, in the future, lease the property to commercial enterprises
at below-market rates due to its avoidance of real estate taxes. Although the Trust may have been established for
beneficial public purposes, Pennsylvania's tax laws were never intended to supply it or its commercial tenants with such
a windfall at the expense of county taxpayers.
With that said, I nonetheless agree that the property should not be subject to taxation under the present circumstances
because [***98] it is being used for a public purpose. In particular, I would find that it is exempt, rather than immune,
from taxation, see Lehigh-Northampton Airport Auth., 585 Pa. at 676 n.9, 889 A.2d at 1180 n.9 [**57] (noting that
immunity is a threshold issue, and a non-immune parcel may be tax-exempt on a separate basis), so long as the public
use continues. See PA. CONST. art. VIII, §2(a)(iii) (permitting the General Assembly to exempt from taxation "[t]hat
portion of public property which is actually and regularly used for public purposes"); 53 Pa.C.S. §8812(a)(8) ("The
following property shall be exempt from all county, city, borough, town, township, road, poor, county institution district
and school real estate taxes: . . . [a]ll other public property used for public purposes . . ..");1 see also Appeal of Mun.
Auth. of Borough of West View, 381 Pa. 416, 420, 113 A.2d 307, 309 (1955) (recognizing that leased property is
exempt from taxation where the lessee uses it for [*636] a public purpose). See generally Wesleyville Borough v. Erie
Cnty. Bd. of Assessment Appeals, 676 A.2d 298, 302 (Pa. Cmwlth. 1996) ("The controlling test for tax exemption is not
whether the property . . . has been leased out, but [***99] whether the use of the property so leased is for a public
purpose.").2 This makes a practical difference in that, under an exemption framework, the property could become
taxable in the future if it is leased for a non-public use. Such a result, in my opinion, would comport with both
controlling law and fundamental fairness.

1 Section 8812(a)(8) represents the 2010 recodification, in the new Consolidated County Assessment Law, of a substantively similar
provision in the now-repealed Fourth to Eighth Class County Assessment Law of 1943. See 72 P.S. §5453.202(a)(7) (repealed).
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2 The Commonwealth Court expressed that the property is not being put to a public use regardless of the identity of the lessee because it is
being used "solely as an investment property that generates rental income." City of Phila. v. Cumberland Cnty. Bd. of Assessment Appeals,
18 A.3d 421, 429 n.15 (Pa. Cmwlth. 2011). This position is substantially inconsistent with the cases cited above as well the discussion in
Appeal of Allegheny County, 425 Pa. 578, 581, 229 A.2d 890, 891 (1967).

Mr. Justice Baer joins this concurring opinion.


Page 29Page 29
2013 U.S. Dist. LEXIS 140205, *

52 of 430 DOCUMENTS

SANDY N. WEBB, Plaintiff, v. GREEN TREE SERVICING, LLC, Defendant.

Civil Action No. ELH-11-2105

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

2013 U.S. Dist. LEXIS 140205

September 30, 2013, Decided


September 30, 2013, Filed

PRIOR HISTORY: Webb v. Green Tree Servicing LLC, 2012 U.S. Dist. LEXIS 104953 (D. Md., July 27, 2012)

CORE TERMS: mortgage, tenant, lease, deposition, rent, inspection, summary judgment, default, deed, cross-motions,
covenants, borrower, phone, email, servicer, reply, discovery, electronic, material facts, notice, renter, surreply, vacant,
phone number, admissible, monthly, window, message, collection, undisputed

COUNSEL: [*1] Sandy N. Webb, Plaintiff, Pro se.

For Green Tree Servicing LLC, Defendant: Brian L Moffet, LEAD ATTORNEY, Gordon Feinblatt Rothman Hoffberger,
Baltimore, MD; John Jun Young Lee, Gordon Feinblatt LLC, Baltimore, MD.

JUDGES: Ellen Lipton Hollander, United States District Judge.

OPINION BY: Ellen Lipton Hollander

OPINION

MEMORANDUM OPINION
Sandy N. Webb, plaintiff, 1 sued her mortgage servicer, Green Tree Servicing, LLC ("Green Tree"), defendant, alleging
several torts and statutory violations arising out of Green Tree's conduct with respect to her mortgage. 2 In particular, in
her Amended Complaint (ECF 26), plaintiff asserted five counts: interference with a business relationship (Count I);
breach of contract (Count II); trespass to land (Count III); violation of the Fair Debt Collection Practices Act
("FDCPA"), 15 U.S.C. §§ 1692 et seq. (Count VI); and common law negligence based on breach of the statutory duties
imposed by the FDCPA (Count VII). Those five counts survived challenges to the sufficiency of pleading. See Webb v.
Green Tree Serv'g, LLC, Civ. No. ELH-11-2105, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464 (D. Md. Dec. 9,
2011) (ECF 16 & 17) ("Webb I") (granting in part and denying in part motion to dismiss) and 2012 U.S. Dist. LEXIS
79451, 2012 WL 2065539 (D. Md. June 7, 2012) [*2] (ECF 52 & 53) ("Webb II") (granting in part and denying in part
motion to strike amended complaint). In so ruling, I determined that all of the common law claims in this case are
governed by Maryland law. See Webb I, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464, at *4 n.12; Webb II, 2012
U.S. Dist. LEXIS 79451, 2012 WL 2065539, at *6 n.7. 3

1 Plaintiff is an attorney licensed to practice law in Maryland and a member of the bar of this Court. However, she resides in Oregon. Webb
is self-represented in this case.

2 Plaintiff filed suit in the Circuit Court for Queen Anne's County, Maryland. Green Tree removed the suit to federal court on the basis of
diversity jurisdiction. See 28 U.S.C. § 1332(a); 1441; see also Notice of Removal (ECF 1). More than $75,000 is in controversy, and the
citizenship of the parties was completely diverse at the time the action commenced. See Webb v. Green Tree Serv'g, LLC, Civ. No. ELH-11-
2105, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464, at *1 n.2 (D. Md. Dec. 9, 2011) (ECF 16). See also Grupo Dataflux v. Atlas
Global Gp., L.P., 541 U.S. 567, 571, 124 S. Ct. 1920, 158 L. Ed. 2d 866 (2004) (stating that diversity jurisdiction in cases removed from
Page 30Page 30
2013 U.S. Dist. LEXIS 140205, *

state court depends on citizenship at time case is initiated, not time case is removed); Athena Automotive, Inc. v. DiGregorio, 166 F.3d 288,
290 (4th Cir. 1999) [*3] ("Because diversity jurisdiction depends on the citizenship status of the parties at the time an action commences, we
must focus our jurisdictional inquiry solely on that time."); Forrest v. Green Tree Serv'g, LLC, Civ. No. ELH-13-1525, 2013 U.S. Dist.
LEXIS 89479, 2013 WL 3270447, *3-5 & n.3 (D. Md. June 25, 2013) (recognizing that, although Green Tree subsequently became a citizen
of Maryland due to a change in the membership of the company, the change in citizenship does not affect jurisdiction in previously
commenced actions).

3 Plaintiff's Amended Complaint is the operative pleading. Hereafter, unless otherwise specified, references to plaintiff's "complaint" refer to
her Amended Complaint.
Plaintiff's original Complaint (ECF 2) contained claims of invasion of privacy by intrusion upon seclusion (Count IV) and non-statutory
negligence (Count V). Those counts were subsequently dismissed. See Webb I, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464, at *10-
12. When plaintiff filed her Amended Complaint, adding the two FDCPA-related counts, she continued the numbering of the counts with
Counts VI and VII, despite the dismissal of Counts IV and V. In a subsequent ruling, I struck a portion of Count VII, which alleged
negligence based on breach [*4] of statutory duties under the Protecting Tenants at Foreclosure Act, Pub. L. No. 111-22, 123 Stat. 1632, §§
701 et seq. (2009), as amended by Pub. L. No. 111-203, 124 Stat. 1376, § 1484 (2010), and its Maryland state-law counterpart, Md. Code
(2010 Repl. Vol., 2011 Supp.), § 7-105.6(b)(2) of the Real Property Article. See Webb II, 2012 U.S. Dist. LEXIS 79451, 2012 WL 2065539,
at *7-8. I also observed that, although Count VII is captioned "Negligence Per Se," Maryland does not adhere to a negligence per se regime
in actions for negligence based on the violation of statutory duties. See 2012 U.S. Dist. LEXIS 79451, [WL] at *6.

Thereafter, the case proceeded to discovery. In the course of discovery, Green Tree filed a Third-Party Complaint (ECF
39) against Five Brothers Mortgage Company Services and Securing, Inc. ("Five Brothers"), a business entity that
plaintiff alleged had acted as Green Tree's agent. Upon the conclusion of discovery, the Third-Party Complaint was
voluntarily dismissed, pursuant to Fed. R. Civ. P. 41(a). See ECF 70 & 73.
Three motions are now at issue. Green Tree filed a Motion for Summary Judgment (ECF 74) and a supporting
memorandum (ECF 74-1) (collectively, the "Motion"); plaintiff filed a Cross-Motion for Summary Judgment [*5]
("Cross-Motion") (ECF 75); and Green Tree filed a Motion for Sanctions pursuant to Rule 11 of the Federal Rules of
Civil Procedure ("Sanctions Motion") (ECF 77). 4 The summary judgment motions have been fully briefed, 5 and no
hearing is necessary to resolve them. See Local Rule 105.6. For the reasons that follow, I will grant Green Tree's Motion
and deny plaintiff's Cross-Motion. Pursuant to Local Rule 105.8(b), I will direct plaintiff to respond to the Sanctions
Motion and, in the interim, deny that motion, without prejudice to Green Tree's right to renew the Sanctions Motion
following plaintiff's submission. 6

4 The parties also filed a flurry of ancillary motions relating to various aspects of the briefing of the cross-motions for summary judgment,
which are discussed and resolved infra.

5 In connection with the cross-motions for summary judgment, I have considered Green Tree's Motion; plaintiff's Cross-Motion (including
her opposition to the Motion); Green Tree's consolidated reply in support of its Motion and opposition to the Cross-Motion ("Green Tree
Reply") (ECF 79); plaintiff's reply ("Webb Reply") (ECF 80); and other supplemental submissions, as discussed, infra.

6 Pursuant to [*6] Local Rule 105.8(b), which governs motions for sanctions, I cannot resolve the Sanctions Motion until plaintiff responds
to it, if and as ordered by the Court. Local Rule 105.8(b), entitled "Responses Required Only Upon Court Order," provides: "Unless
otherwise ordered by the Court, a party need not respond to any motion filed under Fed. R. Civ. P. 11 or 28 U.S.C. § 1927. The Court shall
not grant any motion without requesting a response."

Factual Background
At all times relevant, Ms. Webb owned a parcel of real property in Grasonville, Maryland, containing a single family
home, which she purchased in December 2006 (the "Property" or the "Residence"). See Deposition of Sandy N. Webb at
31 ("Webb Dep."). 7 Ms. Webb financed her purchase of the Property by means of a mortgage loan in the amount of
$209,900 from National City Mortgage ("National City"), a lending institution that is not a party to this case. The loan
was evidenced by a promissory note (the "Note"), see Ex.B to Motion (ECF 74-3), dated December 21, 2006, between
Ms. Webb as "Borrower" and National City as "Lender." Under the Note, plaintiff was obligated to repay the mortgage
loan over a thirty year period, with interest [*7] at a fixed annual rate of 6.375%, by monthly payments of $1,309.51
due on the first of each month. See id. at 1. The loan obligation was secured by a Deed of Trust executed by Ms. Webb,
also dated December 21, 2006, see Deed of Trust, Ex.C to Motion (ECF 74-4), placing the Property in trust for the
benefit of National City, as security for repayment under the Note. 8
Page 31Page 31
2013 U.S. Dist. LEXIS 140205, *

7 Both sides have submitted excerpts from various depositions as exhibits. As to each deposition, I cite to the pagination of the deposition
transcript, rather than the pagination of any particular excerpt submitted by either party. Excerpts from Ms. Webb's deposition are contained
in ECF 74-2 and ECF 77-5.

8 Under Maryland law, the real property security arrangement established by a deed of trust is technically distinct from a "common law
mortgage." Legacy Funding LLC v. Cohn, 396 Md. 511, 513 n.1, 914 A.2d 760, 761 n.1 (2007). The principal distinction is this:

"There are two parties to a mortgage; the mortgagor (debtor) and the mortgagee (creditor). Deeds of trust are three party
instruments; the grantor (debtor), the grantee (trustee) and the cestui que trust or beneficiary (creditor). When a mortgage
is used, the property [*8] is conveyed directly to the creditor. With a deed of trust, the property is conveyed to a third
party in trust for the benefit of the creditor."

Wellington Co., Inc. Profit Sharing Plan v. Shakiba, 180 Md. App. 576, 594, 952 A.2d 328, 339 (2008) (citation and emphasis omitted).
Despite the "differences between the two instruments, [the Maryland appellate courts] have generally treated them the same" and, in cases
involving deeds of trust, courts often "refer to the instruments as mortgages and the debtors as mortgagors." Legacy Funding, 396 Md. at
513 n.1, 914 A.2d at 761 n.1; see LeBrun v. Prosise, 197 Md. 466, 473-74, 79 A.2d 543, 547 (1951) ("For most purposes [a] deed of trust is
a mortgage.") (emphasis in original); Manor Coal Co. v. Beckman, 151 Md. 102, 115-16, 133 A. 893 (1926) ("'A deed of trust to secure a
debt is in legal effect a mortgage.'") (citation omitted). The trustee under the Deed of Trust here was Lawyers Title Insurance Corporation, a
non-party.

Ms. Webb resided at the Property from mid December 2006 until May 2008. See Webb Dep. at 41, 46, 55-56. After
unsuccessfully placing the Property on the market for sale in the Spring of 2008, see id. at 54-56, Ms. Webb moved
[*9] to Oregon in May 2008. Id. at 46. Beginning in June 2008, Ms. Webb rented the Property to a series of tenants. See
id. at 56.
At some point, PNC Bank became National City's successor by merger. Subsequently, PNC Bank assigned the Deed of
Trust and the Note, "together with all interest secured thereby, all liens, and any rights due or to become due thereon,"
to Green Tree, by an Assignment of Mortgage (the "Assignment") filed in the Land Records of Queen Anne's County,
Maryland, on March 30, 2010. Assignment, Ex.1 to Cross-Motion (ECF 75-1 at 1-2). 9

9 Green Tree also submitted a copy of the Assignment as Exhibit D to its Motion (ECF 74-5), but the copy submitted by Green Tree does not
include the signature page. Although the Assignment was filed in the land records on March 30, 2010, it states that its "Effective Date" was
November 1, 2009. Assignment at 1. It was executed by a vice president of PNC Bank on February 18, 2010. Id. at 2. The parties dispute
which of those dates is the date that Green Tree "obtained" or "received" the debt, within the meaning of the FDCPA. See 15 U.S.C. §
1692a(4), (6)(F)(iii). Their dispute is addressed in the Discussion.

By a Lease Agreement (the "Lease") [*10] dated August 6, 2010, Ms. Webb rented the Property to a tenant, Christina
Klamp, for a term described in the Lease as "a term of 12 months, beginning on 8/15/10, and ending at 11:59 PM on
8/30/11." Lease at 1, Ex.22 to Cross-Motion (ECF 75-22 at 2-6). The monthly rent under the Lease was $1,200. See id.
In September 2010, just over a month after the Lease was executed, Ms. Webb's husband, 10 a Naval reservist, sustained
a serious injury to his back while on duty in San Diego. See Webb Dep. at 135. Ms. Webb's husband underwent
hospitalization due to the injury and was unable to work for several months, which placed significant financial strain on
the couple. See id. at 134-37. Because their "income was dramatically reduced overnight" due to her husband's injury,
id. at 135, Ms. Webb ceased making monthly payments toward the mortgage on the Property as of October 2010; the
payment due on September 1, 2010, was the last monthly mortgage payment that was made by Webb. See id. at 134.

10 Ms. Webb married her husband sometime after she purchased the Property. See Webb Dep. at 40.

The acts of Green Tree and its alleged agent, Five Brothers, that are at issue in this suit occurred during Ms. Klamp's
[*11] tenancy, after Ms. Webb became delinquent on her mortgage payments. In order to frame the issues properly, it is
necessary to set out the alleged facts as plaintiff presented them in her complaint, 11 before presenting the undisputed
material facts drawn from the summary judgment record that is now before the Court.
Page 32Page 32
2013 U.S. Dist. LEXIS 140205, *

11 Although the Amended Complaint added two new counts and revised plaintiff's damages requests, it presented the same substantive
factual allegations as the original Complaint.

A. Facts Alleged in the Amended Complaint


Although Ms. Webb was in default of her payment obligations in January 2011, "the Residence had not been foreclosed
on." Amended Complaint ¶ 10. Ms. Webb "was informed on January 18, 2011 by her tenant" (i.e., Ms. Klamp, although
the complaint does not identify the tenant by name) that Ernest Wood, 12 a representative of Green Tree, "was calling her
and asking questions about Mrs. Webb's whereabouts because Green Tree 'needed to get a hold of her regarding her
mortgage status.'" Id. ¶ 13. The tenant (i.e., Ms. Klamp) "was contacted at work and home by Green Tree about the
homeowner's mortgage status," and Mr. Wood was "harassing the tenant or telling her inappropriate [*12] and private
information about the collection matter," despite the fact that "Mrs. Webb was in contact with Green Tree and Green
Tree knew where Mrs. Webb lived because she was in weekly contact via phone with Green Tree's representative." Id.
Ms. Webb told Mr. Wood "on January 19 & 20, 2011 that he could not contact the tenant living at the Residence, either
at the home or at work." Id. However, Mr. Wood "continued calling the tenant at work and home on the days of January
18, 19 & 20." Id.

12 Mr. Wood, an employee of Green Tree, was identified only as "Ernie" in the complaint. See Amended Complaint ¶ 13.

On January 27, 2011, an unidentified person "was walking around the Residence and approached the tenant, and told the
tenant they were coming back the next day to clear the tenant's stuff out of the Residence, put new locks on the doors,
and board up the windows because the home had been foreclosed by the bank." Id. ¶ 7. This unidentified person
allegedly was an "employee" of Five Brothers. Id. ¶ 8. The Five Brothers employee "was found on the Residence
property looking around and clearly inside the private areas of the yard and peering through windows." Id. "The tenant
contacted Mrs. [*13] Webb because she was 'freaked-out' and confused about the situation." Id. ¶ 7.
Ms. Webb alleged that she was able to speak by phone with the Five Brothers employee at the Property, who gave her
Five Brothers' toll-free phone number, stating: "'[I]t didn't matter what [Mrs. Webb] had to say, it only mattered to the
employee if the Residence was on a list to be cleared and boarded up because he [(the employee)] takes his direction
only from the mortgage company who owns the home.'" Id. ¶ 8 (quoting employee) (brackets and alterations in
original). According to plaintiff, she had not received any notice of an inspection of the Property from Green Tree. Id. ¶
29.
Despite spending "a large part of January 27, 2011 on the phone" with representatives of Five Brothers and Green Tree
"trying to clear up the confusion and the improperly ordered . . . home clean-out," Ms. Webb claimed that she was
unable to receive assurance that the Residence would not be cleared out. Id. ¶ 8. When Ms. Webb called Five Brothers'
toll-free number, a Five Brothers employee told her that "'if she paid her bills this wouldn't be a problem,'" and then
hung up on her. Id. ¶ 9 (quoting employee). Ms. Webb called back [*14] and spoke with a "supervisor who told her the
only way it would call off the moving/close-up crew was if the mortgage lender told her to take the Residence off the
list of recently acquired homes," and that "Five Brothers needed nothing besides the phone call from the bank to
schedule a clean-out when the bank owned the property." Id. Ms. Webb called Green Tree but was unable to speak with
Mr. Wood and was unable to achieve a resolution of the situation. See id. ¶ 10-11. According to the complaint, Ms.
Webb's "tenant sent her father to the Residence on January 28, 2011 to ensure no one entered the Residence and stole
her furniture and personal effects or locked her out of the Residence by changing the locks." Id. ¶ 11.
Webb spoke with Wood on January 28, 2011, and Wood "repeatedly stated he had every right to secure the Residence as
it 'had been foreclosed upon.'" Id. ¶ 12 (quoting Wood). Wood "kept stating that the house was vacant and had been
foreclosed upon so he had the right to enter and clear it out and secure the location." Id. Although "Mrs. Webb explained
the difference between foreclosure and default," Wood "wouldn't listen or acknowledge any difference . . . ." Id. Webb
"was [*15] able to confirm with Green Tree that Five Brothers had been informed that the Residence should be taken
off the list of bank owned properties in need of securing." Id. ¶ 11. However, Wood "would not provide any assurances
that the he would not again place the Residence on the list to be secured by Five Brothers Mortgage Assistance." Id. ¶
12.
Further, the complaint alleged, id. ¶ 14:
Page 33Page 33
2013 U.S. Dist. LEXIS 140205, *

On February 28, 2011, after much discussion with the tenant, Mrs. Webb released the tenant from her lease because Mrs. Webb
could no longer promise her quiet enjoyment of the home due to the illegal and harassing actions inflicted upon the tenant by Green
Tree--the tenant was a young female living alone in her first home just out of college who felt threatened and unsafe in her own
home.

According to plaintiff, "[b]y running off Mrs. Webb's tenant, Green Tree turned what was a temporary setback in
finances into a permanent setback from which [Ms. Webb] cannot recover." Id. ¶ 15. "If the tenant had never been run
off, Mrs. Webb would have been able to recover financially and return to making payments on the home." Id. ¶ 16. And,
Ms. Webb "intended to again rent the home and make payments" but, "due to Green [*16] Tree's actions in running off
tenant's from the Residence, she cannot in good conscious [sic] rent to another tenant." Id.
As noted, I previously concluded that five counts of the complaint stated claims upon which relief could be granted.
Specifically, Count I alleged tortious interference with a business relationship largely on the basis of the following
allegation in the complaint, id. ¶ 19:

Green Tree . . . has harassed Mrs. Webb's tenant and interfered with Mrs. Webb's business contract with a tenant who was a bona
fide tenant (having moved in prior to any default or even late payment and not being related to the homeowner in anyway). By
intentional and improper conduct, Green Tree ran the tenant out of the home and harassed the tenant who was rightfully living in
the home. Once the tenant was released from her lease due to homeowner's inability to provide quiet enjoyment (due to threats of
breaking and entry, harassment, and actual trespass), the homeowner was without ability to collect rents to pay the mortgage once
the medical and financial emergency in homeowner's family had resolved.

Counts II and III alleged breach of contract and trespass to real property, respectively, both [*17] based on the alleged
entry of the Five Brothers employee onto the Property on January 27, 2011, without prior notice of inspection as
required by a provision of the Deed of Trust. Plaintiff alleged: "Green Tree gave no notice, never specified any
reasonable cause, and had no reasonable cause to suspect the Property was in any danger of being damaged due to a
renter being in the home." Id. ¶ 29.
In Count VI, plaintiff alleged that Green Tree was a "debt collector" as defined by the FDCPA, 13 and violated the
FDCPA by its telephone contact with the tenant and the entry of the Five Brothers employee onto the Property.
Specifically, the complaint stated, id. ¶¶ 53-54:

[Green Tree] violated [the FDCPA] by engaging in conduct the natural consequence of which is meant to harass, oppress, or abuse
the Plaintiff in connection with collection of a debt by calling Plaintiff's tenant at work repeatedly to "talk to" tenant about
Plaintiff's "default" and sending an agent to go to the home to who told the tenant that the home had been foreclosed and that the
tenant would be locked out and her items removed.
[Green Tree] violated [another provision of the FDCPA] in that Defendants employed false and [*18] deceptive means to collect a
debt by intentionally scaring off any current renter (by being hiring someone who told the tenant that the home had been foreclosed
and calling her at work about the "default") and threatening to run off any future renter.

13 As discussed, infra, Green Tree argued that it does not qualify as a "debt collector" under the FDCPA, but I ruled that this was an
affirmative defense that should be resolved at the summary judgment stage on the basis of evidence outside the pleadings. See Webb II, 2012
U.S. Dist. LEXIS 79451, 2012 WL 2065539, at *5.

Finally, in Count VII, plaintiff alleged negligence by breach of statutory duties imposed by the FDCPA. The complaint
stated that Green Tree owed a duty under the FDCPA "to not harass and/or annoy the tenant in the Residence," id. ¶ 57,
and that "Green Tree breached that duty by calling the tenant at work and sending the Five Brothers Mortgage
Assistance agents to the home to 'inspect and secure' the Residence when [Green Tree] knew the tenant was in the
Residence and the Residence was not foreclosed upon or in danger of destruction/waste/damage." Id. ¶ 58. 14

14 I expressed skepticism that "a negligence claim based on violation of the FDCPA is viable [*19] in Maryland," given that such a claim
would be redundant and merely duplicative of a statutory claim arising "directly under the FDCPA." Webb II, 2012 U.S. Dist. LEXIS 79451,
2012 WL 2065539, at *6. Nevertheless, I ruled that the negligence claim should be resolved after summary judgment, along with the FDCPA
count, because it "would not expand the scope of discovery." Id.
Page 34Page 34
2013 U.S. Dist. LEXIS 140205, *

Notably, plaintiff's Amended Complaint was verified. Ms. Webb signed the Amended Complaint and "solemnly
affirm[ed] under penalty of perjury that the contents of the foregoing complaint [were] true to the best of [her]
knowledge, information and belief . . . ." Id. at 10. On the strength of the foregoing allegations, the Court permitted
plaintiff to "unlock the doors of discovery." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868
(2009) (articulating standard for dismissal of complaint for failure to state a claim upon which relief can be granted).

B. Undisputed Material Facts15

15 The facts presented in this section are drawn from the exhibits submitted by the parties in connection with the cross-motions for summary
judgment, subject to the Court's rulings as to evidentiary disputes that are discussed, infra. The facts are presented in the light most favorable
[*20] to plaintiff and, unless otherwise noted, the facts contained in this section are undisputed.

Discovery has now concluded. The undisputed material facts disclosed by the record demonstrate unequivocally that
events simply did not occur as alleged in the complaint.
As noted, Christina Klamp became plaintiff's tenant in August 2010. Although the Lease was solely in Ms. Klamp's
name, she was not the only occupant of the Property; Klamp resided there with her boyfriend, Charles "Chuck" Miller.
See Deposition of Christina Klamp at 24 ("Klamp Dep."). 16 Ms. Klamp and Mr. Miller, who were young adults (Mr.
Miller turned twenty in the month that the Lease began), had been dating for a year before they decided to rent a house
together. Id. at 25. They made contact with Ms. Webb because an acquaintance of Mr. Miller had been a previous tenant
of the Property. Id. However, Ms. Klamp was the only signatory to the Lease because Mr. Miller had poor credit. Id. at
26. Ms. Webb was aware of this arrangement and agreed to it. Id. at 27; see also Email from Webb to Klamp and Miller
of Aug. 5, 2010 (ECF 75-7 at 2). Ms. Klamp and Mr. Miller evenly divided the $1,200 monthly rent as well as the cost
of the [*21] utilities. Klamp Dep. at 27.

16 Excerpts from the transcript of Ms. Klamp's deposition are contained in ECF 74-6, ECF 75-4, ECF 77-6, and ECF 80-1.

In late November 2010, Ms. Klamp and Mr. Miller's relationship ended abruptly when Ms. Klamp discovered that Mr.
Miller was involved with someone else. See id. at 30. When the two broke up, both Ms. Klamp and Mr. Miller
immediately ceased residing at the Property. Ms. Klamp last slept at the Property on November 24, 2010, the night
before Thanksgiving; she then moved into her father's house. Id. at 48-49. Mr. Miller moved out of the Property by
Sunday, November 28, 2010. Id. at 35. He initially stayed with a friend, and then moved in with the other woman he
was seeing, whom he later married. Id. at 36. Although neither Ms. Klamp nor Mr. Miller resided at the Property after
the weekend of Thanksgiving 2010, each left some belongings at the Property. Id. at 35.
On or about November 28, 2010, Ms. Klamp contacted Ms. Webb by email and phone to inform her that she and Mr.
Miller had broken up and that, as a result, she "wanted to break the lease," because she "wanted to remove [her]self
from anything that reminded [her] of him or was involved with [*22] him." Klamp Dep. at 30-31; see generally id. at
28-31; Webb Dep. at 86-89. Ms. Klamp and Ms. Webb spoke by phone that day and, according to Ms. Klamp, Ms.
Webb was "extremely understanding" and "was basically trying to think of a solution." Klamp Dep. at 31. On Friday,
December 10, 2010, Ms. Webb emailed Ms. Klamp and Mr. Miller, advising them that she had not yet received their
rent for December, and stating, ECF 74-8 at 3:

As I have been discussing with Christina, I am more than willing to let you look for a qualified replacement tenant to take over the
lease. And once the new lease is signed by your replacement we will end your obligations under the lease. However, I really
discourage using this option because to find a replacement tenant you would have to show people the home and I really don't want
Christina showing the house to strangers and taking the chance she would be alone in the house with an untrustworthy person. An
even bigger problem with finding a replacement tenant is that most people do not move during the winter; renters really do not
reappear on the scene until late March or early April. And if you stick it out looking for a good credit/income replacement, it could
[*23] take you quite a while. So under this option, you all could be on the lease for a while paying rent while you look.
I would suggest a second option that gives you some certainty and me peace of mind that Christina isn't showing the house to
strangers. Option 2 is that if you want out of the lease early, I will accept payment for January rent ($1200) and forfeiture of your
Page 35Page 35
2013 U.S. Dist. LEXIS 140205, *

security deposit (which I already have, so this is not new out of pocket money from you) as fulfillment of your obligations under
the lease and I will not report any negative activity against Christina to the credit reporting agencies.
Let me know how you want to proceed and we can work on the details of your move out.

On December 14, 2010, Ms. Webb emailed Klamp and Miller again, advising that she had received their $1,200
December rental payment and reiterating: "Just let me know how you want to proceed with the house and terminating
the lease." ECF 74-8 at 2. Ms. Klamp decided that she wanted to attempt to find a replacement tenant. See Webb Dep. at
108-09; Klamp Dep. at 40-41. At her deposition, Ms. Klamp testified that she and Ms. Webb reached an agreement that
Ms. Klamp would attempt to find a replacement tenant [*24] but that, "if that didn't happen, then the lease would be
terminated between [Webb] and [Klamp] in March." Klamp Dep. at 40. In other words, according to Ms. Klamp, Ms.
Webb "agreed for [Klamp] to stay involved in the lease until March of 2011 unless [Klamp] found other renters to rent
the house . . . ." Id. at 40-41; see generally id. at 40-43. Mr. Miller also agreed to pay his half of the rent until a
replacement tenant was found or until March 2011. Id. at 49.
According to Ms. Klamp, she "didn't want to rent the property" and undergo the "miserable process" of "going in and
out of the house that [she] didn't want to go into," in order to show it to potential tenants. Id. at 46. However, she "felt
that was [her] only option to possibly get out of the lease even earlier . . . so [she] didn't have to continue paying until
March." Id. In sum, Ms. Klamp testified that, in December 2010 (and not as late as January or February 2011), she and
Ms. Webb reached a "[f]irm agreement" that if no renter had been found by March 1, 2011, she would be released from
the Lease. Klamp Dep. at 135.
Accordingly, by email on December 16, 2010, Ms. Klamp advised Ms. Webb that she wanted "to go ahead and [*25]
post an ad on craigslist in addition to a sign in the front yard," and that "[b]eing in the house by [her]self" was not "an
issue," because she could "find someone to be there with [her]." ECF 74-8 at 2. Ms. Webb responded by email the same
day, advising Ms. Klamp that she would provide Klamp with a copy of the craigslist ad and pictures she had previously
used to advertise the Property for rent. Id. Ms. Klamp posted a black and orange "For Rent" sign in the front yard of the
Property, containing Ms. Klamp's cell phone number. Klamp Dep. at 44-45. According to Ms. Klamp, she showed the
Property to some potential renters, but none of them ultimately entered into a lease. Id. at 142.
In the meantime, as of January 4, 2011, Ms. Webb was four months behind on her mortgage payments, having failed to
make the payments due for October, November, December, and January. The four-month delinquency triggered an
automatic request, generated by Green Tree's computer system, for a visual site inspection of the Property. See
Declaration of Ernest E. Wood ¶ 2 ("Wood Decl."), Ex.K to Motion (ECF 74-12). The request was transmitted to Five
Brothers, and an employee or contractor of Five Brothers conducted [*26] a visual site inspection of the Property on
January 10, 2011. 17 The inspector submitted an inspection report noting that the Property was "Vacant per visual /
Locked / No personal property visible / For rent by owner @ [Klamp's cell phone number]." Inspection Report 1/10/11
(ECF 75-20 at 4). The Five Brothers inspector also noted that there was no exterior damage to the Property and that "No
Interview [was] Conducted." Id. The inspection report included photographs of the exterior front and what appears to be
the rear or side of the Property, and a picture of the "For Rent" sign in the yard with Ms. Klamp's phone number. See id.
(ECF 75-20 at 6).

17 The Five Brothers employee or contractor who conducted the inspection on January 10, 2011, is not identified in the record.

On January 11, 2011, a notation of the results of the inspection was entered into Green Tree's electronic record for Ms.
Webb's account. It stated, "Site Visit Completed"; provided the inspector's notes that the Property was "Vacant per visual
/ Locked / No personal property visible / For rent by owner @ [Ms. Klamp's cell phone number]"; and stated: "External
inspection ordered." Green Tree Account Notes at 13, Ex.3 [*27] to Cross-Motion (ECF 75-3); see also Wood Decl. ¶
3; Deposition of Ernest Wood at 24 ("Wood Dep."), Ex.15 to Cross-Motion (ECF 75-15).
Ernest Wood, a "collection representative" in Green Tree's mortgage collections department, was assigned to Ms.
Webb's account. Wood Decl. ¶ 1. Green Tree's electronic record for Ms. Webb's account indicates that, after speaking
with Ms. Webb by phone on numerous occasions regarding her delinquent payments in October and November 2010,
see Green Tree Account Notes at 17-24, Mr. Wood had been unable to reach Ms. Webb by phone in December or from
the start of January through January 13, 2011, despite attempts every few days. See id. at 13-17. On some but not all
occasions, Mr. Wood left messages for Ms. Webb asking her to return his calls. See id. 18
Page 36Page 36
2013 U.S. Dist. LEXIS 140205, *

18 Plaintiff alleges that she called Green Tree in January 2010 and left numerous voice messages for Mr. Wood that are not reflected in
Green Tree's records. See Webb Decl. ¶ 17. In considering Green Tree's Motion, the Court must assume the truth of these averments. Plaintiff
has submitted deposition testimony of Mr. Wood that voice messages from a borrower would not necessarily be reflected in the electronic
[*28] record and that it was within his discretion whether to make a note of a voice message. See Wood Dep. at 24-25. Moreover, she has
submitted deposition testimony of Curtis Baker, another employee of Green Tree (apparently in a supervisory position within Wood's
department, although the portion of Baker's deposition in which he presumably described his position is not contained in the record), who
indicated that collection representatives are required to note in the records all messages received from borrowers. See Deposition of Curtis
Baker at 36-37, Ex.14 to Cross-Motion (ECF 75-14). However, plaintiff provides no indication of the content of any of her messages. In
particular, she does not indicate that she ever told Mr. Wood that the Property was occupied. Without any indication of the content of Ms.
Webb's messages, the mere fact that she left them does not generate a dispute of material fact as to what Wood and Green Tree knew or
intended in January 2010.

On January 13, 2011, having seen the report of the January 10 inspection in the electronic record, and being
"[c]oncerned that the Property was vacant," Wood Decl. ¶ 4, Mr. Wood called Ms. Webb but again she did not answer
and [*29] he left a message. Id.; see also Green Tree Account Notes at 13. On January 17, 2011, Mr. Wood called Ms.
Webb again and again got no answer. Wood Decl. ¶ 5; Green Tree Account Notes at 12. He then called the phone
number listed on the "For Rent" sign, as stated in the inspection report, which he "assumed was associated with [Ms.
Webb]." Wood Decl. ¶ 6. In reality, of course, it was Ms. Klamp's phone number.
Mr. Wood's notes for January 17, 2011, entered into the electronic record for Ms. Webb's account, state, Wood Dep. at
23; see also Green Tree Account Notes at 12: 19

Tried home. Left message to call back. Tried [Klamp's cell phone number], contact for rental. Talked to lady. Said app 20 not at that
number. Advised MS 21 this is the number on the sign for rental contact. MS said she will get message to app. Left message to call
back. Home not qualified . . . for hamp 22 as is a rental property. Account needs to be brought current plus legal fees.

19 Mr. Wood's notes as contained in the electronic system are typed in a form of shorthand that omits most vowels from words and uses
frequent acronyms and jargon terms. As such, it is difficult to decipher. The quoted text is actually what [*30] Mr. Wood read (and
interpreted) from his notes at his deposition.

20 The exact connotation of "app" is not clear, but it is a reference used in the notes repeatedly to refer to Ms. Webb. In the electronic notes,
the term is typed "AP."

21 The exact connotation of "MS" is also unclear, although in this context it refers to Ms. Klamp. In the electronic notes, it appears to refer
ordinarily to the person with whom Mr. Wood was speaking in a given phone call (perhaps it stands for "Ms.").

22 The acronym HAMP refers to the Home Affordable Modification Program, a federal initiative authorized by §§ 109 and 110 of the
Emergency Economic Stabilization Act of 2008, Pub. L. 110-343, 122 Stat. 3765 (Oct. 3, 2008), intended to avoid foreclosures by creating
incentives for mortgage lenders and servicers to modify outstanding mortgage loans.

Green Tree's electronic record for Ms. Webb's account reflects another attempt to contact Ms. Webb by telephone (via
Ms. Klamp) on January 20, 2011. Mr. Wood's notation from January 20, 2011 states, Wood Dep. at 23; see also Green
Tree Account Notes at 12:

Tried home. Left message to call back. Tried [Klamp's cell phone number]. Talked to lady. She said she is a previous [*31] tenant.
Said she is trying to get the property rented out for the app as she was breaking the lease. Asked MS [when] . . . the last rent
payment was made. MS said she had made all her payments and is current with app. Advised MS they'll . . . [s]till need to have app
call in. MS said okay. Tried work. No longer in service.

According to Mr. Wood, he made this second call to "the number displayed on the 'for rent' sign, solely in an attempt to
locate Plaintiff," and he "learned, for the first time, that the number on the sign belonged to Ms. Klamp, who described
herself as Plaintiff's 'former tenant.'" Wood Decl. ¶ 9. In his declaration, Wood stated, id.:

Ms. Klamp further informed me that she was "breaking the lease" and was attempting to rent the Property. In an effort to confirm
the status of the Property, I inquired as to when Ms. Klamp made her last rent payment to Plaintiff. Ms. Klamp responded that she
Page 37Page 37
2013 U.S. Dist. LEXIS 140205, *

had made all her rental payments to Plaintiff and I reiterated that I needed Plaintiff to contact me. At no time during this
conversation did I reveal any information to Ms. Klamp regarding Plaintiff's mortgage loan.

Wood did not mention any calls to Klamp other than the ones on January [*32] 17 and 20. Nor are any other phone
conversations with Klamp memorialized in Green Tree's electronic records.
At her deposition, Ms. Klamp's recollection was not inconsistent with Mr. Wood's notes and averments, although Ms.
Klamp repeatedly stated that her memory on these points was not precise, and she needed to review an email she wrote
on January 18, 2011, to refresh her recollection as to some of the details of the call on January 17, 2011. Klamp Dep. at
70-77.
As to January 17, 2011, Klamp recalled that she received a call from "Ernie" on that date, and he "was looking for Ms.
Webb." Id. at 70. According to Klamp, that call was the first one that she ever received from Mr. Wood, id. at 71, and,
"[f]rom the best that [she] can remember, [she] was contacted twice." Id. at 75-76; see also id. at 79.
In the call on January 17, Mr. Wood stated that he was trying to "contact" Ms. Webb, but Ms. Klamp could not recall
whether he said why he was calling. Id. at 70. In any event, Klamp did not give Webb's phone number to Wood because
she "didn't know who Ernie was" and "didn't feel comfortable giving Sandy's personal information to him." Id. Klamp
explained: "As far as I knew, it was just [*33] some random man calling me at work looking for Sandy . . . ." Id. 23 As a
result of the phone call, Ms. Klamp emailed Ms. Webb on January 18, 2011, stating: "A man named Ernie from Green
Tree Servicing called me yesterday looking for your number. I refused to give it to him...I told him I would give you his
instead. I'm not quite sure what it was in reference to, but I just wanted to let you know." ECF 75-13 at 6 (ellipsis in
original).

23 Although Ms. Klamp testified that Mr. Wood called her "at work," his notes reflect that he called her cell phone number, as listed on the
"For Rent" sign, and the evidence in the record does not disclose any plausible way that Mr. Wood could have known Ms. Klamp's work
phone number. See Klamp Dep. at 134. Notably, January 17, 2011, was a Monday, and Mr. Wood's electronic notes reflect that the call was
made at around 3:00 p.m. Thus, Ms. Klamp likely received the call while she was at work, and may simply not recall accurately the phone
on which she received the call. In any event, this minor discrepancy does not create a dispute of material fact.

Ms. Klamp did not recall the exact date of the second call, but she "want[ed] to say it was within the same [*34]
month" as the first call. Klamp Dep. at 77. As to the content of the second call, Ms. Klamp stated: "I just remember he
was looking for Sandy and that it seemed to be that it was in reference to the property. . . ." Id. at 77-78. She could not
recall whether Mr. Wood told her why he was trying to locate Ms. Webb. Id. at 78-79.
Of course, Ms. Klamp and Mr. Wood are the only people with direct knowledge of the number and content of any phone
conversations between them. Ms. Klamp's memory was somewhat vague, especially as to the second call. Arguably, Ms.
Webb's recollection of what Ms. Klamp told her at the time about the content of the call might be admissible under an
exception to the rule against hearsay (or might refresh Ms. Klamp's recollection if it was provided to her). Even
accepting that proposition, however, Ms. Webb's testimony on this point is insufficient to generate a genuine factual
dispute. At her deposition, Ms. Webb stated:

[Mr. Wood] started calling [Ms. Klamp] at work. She was upset. He called her at work on the first day it was no big deal. She took
a message, sent me his number. The second day she took a message, sent me his number. The third day she was getting pissy [*35]
about it. The people at work thought she was getting collection calls because she was behind on bills.

Webb Dep. at 132. Even assuming that there were three calls, as Ms. Webb alleges, nothing in the above-quoted
testimony is indicative of the actual content of anything Mr. Wood supposedly said to Ms. Klamp.
On Friday, January 21, 2011, Ms. Webb sent Ms. Klamp an email stating, in relevant part, ECF 74-9:

I wanted to put what we discussed into writing to make sure we both know what to expect. . . . I will continue to attempt to rent the
unit, but as you have seen the bulk of phone calls are not serious renters . . . . What we have agreed is that you will not be held
responsible for the rent until the end of the lease but instead will pay February rent and forfeit the security deposit. You will move
out by the end of February and turn over the keys. In return, I will forgive whatever rent I am entitled to under the remainder of the
lease that goes through 8/30/11.
Page 38Page 38
2013 U.S. Dist. LEXIS 140205, *

The email does not mention the underlying reason for the early termination of the Lease, or the reason why the email
was sent at that particular juncture. At her deposition, Ms. Webb testified, Webb Dep. at 131-33:

[A]t that point [*36] I had decided that this was the best move. . . . At this point I had gotten pretty behind on my mortgage and I
had been in a pretty heated debate about having a tenant in the home with Ernie from Green Tree, he had made his opinion on this
very known to me that he thought it was horrible that I had a tenant in the home. He hated it . . . . And at that point between what
she was telling me that this guy was calling her at work and the conversations I was having with this guy who had told me his
opinion about having a renter in the house I knew there was no way that this was going to deescalate. So at that point she had been
pushing for it all along, renters weren't coming along and I just told her, hey, let's just, if that's still what you want to do let's do it
because I knew things were going to get worse. . . . So I finally caved in to her, saying, go ahead, just leave.

In contrast, Ms. Klamp testified, as noted, that she and Ms. Webb had had a "[f]irm agreement" since December that, if
no renter had been found by March 1, Ms. Klamp would be released from the Lease. Klamp Dep. at 135.
In the interim, the initial report from the Five Brothers site inspection that the Property was vacant [*37] had
automatically triggered a computer generated request to Five Brothers to conduct a somewhat more thorough "exterior
inspection." An employee or contractor for Five Brothers performed this inspection on January 20, 2011, completing a
report on a more detailed form than the previous inspection. See Inspection Report 1/20/11 (ECF 75-20 at 1). 24 The
inspector again reported that the "Property is vacant" and noted the "For rent sign" with Ms. Klamp's phone number. Id.
The inspector also noted that the vacancy of the property was "Verified By: VISUAL"; that the Property was secure;
that the status of the utilities was unknown; that there was "No personal property prese[nt]"; that there were no visible
exterior damages; and that the inspector did not have an "Interior View." Id. Notably, none of plaintiff's causes of action
arise from either this inspection or the previous inspection that occurred on January 10, 2011.

24 Again, the record does not reveal the identity of the person who conducted the inspection.

The results of the second inspection were received electronically in Green Tree's records on January 25, 2011. See
Green Tree Account Notes at 11. The electronic record stated: Property [*38] is vacant. For rent sign [Klamp's phone
number]." Id. Later that day, Lorna Agravante, a Green Tree employee, emailed Mr. Wood, asking him to "advise of any
account level reason NOT to approve [Ms. Webb's account] for Re-Key/Winterization." ECF 75-15 at 6 (bold and
capitals in original). Mr. Wood replied: "approve." Id. The same day, Ms. Agravante entered into Green Tree's electronic
record for Ms. Webb's account the following directive to Five Brothers: "RE-KEY ORDERED.......Please secure
according to FNMA guidelines and if over the allowable, please bid." Green Tree Account Notes at 11 (ellipsis in
original).
According to Christina Hankey, the Operations Manager for Five Brothers, Five Brothers received an "initial secure
order" for the Property from Green Tree. Deposition of Christina Hankey at 10, 24 ("Hankey Dep."). 25 According to Ms.
Hankey, an "initial secure" entails the following steps, id. at 24:

[I]n accordance with Fannie Mae guidelines . . . complete a lock change, secure the property. If it has a broken window, Fannie
Mae requires that window be boarded. If there is a pool in the yard, . . . the pool must be secured or if there is a fence around the
pool, the fence itself [*39] must be secured. The grass must be cut if it's within Fannie Mae's grass cutting season and/or the
property winterized if it's within Fannie Mae's winterization season. They have to cap any exposed wires or gas lines, . . . remove
any hazards that are in the property, submit a bid for any damages that are required to be cured in accordance with Fannie Mae
regulations.

25 Excerpts from the transcript of Ms. Hankey's deposition are contained in ECF 74-14 and ECF 75-10.

Daniel Van Keuren, an employee of Green Tree, also discussed the process of initially securing a property. See
Deposition of Daniel Van Keuren at 10-11 ("Van Keuren Dep."). 26 At his deposition, he stated, id.: "[Five Brothers]
would first confirm vacancy. Then . . . per Fannie Mae guidelines, they would re-key the property through a secondary
access point, either a rear or side door, leaving the front door available . . . to the homeowner." Mr. Van Keuren stated
that it would not be appropriate to re-key a property if it was discovered that the property was occupied. Id. at 12.
Page 39Page 39
2013 U.S. Dist. LEXIS 140205, *

According to Van Keuren, it is the responsibility of Five Brothers to determine whether a property is occupied or vacant.
Id. at 13-14.

26 Excerpts [*40] from the transcript of Mr. Van Keuren's deposition are contained in ECF 74-13 and ECF 75-17. Neither side submitted the
initial pages of the deposition transcript, in which Mr. Van Keuren presumably described his exact position with Green Tree.

When Five Brothers received the initial secure order for the Property, it contacted one of its independent contractors in
the Grasonville area, Dean O'Donnell, to secure the Property. Hankey Dep. at 24. At the time, Mr. O'Donnell was the
proprietor of a landscaping and lawn care business operating under the name 3D Lawn Care. Deposition of Dean
O'Donnell at 9 ("O'Donnell Dep."). 27 O'Donnell had performed a number of lawn mowing jobs for Five Brothers, id. at
10-11, but had never previously secured a property. Id. at 15. According to O'Donnell, Five Brothers "asked [him] if he
was interested in securing a foreclosed home," i.e., the Property, and he "told them [he] would go look at it and get back
to them." Id.

27 Excerpts from the transcript of Mr. O'Donnell's deposition are contained in ECF 74-16, ECF 75-6, and ECF 77-8.

Coincidentally, Mr. O'Donnell's cousin, Mark Thomas, runs an automotive service shop that is located across the street
from [*41] the Property. Id. at 16; see also Deposition of Mark Thomas at 51 ("Thomas Dep."). 28 Mr. O'Donnell drove
to the Property on January 27, 2011, to determine "whether or not [he] wanted it and/or give [Five Brothers] a price to
do the job." O'Donnell Dep. at 39. He "initially told [Five Brothers] that [he] was interested, but [he] couldn't tell them
anything until [he had] seen what was entailed." Id. So, he went to the Property "with the intention[ ] of giving [Five
Brothers] an estimate on securing the property." Id.; see also Thomas Dep. at 51.

28 Excerpts from the transcript of Mr. Thomas's deposition are contained in ECF 74-7, ECF 75-12, and ECF 77-7.

When O'Donnell arrived on the street, it was unclear to him "which house exactly was the house [he] was supposed to
be looking at," because the mailboxes to several houses on the street were all placed together, away from the houses. Id.
at 16. So, he went across the street to his cousin's service station to "ask [Mr. Thomas] if he knew which house was
which." Id.; see also Thomas Dep. at 51-52. Mr. Thomas knew both Ms. Webb and Ms. Klamp. Indeed, he and Ms.
Klamp worked out at the same gym. Thomas Dep. at 37. 29 When Mr. Thomas realized [*42] that the house Mr.
O'Donnell had been asked to secure was Ms. Webb's, he told his cousin: "I don't think that would be a foreclosure,
knowing Sandy Webb. She's not going to let something go into foreclosure. . . . I think you've got something wrong
here, because I know that's Sandy's house, and I think you got the wrong house." Id. at 52-53.

29 Mr. Thomas testified that he had run into Ms. Klamp at the gym shortly after she and Mr. Miller broke up, and Ms. Klamp informed him
about her situation with regard to the breakup and the Property. Thomas Dep. at 37-38. According to Mr. Thomas, Ms. Klamp informed him
that she was looking to find someone else to rent the Property, id. at 38-39, and that "Christina said that she could get out of her contract . . .
at around March, that she would be let out in March regardless [of] whether she found someone to take over or not, March of 2011." Id. at
39. Mr. Thomas believed that this conversation with Ms. Klamp had taken place in November 2010, before Thanksgiving. Id. at 37-38, 41.
Given Ms. Klamp's testimony regarding the timing of the end of her relationship with Mr. Miller, it is likely that Mr. Thomas did not
accurately recall the date. In any [*43] event, this discrepancy does not create a dispute of material fact.

Nevertheless, O'Donnell looked in the front window of the Property to determine whether it was occupied. According to
O'Donnell, the Property "looked to be vacant." O'Donnell Dep. at 31. Mr. O'Donnell recalled that there were "one or
two small pieces of furniture that [he] could see from one window that [he] looked through," but he "didn't do a lot of
poking." Id. at 17-18. He did not look through any windows other than the front window, enter the home, or take any
pictures. Id. at 34. He did not walk to the back of the Property and did not open any gates. Id. at 32. Moreover,
O'Donnell testified that, to the extent that he had gone on the Property and looked in the window, it was not at Five
Brothers' instruction but of his own volition, as part of his determination of whether he was interested in the job. Id. at
44-45.
Page 40Page 40
2013 U.S. Dist. LEXIS 140205, *

Mr. Thomas and Mr. O'Donnell telephoned Webb from Mr. Thomas's office at the shop. Thomas Dep. at 53. They both
spoke with Ms. Webb. She "was surprised" and told Mr. Thomas, "don't let him touch that house." Id. According to Mr.
O'Donnell, Ms. Webb asked him if he had looked through the windows and he [*44] said that he had, in order to
determine whether the house was occupied. O'Donnell Dep. at 16-17. Ms. Webb also informed the cousins that "there
must be a mistake and . . . that she would look into the matter and get it straight." Thomas Dep. at 54.
Accordingly, Mr. Thomas "didn't let" Mr. O'Donnell secure the Property. Id. at 53. Mr. Thomas testified: "I told Dean
not to do it, don't mess with it," and O'Donnell responded, "whatever you say. He said, I think I'll stay away from it."
Thomas Dep. at 55. O'Donnell "decided [he] didn't want anything to do with the job," O'Donnell Dep. at 16, drove
away, see Thomas Dep. at 55, and did not return to the Property. O'Donnell Dep. at 29. Thereafter, O'Donnell informed
Five Brothers that he "wasn't interested in the job." Id. at 15.
Both Mr. Thomas and Mr. O'Donnell testified unequivocally that Ms. Klamp was not at the Property that day and that
they did not speak with her in person or by telephone. See Thomas Dep. at 53-55; O'Donnell Dep. at 18, 32, 40. Ms.
Klamp also testified that she was not at the Property and "never saw anybody" in person at the Property. Klamp Dep. at
85. In contrast to Mr. Thomas and Mr. O'Donnell, she testified that she [*45] had a "vague memory" that Mr. Thomas
had called her that day, but she also insisted repeatedly that she did not remember this accurately. Id. at 81-84.
Moreover, Ms. Klamp testified that, although her father had helped her show the Property to prospective renters at
various times, she did not "remember him being involved with Green Tree or Five Brothers or any of that component to
it at all." Id. at 140; see id. at 133-34.
The following colloquy from Ms. Klamp's deposition is pertinent, id. at 138-140:

[Counsel for Five Brothers]. . . . Did you have any idea or come to learn as to why Green Tree or Five Brothers was inquiring at
all?
A. No. I didn't really know what was going on.
Q. Did you ever come to find out what was going on?
A. . . . [T]he only thing I was told was there was a mistake made. They were pursuing the house and shouldn't have been pursuing
the house. There was no reason why they should have been pursuing that house. That's . . . the impression I was under.
Q. And who gave you that impression?
A. Sandy. Ms. Webb. . . .
Q. [*46] No one from Green Tree or Five Brothers gave you that information about why they were stopping by the property or
inquiring as to Sandy's contact information?
A. No, I didn't learn that from Green Tree or Five Brothers. No. It was--Sandy informed me about everything.
Q. Were you ever intimidated at all by Green Tree or Five Brothers or any of their employees or agents?
A. Not at all.
Q. Were you ever scared at all?
A. No, I was never scared.
***
Q. . . . Did any of this ordeal with Green Tree or Five Brothers have any bearing at all on your decision to move out of that
residence?
A. No. I would have moved out whether they--no matter what they said. . . . I had chosen before any of their involvement that I
wanted to get out of the house. 30

30 Plaintiff has submitted an unauthenticated copy of what appears to be a page from her cell phone call records, reflecting that she received
an incoming call from Ms. Klamp's cell phone on January 27, 2010, which lasted for seven minutes, after which she exchanged phone calls
with a number that she states is Mr. O'Donnell's. Thus, she suggests that Ms. Klamp, Mr. O'Donnell, and Mr. Thomas are mistaken in their
recollections and that she learned that Mr. [*47] O'Donnell was at the Property from Ms. Klamp. Even assuming that this record can support
plaintiff's claim, there is no dispute that Ms. Klamp was not at the Property on January 27, 2010.
Page 41Page 41
2013 U.S. Dist. LEXIS 140205, *

Green Tree's electronic records reflect that Ms. Webb called Green Tree on January 27, 2011, shortly after 4:00 p.m.,
and spoke with an employee other than Mr. Wood. The notes from that call (as interpreted by Mr. Wood) state, Wood
Dep. at 34; see also Green Tree Account Notes at 10:

Talked to app. MS said someone from Five Brothers had been at home and said they would rekey home even though home is
currently occupied with tenants. Told MS Green Tree could rekey home if home was occupied. Told MS would forward E/ [Wood
did not know what "E/" meant] to [supervisor] to be sure [that] . . . wouldn't happen. Emailed JDP.

The next entry in the electronic record was made later that day by a user with the initials JDP, and stated: "Management
Review . . . Emailed FNMA Prop to make sure home is not rekeyed...renters [live in house]." Green Tree Account Notes
at 10 (capitalization altered). At about 7:00 p.m. that day, the electronic record reflects another call received from Ms.
Webb. The notes state, Wood Dep. [*48] at 33-34; see also Green Tree Account Notes at 10:

Inbound from Sandy wanting to know if this was taken care of. Said renter is freaking out and not wanting to leave her home for
fear she will come back to a cleared-out home. Advised her have requested the rekey to be cancelled. She will follow up tomorrow.

The parties agree that the Property was not re-keyed. On or about February 28, 2011, Ms. Klamp concluded her tenancy
and removed her remaining possessions (and Mr. Miller's) from the Property. See ECF 75-13 at 1. On that date, Ms.
Webb provided Klamp with a letter of reference, which stated, among other things: "While Christina had a year lease
and sought to end the lease early due to an extraordinary personal situation, she left on good terms because she fulfilled
her contractual obligations to terminate early." Ex.I to Motion (ECF 74-10). When asked at her deposition about the
"extraordinary personal situation" to which Ms. Webb referred, Ms. Klamp testified that this phrase referred to her
breakup with Mr. Miller. And, she unequivocally stated that her breakup with Mr. Miller was the only reason that she
sought to end the Lease early. Klamp Dep. at 127.
Additional facts will be [*49] included in the Discussion.

Discussion

A. Summary Judgment Standard


Under Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is appropriate only "if the movant shows
that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." A fact
is "material" if it "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).
In resolving a summary judgment motion, the court must view all of the facts, including reasonable inferences to be
drawn from them, in the light most favorable to the non-moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986); News and Observer Publishing Co. v. Raleigh-
Durham Airport Auth., 597 F.3d 570, 576 (4th Cir. 2010); Dennis v. Columbia Colleton Med. Ctr., Inc., 290 F.3d 639,
645 (4th Cir. 2002). "A party opposing a properly supported motion for summary judgment 'may not rest upon the mere
allegations or denials of [its] pleadings,' but rather must 'set forth specific facts'" showing that there is a triable issue.
Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir. 2003) [*50] (quoting former Fed. R. Civ.
P. 56(e)), cert. denied, 541 U.S. 1042, 124 S. Ct. 2171, 158 L. Ed. 2d 732 (2004). See Celotex Corp. v. Catrett, 477 U.S.
317, 322-24, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). The "judge's function" in reviewing a motion for summary
judgment is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine
issue for trial." Liberty Lobby, 477 U.S. at 249. If "the evidence is such that a reasonable jury could return a verdict for
the nonmoving party," there is a dispute of material fact that precludes summary judgment. Id. at 248.
When, as here, the parties have filed cross-motions for summary judgment, the court must consider "each motion
separately on its own merits 'to determine whether either of the parties deserves judgment as a matter of law.'"
Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir.) (citation omitted), cert. denied, 540 U.S. 822, 124 S. Ct. 135, 157 L.
Ed. 2d 41 (2003). "Both motions must be denied if the court finds that there is a genuine issue of material fact. But if
there is no genuine issue and one or the other party is entitled to prevail as a matter of law, the court will render
judgment." 10A WRIGHT, MILLER & KANE, FEDERAL PRACTICE & PROCEDURE § 2720, [*51] at 336-37 (3d ed. 1998,
2012 Supp.).
Page 42Page 42
2013 U.S. Dist. LEXIS 140205, *

B. Evidentiary Matters
Before discussing the merits of the parties' arguments, I must resolve some disputes between the parties concerning
what evidence is properly before the Court.
Green Tree maintains that plaintiff must be deemed to have admitted the truth of several contentions that, in its view,
fatally undermine certain of her claims, because she failed to respond timely to Green Tree's "First Set of Request[s] for
Admission of Facts and Genuineness of Documents" ("Request for Admissions"), a copy of which it submitted as
Exhibit 1 to the Green Tree Reply (ECF 79-1). 31 Plaintiff does not agree that the Court should accept as admitted the
contentions in the Request for Admissions. See Webb Reply at 1-3. Green Tree moved for leave to file a Surreply (ECF
85, ECF 85-1) regarding the dispute over the Request for Admissions, and plaintiff filed a Response to Surreply (ECF
86). 32

31 Because the deadline for plaintiff to respond to the Request for Admissions had not elapsed when the Motion and the Cross-Motion were
filed, the issues regarding the Request for Admissions were first raised in the Green Tree Reply.

32 Leave of court is necessary to file [*52] a surreply. See Local Rule 105.2(a). I will grant the motion for leave to file the Surreply (ECF
85). Green Tree moved to strike plaintiff's Response to Surreply (ECF 89). That motion will be denied.

In addition, Green Tree filed a Motion to Strike (ECF 78), asserting that I should not consider several averments in a
declaration filed by Ms. Webb on grounds of lack of relevance and/or hearsay. It also contends that several other
documentary exhibits submitted by plaintiff should be disregarded on the same grounds and/or because they have not
been properly authenticated. Plaintiff filed an opposition to the Motion to Strike, see Strike Opposition (ECF 83); Green
Tree filed a reply, see Strike Reply (ECF 84); plaintiff filed a single-paragraph surreply, see Strike Surreply (ECF 87-1),
accompanied by a motion for leave to file it (ECF 87); and Green Tree filed an opposition, see Strike Surreply
Opposition (ECF 88). 33 I address these matters in sequence.

33 I will grant plaintiff's motion for leave to file the Strike Surreply (ECF 87). However, I have also considered the arguments in the Strike
Surreply Opposition.

1. Request for Admissions


Requests for admissions are a discovery device governed [*53] by Rule 36 of the Federal Rules of Civil Procedure.
Rule 36(a) provides:

A party may serve on any other party a written request to admit, for purposes of the pending action only, the truth of any matters
within the scope of Rule 26(b)(1) 34 relating to:

(A) facts, the application of law to fact, or opinions about either; and
(B) the genuineness of any described documents.34

In response to a request for an admission, the answering party must either admit the matter requested or, "[i]f a matter is
not admitted, . . . specifically deny it or state in detail why the answering party cannot truthfully admit or deny it." Fed.
R. Civ. P. 36(a)(4). Moreover, the rule allows a party to admit a matter in part and deny it in part or plead a lack of
knowledge or information under certain circumstances. See id.

34 Fed. R. Civ. P. 26(b)(1) establishes the scope of civil discovery in a federal action. It provides:

Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any
nonprivileged matter that is relevant to any party's claim or defense--including the existence, description, nature, custody,
condition, and location of any documents or other [*54] tangible things and the identity and location of persons who
know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject
matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably
calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule
Page 43Page 43
2013 U.S. Dist. LEXIS 140205, *

26(b)(2)(C) [which authorizes the court to limit discovery on the basis of redundancy, availability from another source or
prior opportunity, or cost/benefit considerations].

The effect of an admission is specified in Fed. R. Civ. P. 36(b):

A matter admitted under this rule is conclusively established unless the court, on motion, permits the admission to be withdrawn or
amended. Subject to Rule 16(e), 35 [*55] the court may permit withdrawal or amendment if it would promote the presentation of
the merits of the action and if the court is not persuaded that it would prejudice the requesting party in maintaining or defending the
action on the merits. An admission under this rule is not an admission for any other purpose and cannot be used against the party in
any other proceeding.

35 Fed. R. Civ. P. 16(e) provides that a court "may modify the [pretrial] order issued after a final pretrial conference only to prevent manifest
injustice."

Of import here, Rule 36(a)(3) establishes the time to respond to a request for admissions and the consequence of an
untimely response:

A matter is admitted unless, within 30 days after being served, the party to whom the request is directed serves on the requesting
party a written answer or objection addressed to the matter and signed by the party or its attorney. A shorter or longer time for
responding may . . . be ordered by the court. 36

36 Rule 36(a)(3) also allows the parties to stipulate among themselves to a shorter or longer time for responding to a request for admission.
That provision is not relevant here.

In its Request for Admissions, Green Tree asked plaintiff [*56] to admit several background facts and the authenticity
of a number of documents. However, it also asked for admissions that go to the heart of the merits of some of plaintiff's
claims. For instance, it asked plaintiff to admit that she made her mortgage payment for October 2009 on October 15,
2009, and that servicing rights for the mortgage were assigned to Green Tree on November 1, 2009. See Request for
Admissions No. 8, 9. If admitted, those contentions would tend to show that plaintiff's mortgage was not in default
when it was assigned to Green Tree, in turn indicating that Green Treen is exempt from liability under the FDCPA as a
"debt collector" with respect to plaintiff's mortgage. Similarly, Green Tree asked plaintiff to admit that her tenant was
neither residing nor present at the Property on January 27, 2011; that the tenant had no communications with Green Tree
or Five Brothers on that date; and that the tenant asked to be released from her lease before January 1, 2011, for
personal reasons unconnected to the "acts of Green Tree or Five Brothers." Request for Admissions No. 16, 18, 19, 21-
25. If admitted, those contentions would undermine plaintiff's claim for tortious interference [*57] with a business
relationship.
According to Green Tree's certificate of service, on November 7, 2012, Green Tree transmitted its Request for
Admissions to plaintiff by first-class mail, addressed to plaintiff's then-current address of record. See Request for
Admissions at 8; see also ECF 79-1 at 37 (cover letter for Request for Admissions, also dated Nov. 7, 2012). In addition
to the certificate of service, one of Green Tree's attorneys, John Y. Lee, has filed a declaration, under penalty of perjury,
asserting that he caused the Request for Admissions to be mailed to plaintiff on November 7, 2012. See Ex.C to
Surreply (ECF 85-1 at 20). The thirtieth day after November 7 was Friday, December 7, 2012. Because the time for a
response under Fed. R. Civ. P. 36(a)(3) is triggered by service on the answering party, and because plaintiff was served
with the Request for Admissions via first-class mail, the time to respond was extended three days by operation of Fed.
R. Civ. P. 6(d). Accordingly, based on the date of service certified by Green Tree's counsel, plaintiff was obligated to
respond to the Request for Admissions no later than Monday, December 10, 2012.
Page 44Page 44
2013 U.S. Dist. LEXIS 140205, *

Plaintiff sent Green Tree a response [*58] to the Request for Admissions, in which she denied some of the substantive
requests for admission discussed above. 37 However, Green Tree contends that plaintiff's response was not timely served
and therefore all of the contentions in Green Tree's Request for Admissions are deemed admitted in their entirety,
pursuant to Fed. R. Civ. P. 36(a)(3).

37 Neither party has filed a signed copy of plaintiff's response to the Request for Admissions. However, Green Tree has submitted an
unsigned copy of the response, which plaintiff emailed to it. See Ex.B to Surreply (ECF 85-1 at 13). Neither party appears to contend that
there is any discrepancy between the unsigned copy and the signed copy.

The certificate of service on plaintiff's response states that the response was mailed to Green Tree on December 7, 2012,
which would have been timely. See Fed. R. Civ. P. 5(b)(2)(C) (providing that, when a paper is served by mail, "service
is complete upon mailing"). However, Green Tree has submitted a copy of the envelope in which the response was
contained, see Ex.2 to Green Tree Reply (ECF 79-2), which contains a postmark dated December 14, 2012, in Portland,
Oregon. 38 Moreover, Green Tree asserts that [*59] it did not receive the response until December 17, 2012, which it
posits is "consistent" with plaintiff having mailed the response on December 14. Green Tree Reply at 7 n.7. In addition,
plaintiff sent Green Tree's counsel an unsigned courtesy copy of her response via email. However, the email was sent on
December 13, 2012, see Ex.B to Surreply (ECF 85-1 at 11), which still would have been untimely. 39

38 The envelope also contains a postage stamp generated by a digital postage meter, which also includes a date. The exact date of the
postage is not clearly legible, but it is a date in November 2012. Because neither side contends that the response was mailed in November
2012, I will disregard this date.

39 Green Tree also notes that the courtesy copy of the response is not valid because it was not signed, and that service by email is effective
only if the recipient "consented in writing" to accept service by email, Fed. R. Civ. P. 5(b)(2)(E), which Green Tree contends it did not do.
See Surreply at 2 n.2.

Plaintiff presents both factual and legal responses to Green Tree's arguments. As a factual matter, plaintiff asserts that
her response was not untimely for two reasons: (1) because the [*60] Request for Admissions was not served on
November 7, 2012, and (2) because she served her response on December 7, 2012.
As to the first reason, plaintiff claims that she did not actually receive the Request for Admissions until November 14,
2012. In an email sent to Green Tree's counsel, Mr. Lee, on the afternoon of November 14, 2012, plaintiff said: "Can
you send the admissions request via email in Word. My husband said they just arrived at the house and since we have
already lost a week, I want to at least get a peak [sic] at them and start responding." Ex.A to Webb Reply (ECF 80-1 at
5). Mr. Lee emailed plaintiff an electronic copy of the Request for Admissions later that day, saying: "As a courtesy, I
will provide them." Id. Plaintiff suggests that the Request for Admissions was "most likely served well after the
[November 7, 2012] deadline for request for admissions in the scheduling order." Webb Reply at 2. 40 She also faults
Green Tree for not providing the Court with a copy of the postmarked envelope in which it sent the Request for
Admissions although, as Green Tree points out, that envelope is in plaintiff's possession, not Green Tree's.

40 Plaintiff states that she did not "protest [*61] the late serving of the Request for Admissions due to Hurricane Sandy [which made
landfall on the eastern seaboard on or about October 29, 2012], assuming that a delay in delivery could have been caused by the electricity
and other logistical nightmares caused on the east coast by the storm." Webb Reply at 2 n.1. She also protests that Green Tree sent the
Request for Admissions to "an address known to be slow," id. at 2. However, the address to which Green Tree sent the Request for
Admissions was plaintiff's address of record.

As to the second reason, plaintiff asserts that she mailed her response to the Request for Admissions on December 7,
2012, by placing it in a mailbox in Washington County, Oregon-- not Multnomah County, where Portland is situated.
Webb Reply at 2 n.1. She hypothesizes that a postal "processing center" in Portland "must have stamped [the postmark
on the response] days later after some sort of delay that was no fault of Plaintiff." Id. She posits, moreover, that "if the
evidence of the cover letter and certification [for the Request for Admissions] from the defendant is enough for their
proof of date sent then it should also be sufficient evidence for plaintiff to [*62] attest in a certification that admissions
were sent on a date certain." Id. at 1. 41
Page 45Page 45
2013 U.S. Dist. LEXIS 140205, *

41 In light of this argument, it is noteworthy that plaintiff has not actually provided a signed certificate or sworn declaration as to the date on
which her response was sent. It is also notable that, in her email of December 13, 2012, transmitting the unsigned courtesy copy of her
response, she stated: "Just in case the mail is taking as long as it did to get to my house from your office, here is the unsigned answer I sent
last week." Ex.B to Surreply (ECF 85-1 at 11).

Plaintiff's factual argument is less than convincing, especially in light of the cavalier approach that it appears she has
taken to accurate portrayal of the facts underlying her substantive claims. I need not resolve the factual dispute as to
when the Request for Admissions and its response were served, however, because I am persuaded by plaintiff's legal
argument: even if the response was served four days late, Green Tree suffered no prejudice.
Although Fed. R. Civ. P. 36(a)(3) provides that requests for admissions are deemed admitted if not timely answered, the
Fourth Circuit has clearly stated that a district court is nevertheless [*63] vested with discretion "not to deem the
requests for admission as admitted." Nguyen v. CNA Corp., 44 F.3d 234, 242 (4th Cir. 1995). In Nguyen, the Court held
that "the district court did not abuse its discretion in refusing to consider the requests for admission as admitted," where
the response was "filed one day late," because "the late response was so minimal in time and work on the date for
responding was slowed by [a] snow storm." Id. at 243.
Here, no cognizable prejudice inured to Green Tree from plaintiff's late filing. As noted, the response to the Request for
Admissions was not due until after Green Tree filed its summary judgment Motion, and so even if the response was
timely, Green Tree could not have addressed it in the Motion. Moreover, Green Tree's reply to plaintiff's Cross-Motion
was not due until December 20, 2013, 42 nearly a week after plaintiff's response was served and a full week after Green
Tree had received the courtesy copy by email.

42 The Cross-Motion was filed on Monday, December 3, 2012, and by operation of Local Rule 105.2(a) and Fed. R. Civ. P. 6(d), Green
Tree's reply was due seventeen days later, on Thursday, December 20, 2012. It was filed on that date.

The [*64] "'failure to respond in a timely fashion'" to a request for admissions "'does not require the court automatically
to deem all matters admitted,'" United States v. Petroff-Kline, 557 F.3d 285, 293 (6th Cir. 2009) (citation omitted), and a
district court may "accept 'the filing of an answer that would otherwise be untimely.'" Id. (citation omitted). "The court
may permit . . . withdrawal or amendment [of deemed admissions] 'when [1] the presentation of the merits of the action
will be subserved thereby and [2] the party who obtained the admission fails to satisfy the court that withdrawal or
amendment will prejudice that party in maintaining the action or defense on the merits.'" Raiser v. Utah County, 409
F.3d 1243, 1246 (10th Cir. 2005)) (citation omitted) (brackets in original). Indeed, Fed. R. Civ. P. 36(b) expressly
permits withdrawal of admissions on the basis discussed in Raiser.
Green Tree protests that Rule 36(b) permits admissions to be withdrawn "on motion," and that plaintiff has not filed
such a motion. However, "a formal motion is not always required. Instead, a withdrawal 'may be imputed from a party's
actions' . . . ." Petroff-Kline, 557 F.3d at 293 (internal citations [*65] omitted). Plaintiff has timely and unequivocally
made clear that she does not intend to admit wholesale the contentions in Green Tree's Request for Admissions. In light
of the Fourth Circuit's "strong policy that cases be decided on their merits," United States v. Shaffer Equip. Co., 11 F.3d
450, 453 (4th Cir. 1993), I exercise my discretion not to rely on plaintiff's deemed admissions to the contentions in
Green Tree's Request for Admissions in resolving the pending motions.

2. Hearsay, Relevance, and Authentication


As noted, Green Tree challenges the admissibility of several of plaintiff's evidentiary submissions. In the context of
summary judgment motions, Fed. R. Civ. P. 56(c) provides that each side must support its factual assertions with
citation to "particular parts of materials in the record," Fed. R. Civ. P. 56(c)(1)(A), and that a party may object that
material cited by the other side cannot be presented in a form that would be admissible in evidence." Fed. R. Civ. P.
56(c)(2). Thus, although at the summary judgment stage a party does not necessarily need to "produce evidence in a
form that would be admissible at trial," Celotex, supra, 477 U.S. at 324, when the opposing party [*66] objects on
admissibility grounds, "[t]he burden is on the proponent to show that the material is admissible as presented or to
explain the admissible form that is anticipated." Fed. R. Civ. P. 56, Adv. Cmte. Notes, 2010 Amendments. Green Tree's
evidentiary challenges pertain to relevance, hearsay, and authentication.
Page 46Page 46
2013 U.S. Dist. LEXIS 140205, *

Under Rule 402 of the Federal Rules of Evidence, "[r]elevant evidence is admissible" unless rendered inadmissible
pursuant to some other particular legal provision, and "[i]rrelevant evidence is not admissible." "Evidence is relevant if:
(a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of
consequence in determining the action." Fed. R. Evid. 401. These evidentiary relevance "principles apply to summary
judgment motions." Ziskie v. Mineta, 547 F.3d 220, 225 (4th Cir. 2008).
Hearsay is defined by Rule 801(c) of the Federal Rules of Evidence. It is "a statement, other than one made by the
declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." Id.
Hearsay is "not admissible," absent a rule of evidence or other statute or rule that renders it admissible. [*67] Fed. R.
Evid. 802. However, out of court statements are "not hearsay" if they are "not offered 'to prove the truth of the matter
asserted.'" United States v. Vidacak, 553 F.3d 344, 352 (4th Cir. 2009) (quoting Fed. R. Evid. 801(c)). Moreover, there
are several exceptions to the rule against hearsay, whereby an out of court statement may be offered to prove the truth of
the matter asserted. See Fed. R. Evid. 801(d), 803, 804. But, it is well settled that "hearsay evidence, which is
inadmissible at trial, cannot be considered on a motion for summary judgment." Md. Highways Contractors Ass'n v.
Maryland, 933 F.2d 1246, 1251 (4th Cir. 1991); accord Barnes v. Montgomery County, 798 F. Supp. 2d 688, 691 (D.
Md. 2011) ("[H]earsay statements . . . cannot support or defeat a motion for summary judgment.").
Fed. R. Evid. 901 governs authentication of documentary or tangible evidence. It provides that the proponent of an
"item of evidence" must "produce evidence sufficient to support a finding that the item is what the proponent claims it
is," Fed. R. Evid. 901(a)--for instance, competent "[t]estimony that an item is what it is claimed to be," Fed. R. Evid.
901(b)(1), or the "appearance, contents, [*68] substance, internal patterns, or other distinctive characteristics of the
item, taken together with all the circumstances." Fed. R. Evid. 901(b)(4). "It is well established that . . . unauthenticated
documents cannot be considered on a motion for summary judgment." Orsi v. Kirkwood, 999 F.2d 86, 92 (4th Cir.
1993).
Both authentication and hearsay are related to the concept of testimonial competence. Under Fed. R. Evid. 602, a
witness who is not offering expert opinion testimony "may testify to a matter only if evidence is introduced sufficient to
support a finding that the witness has personal knowledge of the matter." An "affidavit or declaration used to support or
oppose a motion [for summary judgment] must be made on personal knowledge, set out facts that would be admissible
in evidence, and show that the affiant or declarant is competent to testify on the matters stated." Fed. R. Civ. P. 56(c)(4).
See In re French, 499 F.3d 345, 358 (4th Cir. 2007) (describing requirements of former Rule 56(e), now codified
without substantive change in Rule 56(c)(4), as "mandatory"). It "is a failure of substance, not merely one of form, for a
party to file a summary judgment affidavit which is [*69] based on anything other than personal knowledge." Malina v.
Baltimore Gas & Elec. Co., 18 F. Supp. 2d 596, 604 n.4 (D. Md. 1998).
Notably, although Rule 56(c)(2) permits a party to object to the presentation of inadmissible evidence at the summary
judgment stage, "[t]here is no need to make a separate motion to strike." Fed. R. Civ. P. 56, Adv. Cmte. Notes, 2010
Amendments. In response to a well founded objection, a court will simply disregard the challenged evidence.
Accordingly, Green Tree's Strike Motion will be denied, as unnecessary. Nevertheless, I have carefully considered all of
Green Tree's evidentiary challenges and plaintiff's arguments in response. Many (although not all) of Green Tree's
challenges are meritorious. However, I have assumed, arguendo, that all of the documentary evidence submitted by
plaintiff is admissible and I have considered it. Admissible or not, none of the evidence submitted by plaintiff is
sufficient to generate a genuine dispute of material fact or demonstrate that she is entitled to judgment in her favor as a
matter of law.

C. Tortious Interference with Business Relationships


The tort of intentional interference with contractual or business relations [*70] is "well-established in Maryland."
Macklin v. Robert Logan Assocs., 334 Md. 287, 296, 639 A.2d 112, 116 (1994). It "arises only out of the relationships
between three parties, the parties to a contract or other economic relationship (P and T) and the interferer (D)." K & K
Mgmt., Inc. v. Lee, 316 Md. 137, 154, 557 A.2d 965, 973 (1989). The tort has "two general manifestations." Macklin,
334 Md. at 297, 639 A.2d at 117. In Macklin, the Maryland Court of Appeals explained: "While the two manifestations
of the tort share an underlying rationale, i.e., 'under certain circumstances, a party is liable if he interferes with and
damages another in his business or occupation,' they differ in their tolerance of interference." Id. at 298, 639 A.2d at 117
(citation omitted).
Under the first scenario, "where a contract between two parties exists, the circumstances in which a third party has a
right to interfere with the performance of that contract are more narrowly restricted." Natural Design, Inc. v. Rouse Co.,
Page 47Page 47
2013 U.S. Dist. LEXIS 140205, *

302 Md. 47, 69, 485 A.2d 663, 674 (1984). Where there is an existing contract that is not terminable at will, "inducing
its breach, even for competitive purposes, is itself improper and, [*71] consequently, not 'just cause' for damaging
another in his or her business." Macklin, 334 Md. at 303, 639 A.2d at 120.
A "broader right to interfere with economic relations exists" under the second scenario, "where no contract or a contract
terminable at will is involved." Natural Design, 302 Md. at 69-70, 485 A.2d at 674. Where there is no existing contract,
or the existing contract is "terminable at will by the party who refuses to continue performance," Macklin, 334 Md. at
304, 639 A.2d at 120, "there is no legal assurance of future performance; thus a competitor who intentionally causes a
third person not to continue an existing contract terminable at will does not improperly interfere with the contractual
relation if no wrongful means are employed." Id. at 305, 639 A.2d at 121. The Maryland Court of Appeals has provided
an illustrative list of "types of wrongful or unlawful acts that could form the basis" for the second manifestation of the
tort, including "'violence or intimidation, defamation, injurious falsehood or other fraud, violation of criminal law, and
the institution or threat of groundless civil suits or criminal prosecutions in bad faith.'" Berry & Gould, P.A. v. Berry,
360 Md. 142, 153, 757 A.2d 108, 113 (2000).
In [*72] this case, Ms. Webb and Ms. Klamp had a contract (i.e., the Lease). See Circuit City Stores, Inc. v. Rockville
Pike Joint Venture Ltd. P'shp, 376 Md. 331, 355, 829 A.2d 976, 989 (2003) ("[A] lease is both a contract and a
conveyance of a leasehold estate in land."). The Lease was not terminable at will. See Lease. Thus, this case involves
the first manifestation of the tort.
The first manifestation of the tort has five elements: (1) the existence of a contract between the plaintiff and a third
party; (2) the defendant's knowledge of that contract; (3) the defendant's intentional interference with the contract; (4)
breach or termination of the contract by the third party, as a result of the defendant's interference; and (5) damages
resulting from the breach or termination of the contract. See Macklin, 334 Md. at 301-02, 639 A.2d at 119; Wilmington
Trust Co. v. Clark, 289 Md. 313, 329, 424 A.2d 744 (1981); Goldman v. Harford Road Building Ass'n, 150 Md. 677,
681-82, 133 A. 843 (1926); Fowler v. Printers II, Inc., 89 Md. App. 448, 466, 598 A.2d 794, 802 (1991), cert. denied,
325 Md. 619, 602 A.2d 710 (1992); Lake Shore Investors v. Rite Aid Corp., 67 Md. App. 743, 748-49, 509 A.2d 727,
729-30 (1986); [*73] see also Webb I, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464, at *4-8. Intent can be proven
"by showing that the defendant intentionally induced the breach or termination of the contract in order to harm the
plaintiff or to benefit the defendant at the expense of the plaintiff." Macklin, 334 Md. at 301, 639 A.2d at 119.
Green Tree correctly argues that plaintiff's claim fails for three reasons, which I have reordered. In the first place, the
tortious conduct that Webb alleged never actually occurred. Plaintiff alleged in her complaint that her tenant was at the
Property and discovered a Five Brothers employee peering in the windows and threatening to change the locks and
remove her possessions. In the complaint, Webb claimed that Green Tree "harassed" her tenant and "ran the tenant out
of the home" with "threats of breaking and entry . . . and actual trespass." Amended Complaint ¶ 19. But, the undisputed
material facts show that this never happened. Instead, Ms. Klamp received two (or, at most, three) phone calls from Mr.
Wood, none of which Ms. Klamp perceived as harassment. No agent of Green Tree or Five Brothers ever threatened Ms.
Klamp, over the phone or in person, with breaking and entry or eviction; indeed, [*74] aside from the handful of non-
harassing calls from Mr. Wood, Ms. Klamp had no dealings at all with representatives of Green Tree or Five Brothers.
Ms. Klamp was not even present at the Property when Mr. O'Donnell was there; while Ms. Klamp continued to have a
possessory interest in the Property through February 2011, she had actually vacated the Property in late November
2010. Even if Klamp had been present, O'Donnell was not there to threaten eviction.
Second, plaintiff cannot show that Green Tree intended to interfere with the Lease. The undisputed evidence makes
abundantly clear that Green Tree did not know, at the time that it directed Five Brothers to secure the Property, that there
was a tenant at the Property. Indeed, Green Tree directed Five Brothers to secure the Property because it appeared to be
vacant on two successive exterior inspections. And, it appeared to be vacant because it was vacant; no one was residing
at the Property. Mr. Wood obtained Ms. Klamp's phone number from the "For Rent" sign and then contacted her. In that
conversation, Klamp described herself to Wood as a former tenant.
In response to these claims, plaintiff has cited communications she had with Mr. [*75] Wood in which she notified him
that she had tenants at the Property. But, all of these communications were made in November 2010 at the latest.
Plaintiff has provided no evidence that could support a determination that Green Tree was on notice that Webb still had
a tenant residing at the Property in January 2011. To the contrary, every objective indication disclosed in the record that
was available to Green Tree at that time pointed in the other direction: the Property appeared vacant; it had a "For Rent"
sign in front of it; and, when contacted by Green Tree, Ms. Klamp described herself as plaintiff's "former tenant."
Page 48Page 48
2013 U.S. Dist. LEXIS 140205, *

Last and perhaps most important, it is abundantly clear that Green Tree's conduct did not cause the termination of the
Lease. Ms. Klamp testified repeatedly and unequivocally that the sole reason she sought to terminate the Lease was her
breakup with Mr. Miller, and that the conduct of Green Tree and Five Brothers played no role whatsoever in her
decision.
In the Cross-Motion and in Ms. Webb's deposition testimony, plaintiff articulated a response to this argument: even
though Green Tree's conduct did not affect Ms. Klamp's decision to break the Lease, Green Tree's conduct [*76]
affected Ms. Webb's decision to release the tenant. Plaintiff encapsulated this contention at her deposition in the
following colloquy with Green Tree's counsel, Webb Dep. at 283-84:

Q Ms. Klamp testified that her request and her decision to get out of the lease had nothing to do with the actions of Green Tree
and/or Five Brothers. Do you recall that?
A I agree 100 percent. Her actions didn't. Mine were different. When she first wanted out it was because her boyfriend had cheated
on her. I only eventually caved in to her wanting to leave because I knew that at a certain point it was going to get worse and I
couldn't sustain what was going on.
Q But . . . Ms. Klamp's request to get out of the lease had nothing to do with Five Brothers and Green Tree. You would agree with
that?
A It [*77] only had to do with my reaction, it did not have to do with her request. Her request started November 28th after she
found out her boyfriend was cheating on her. I worked with her but was never going to let her out of the lease without fulfilling her
obligations until I knew I couldn't followup [sic] on my part. As a lawyer I knew I had duties and honestly I couldn't stick her with
something that I couldn't sustain.

Plaintiff's theory is that the "release was forced upon Plaintiff because she could no longer perform under the contract,
without the ability to guarantee or provide quiet enjoyment." Cross-Motion at 8. Plaintiff's argument is creative,
although she cites no case law in support of it. However, I need not determine whether, as a legal matter, a viable claim
for tortious interference can be stated for interference that causes the plaintiff to breach its contract with the third party
(rather than vice versa). As with the rest of her suit, plaintiff's largest problem is that the undisputed facts stubbornly
refuse to support her legal theory.
It was plaintiff who, in an email of December 10, 2010, first suggested to Ms. Klamp that she cut her losses and break
the Lease, paying [*78] Webb the January rent and foregoing the return of her security deposit. Indeed, plaintiff urged
Ms. Klamp to take that option rather than search for a replacement tenant. That offer, which was motivated solely in
response to Ms. Klamp's breakup with her boyfriend (who had also resided at the Property), far predated the allegedly
tortious conduct of which plaintiff complains. Ms. Klamp also testified that she and Ms. Webb arrived at a firm
agreement in December on the terms on which the Lease was ultimately terminated: the tenant would pay rent through
February and forfeit her security deposit in exchange for a release from the Lease, unless she found a replacement
tenant before that time.
To be sure, Ms. Webb disputes that testimony. According to plaintiff, she and Ms. Klamp did not arrive at their final
agreement until January 21, 2011, when plaintiff sent Ms. Klamp an email memorializing the agreement. But, even
assuming that the agreement was not finalized until January 21, that email was still sent before Green Tree ordered Five
Brothers to secure the Property. The only conduct that Green Tree had undertaken vis-à-vis plaintiff's tenant at that time
was, at most, three phone calls [*79] to Ms. Klamp that Ms. Klamp did not perceive as harassing and that merely
sought contact information for Ms. Webb. As a matter of law, that conduct could not have amounted to tortious
interference with the Lease.
Accordingly, for all three reasons (each of which is independently sufficient), Green Tree is entitled to judgment as a
matter of law as to Count I.

D. Breach of Contract and Trespass to Land


Count II and Count III can be considered together, because the gravamen of both counts is that the entry onto the
Property, without notice to plaintiff, violated Covenant 7 of the Deed of Trust, which provides in pertinent part:

Lender or its agent may make reasonable entries upon and inspections of the Property. If it has reasonable cause, Lender may
inspect the interior of the improvements on the Property. Lender shall give Borrower notice at the time of or prior to such an
interior inspection specifying such reasonable cause.
Page 49Page 49
2013 U.S. Dist. LEXIS 140205, *

Plaintiff claims that the alleged entry on to the Property by Green Tree's agent on January 27, 2011, was unreasonable,
due to the agent's alleged threats of eviction, and was an interior inspection without prior notice, because the agent
allegedly peered into windows. [*80] Accordingly, the entry on to the Property breached Covenant 7 of the Deed of
Trust and, by the same token, constituted a trespass.
"'In order to prevail on a cause of action for trespass, the plaintiff must establish: (1) an interference with a possessory
interest in his property; (2) through the defendant's physical act or force against that property; (3) which was executed
without his consent.'" Royal Investment Gp., LLC v. Wang, 183 Md. App. 406, 445, 961 A.2d 665, 688 (2008) (citation
omitted), cert. granted, 408 Md. 149, 968 A.2d 1064, appeal dismissed before argument, 409 Md. 413, 975 A.2d 875
(2009). Plaintiff's theory is that, by causing its agent to enter onto the Property without complying with Covenant 7,
Green Tree exceeded the scope of consent contained in the Deed of Trust, thereby satisfying the third element of a
trespass claim.
Green Tree responds that Covenant 9, not Covenant 7, of the Deed of Trust controls in this circumstance. Covenant 9
provides, in pertinent part:

If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument . . . or (c) Borrower has
abandoned the Property, then Lender may do and pay for whatever is reasonable [*81] and appropriate to protect Lender's interest
in the Property, and rights under this Security Agreement, including protecting and/or assessing the value of the Property, and
securing and/or repairing the Property. . . . Securing the Property includes, but is not limited to, entering the Property to make
repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building and other code violations
or dangerous conditions, and have utilities turned on and off .

In Green Tree's view, plaintiff had breached her duties under the Deed of Trust by failing to make her payments,
satisfying condition "(a)" for application of Covenant 9. And, it also appeared to Green Tree that the Property had been
abandoned, so as to satisfy condition "(c)." Therefore, Green Tree reasons, Covenant 9 gave it express authority to
secure the Property. Green Tree relies on Paatalo v. J.P. Morgan Chase Bank, N.A., Civ. No. 10-119-BLG-CSO, 2012
U.S. Dist. LEXIS 90101, 2012 WL 2505742 (D. Mont. June 28, 2012), in which the court held that an identical
provision in a deed of trust authorized a mortgage servicer to enter on the property at issue because the homeowner
"had failed to perform his agreement to make [*82] the periodic payments required by the Note and Deed of Trust."
2012 U.S. Dist. LEXIS 90101, [WL] at *10. Moreover, regardless of whether Covenant 7 or Covenant 9 controls, Green
Tree argues that it breached neither provision because the alleged entries on the Property were "reasonable" as a matter
of law. 43

43 Green Tree also argues that, under Covenant 7, "Green Tree had ample 'reasonable cause' to enter the Property as a result of Plaintiff's
default of her monthly payment obligations and abandonment of the Property." Motion at 22. Although I otherwise largely agree with Green
Tree's arguments, this one falls flat. The "reasonable cause" provision of Covenant 7 only applies to interior inspections. And, in order to
undertake an interior inspection, the mortgage servicer must both (a) have "reasonable cause," and (b) give notice of the interior inspection
to the borrower, specifying its reasonable cause. Unless there is an interior inspection and unless the servicer gives notice to the borrower of
the interior inspection, "reasonable cause" is not relevant to whether the servicer's actions are authorized by the Deed of Trust.

Clearly, a good faith belief that a property has been abandoned triggers a mortgage servicer's [*83] right under
Covenant 9 to secure the property. 44 Plaintiff has presented some evidence from the deposition testimony of Ms.
Hankey of Five Brothers and several Green Tree employees suggesting that the methods used by Green Tree and Five
Brothers to determine whether a property is vacant are error-prone and involve little training, oversight, or
accountability. But, I decline plaintiff's invitation to turn this suit into a referendum on the broader business methods of
Green Tree and Five Brothers. Even if defendant's business methods could, in some hypothetical case, lead Green Tree
wrongfully to cause an occupied property to be secured and re-keyed, that did not occur in this case.

44 Notably, the mortgage servicer in Paatalo argued that it was "authorized [under Covenant 9] to enter the property 'if it suspects it has
been abandoned.'" Paatalo, 2012 U.S. Dist. LEXIS 90101, 2012 WL 2505742, at *10. Although the mortgage servicer pointed to several
indicia of abandonment ("no one had been living at the property since January 2010, Plaintiff was behind on his mortgage payments, and an
inspector found shutoff notices from the electric company at the property," id.), the plaintiff disputed that the property had been [*84]
abandoned. The Paatalo Court concluded that abandonment was immaterial because, as noted, the servicer's entry was authorized by
Covenant 9 based solely on the homeowner's failure to make monthly payments. I am not confident that failure to make payments alone
would render any and all entries onto the Property--including entry to secure the Property--"reasonable" within the meaning of Covenant 9.
However, I need not decide that question in Order to resolve the Motion.
Page 50Page 50
2013 U.S. Dist. LEXIS 140205, *

In this case, as discussed, several indicators would objectively have suggested to Green Tree that the Property was
vacant. Moreover, even if Green Tree's order to secure the Property should not have been issued, the order was never
carried out. The Property was never secured or re-keyed, nor was any actual attempt made to do so. The order did not
result in a trespass on plaintiff's Property by Green Tree or any arguable breach of any provision of the Deed of Trust.
The most that Mr. O'Donnell did was to enter onto the Property and look into the front window of an empty house. This
is no less reasonable than other de minimis entries that have been found reasonable under the case law. See, e.g., Beatty
v. BAC Loans Servicing, LP, Civ. No. RDB-10-2229, 2011 U.S. Dist. LEXIS 66909, 2011 WL 2516394, at *3 (D. Md.
June 21, 2011) [*85] (holding that "two drive-by inspections" of the plaintiff's property by a mortgage creditor,
conducted without notice to plaintiff, were "reasonable" and did not violate identical Covenant 7 in deed of trust);
Moseley v. CitiMortgage, Inc., No. C11-5349RJB, 2011 U.S. Dist. LEXIS 125805, 2011 WL 5175598, at *10 (W.D.
Wash. Oct. 31, 2011), (holding that servicer's agents did not unreasonably enter property in violation of identical
Covenant 7 of deed of trust by "plac[ing] a notice on a doorknob, requesting the [homeowner] to contact [the
servicer]").
But, even if O'Donnell's entry was unreasonable, he did not enter onto the Property as Green Tree's agent. Rather, he
testified unequivocally that he entered the Property on his own initiative, in order to determine whether he wanted to
take the job. 45

45 Count II and Count III are focused entirely on the alleged entry onto the Property on January 27, 2011. Plaintiff does not appear to argue
that the two previous inspections, on January 10 and 20, 2011, violated any provision of the Deed of Trust. Even if she were to do so now, it
is well established that "a plaintiff may not amend her complaint through [*86] argument in a brief opposing summary judgment."
Sensormatic Sec. Corp. v. Sensormatic Elecs. Corp., 455 F. Supp. 2d 399, 436 (D. Md. 2006).

In sum, the undisputed material facts do not disclose an entry onto plaintiff's Property by Green Tree or its agents on
January 27, 2011. Even if such an entry had occurred, however, it was clearly authorized under the covenants of the
Deed of Trust (regardless of whether Covenant 7 or Covenant 9 governs). Therefore, Green Tree is entitled to judgment
as a matter of law as to Count II and Count III.

E. FDCPA
The FDCPA imposes a variety of obligations and potential liabilities on "debt collectors," who are generally defined as
entities that "use[ ] any instrumentality of interstate commerce or the mails in any business the principal purpose of
which is the collection of any debts, or [that] regularly collect[ ] or attempt[ ] to collect, directly or indirectly, debts
owed or due or asserted to be owed or due to another." 15 U.S.C. § 1692a(6). In other words, the FDCPA is concerned
with "rights for consumers whose debts are placed in the hands of professional debt collectors for collection." DeSantis
v. Computer Credit, Inc., 269 F.3d 159, 161 (2d Cir. 2001) [*87] (emphasis added).
An entity to which a debt is owed falls outside the definition of "creditor" and qualifies as a "debt collector" only if the
entity "receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such
debt for another," 15 U.S.C. § 1692a(4), or if the "principal purpose" of the entity's business is debt collection. Id. §
1692a(6). So, the FDCPA does not "'apply to creditors collecting debts in their own names and whose primary business
is not debt collection,' or to the individual employees of such creditors." Betskoff v. Enterprise Rent A Car Co., Civ. No.
ELH-11-2333, 2012 U.S. Dist. LEXIS 1260, 2012 WL 32575, at *5 (D. Md. Jan. 4, 2012) (quoting Kennedy v.
Lendmark Fin. Servs., Civ. No. RDB-10-02667, 2011 U.S. Dist. LEXIS 104326, 2011 WL 4351534, at *3 (D. Md. Sept.
15, 2011)); see also Akpan v. First Premier Bank, Civ. No. DKC-09-1120, 2010 U.S. Dist. LEXIS 20371, 2010 WL
917886, at *4 (D. Md. Mar. 8, 2010). Put another way, "[a]n entity that tries to collect money owed to itself is outside
the FDCPA." Carter v. AMC, LLC, 645 F.3d 840, 842 (7th Cir. 2011).
Moreover, the definition of "debt collector" contains an exemption for an entity, such as a mortgage servicer, that
collects debts that were "not in [*88] default at the time [they were] obtained" by the entity. 15 U.S.C. § 1692a(6)(F)
(iii). Thus, it "is well-settled . . . that . . . mortgage servicing companies are not debt collectors and are statutorily
exempt from liability under the FDCPA," to the extent that they take action to collect debts that were not in default at
the time they acquired the debts. Scott v. Wells Fargo Home Mortgage, Inc., 326 F. Supp. 2d 709, 718 (E.D. Va.)
(emphasis omitted), aff'd, 67 Fed. Appx. 238 (4th Cir. 2003); accord Adam v. Wells Fargo Bank, N.A., Civ. No. ELH-09-
2387, 2011 U.S. Dist. LEXIS 96604, 2011 WL 3841547, at *20 (D. Md. Aug. 26, 2011); Flores v. Deutsche Bank Nat'l
Page 51Page 51
2013 U.S. Dist. LEXIS 140205, *

Trust Co., Civ. No. DKC-10-0217, 2010 U.S. Dist. LEXIS 67255, 2010 WL 2719849, at *6 (D. Md. July 7, 2010);
Sparrow v. SLM Corp., Civ. No. RWT-08-00012, 2009 U.S. Dist. LEXIS 1432, 2009 WL 77462, at *2 (D. Md. Jan. 7,
2009); see also De Dios v. Int'l Realty & Investments, 641 F.3d 1071, 1075 n.3 (9th Cir. 2011) (citing legislative history
of the FDCPA indicating that the exception in § 1692a(6)(F)(iii) was intended to provide that "'mortgage service
companies and others who service outstanding debts for others, so long as the debts were not in default when taken for
servicing,'" are not debt collectors).
Green Tree claims [*89] that it is not a "debt collector" with respect to plaintiff's mortgage because it comes within the
FDCPA's exception for mortgage servicers. Plaintiff contends that Green Tree does not qualify for the mortgage servicer
exception because her mortgage was in default when Green Tree acquired it from PNC Bank. In Webb II, I reserved
ruling on this dispute until the summary judgment stage.
Plaintiff's argument is dependent on two propositions. First, although the Assignment of the Deed of Trust from PNC
Bank to Green Tree states that it is "[e]ffective" as of November 1, 2009, the Assignment was not actually executed until
February 18, 2010. According to plaintiff, for purposes of the FDCPA's mortgage servicer exception, the date of actual
execution is what counts. Second, in February 2010, plaintiff made her mortgage payment late and thus she argues that
her mortgage was in default when the assignment was made. The Note states that the monthly mortgage payments are
due "on the 1st day of each month." Note ¶ 3. Moreover, with respect to late payments and default, the Note provides,
Note ¶ 6 (emphasis added):

(A) Late Charge for Overdue Payments


If the Note Holder has not received the full [*90] amount of any monthly payment by the end of 15 calendar days after the date it
is due, [Borrower] will pay a late charge to the Note Holder. The amount of the charge will be 5.00% of [the] overdue payment of
principal and interest. [Borrower] will pay this late charge promptly but only once each late payment.

(B) Default
If [Borrower does] not pay the full amount of each monthly payment on the date it is due, [Borrower] will be in default.

(C) Notice of Default


If [Borrower is] in default, the Note Holder may send [Borrower] a written notice telling [Borrower] that if [Borrower does] not
pay the overdue amount by a certain date, the Note Holder may require [Borrower] to pay immediately the full amount of Principal
which has not been paid and all the interest that [Borrower] owe[s] on that amount. . . .

Green Tree argues that the date it "obtained" plaintiff's mortgage, within the meaning of the FDCPA, was November 1,
2009, the effective date of the Assignment, and that plaintiff's mortgage was not in default on that date. In contrast, as
noted, plaintiff insists that the date Green Tree "obtained" the mortgage was February 18, 2010, the date the Assignment
was executed.
Defendant cites Crone v. Bank of Am., N.A., No. 4:11-cv-733, 2012 U.S. Dist. LEXIS 143202, 2012 WL 4754434, at *3
(E.D. Tex. Sep. 6, 2012), [*91] for the proposition that an assignment of a mortgage may validly be backdated.
However, Crone did not address whether a mortgage assigned via a backdated assignment is "obtained" by the assignee
on the date of the assignment's execution or on the backdated effective date. Plaintiff cites Md. Code (2010 Repl. Vol.,
2013 Supp.), § 2-103 of the Real Property Article, which provides: "Every valid assignment of a mortgage is sufficient
to grant to the assignee every right which the assignor possessed under the mortgage at the time of the assignment."
(Emphasis added.) However, that Maryland statute does not address whether the "time of the assignment" is the date the
assignment is executed or that date that the assignment says that it is effective. The "FDCPA does not define the term
'obtained,'" Brown v. Morris, 243 F. App'x 31, 34 (5th Cir. 2007), and I have not found case law directly addressing
whether a mortgage is obtained by assignment on the assignment's execution date or its effective date. However, there is
no need to resolve this issue because, regardless of which date the mortgage in this [*92] case was obtained, I conclude
that the mortgage was not in default.
To be sure, courts considering FDCPA claims involving mortgages that contain the same provision, expressly stating
that a loan is in default if the monthly payment is not made on the first of the month, have endorsed the proposition that,
if a mortgage is assigned at a time in the month when the borrower has not made his or her monthly payment, the
mortgage is in default and the assignee is not entitled to the mortgage servicer exception. See, e.g., Kapsis v. Am. Home
Mortg. Serv'g, Inc., 923 F. Supp. 2d 430, 442 (E.D.N.Y. 2013); Castellanos v. Deutsche Bank, No. 1:11-cv-815, 2012
Page 52Page 52
2013 U.S. Dist. LEXIS 140205, *

U.S. Dist. LEXIS 93455, 2012 WL 2684968, at *6-8 (S.D. Ohio July 6, 2012); see also Glenn v. FNF Serv'g, Inc., No.
5:12-CV-703-D, 2013 U.S. Dist. LEXIS 114138, 2013 WL 4095524, at *4-5 (E.D.N.C. Aug. 13, 2013) (holding that
borrower plausibly alleged that mortgage was in default when assigned to servicer "as of December 1, 2009, when the
second payment was due and unpaid, or as of December 16, 2009, when the fifteen-day late payment grace period
ended") (emphasis added). However, in this case, the mortgage was assigned on February 18, 2010, and plaintiff asserts
that she had already made her monthly [*93] mortgage payment (albeit late) by that date, i.e., on February 15, 2010.
See Cross-Motion at 15. 46 Even if plaintiff's mortgage was technically in default from February 2 through February 14,
2010, during which time her monthly payment was due and unpaid, that default was cured by plaintiff's alleged payment
on February 15, before the mortgage was assigned on February 18. Accordingly, even if Green Tree obtained plaintiff's
mortgage on February 18, 2010, the mortgage was not in default at that time and Green Tree is exempt from liability as
a "debt collector" under the FDCPA.

46 Notably, plaintiff has not actually submitted any documentary evidence, or even her own sworn statement, regarding the date on which
she made her February 2010 payment. She merely asserts, in the Cross-Motion, that she paid on February 15, 2010. This unsworn assertion
in a legal brief is insufficient to establish a material fact for summary judgment purposes. See, e.g., EEOC v. CTI Global Sols., Inc., 815 F.
Supp. 2d 897, 914 (D. Md. 2011) (To avoid summary judgment in the movant's favor, the non-moving party 'must present evidentiary matter
showing that there is a genuine issue of material fact that is worth [*94] bringing to trial.' Defendant fails to present such evidence here,
instead only presenting conclusory statements in its brief to support these assertions.") (emphasis in original) (internal citations omitted).

Even if Green Tree were subject to the FDCPA, however, plaintiff's FDCPA claims also fail on the merits because the
undisputed material facts evince no conduct by Green Tree that would have violated the FDCPA. In her complaint,
plaintiff alleged that Green Tree violated two provisions of the FDCPA. First, she asserted that, by "calling Plaintff's
tenant at work repeatedly to 'talk to' tenant about Plaintiff's 'default' and sending an agent to go to the home . . . who told
the tenant that the home had been foreclosed and that the tenant would be locked out and her items removed," Amended
Complaint ¶ 53, Green Tree violated 15 U.S.C. § 1692d, which provides that a debt collector may not "engage in any
conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of
a debt." Such unlawful conduct includes, but is not limited to, "[c]ausing a telephone to ring or engaging any person in
telephone conversation repeatedly or continuously [*95] with intent to annoy, abuse, or harass any person at the called
number." Id. § 1692d(5). Second, by "intentionally scaring off any current renter (by . . . hiring someone who told the
tenant that the home had been foreclosed and calling her at work about the 'default') and threatening to run off any
future renter," plaintiff alleged that Green Tree violated 15 U.S.C. § 1692e(10), which prohibits the "use of any false
representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a
consumer."
But, as discussed, the undisputed material facts simply do not reflect that any such conduct actually occurred. Mr. Wood
of Green Tree made two (or, at most, three) calls to plaintiff's tenant, none of which were perceived by Ms. Klamp as
harassment. Moreover, the calls were made with the stated intention of getting in touch with Ms. Webb, not annoying or
harassing Ms. Klamp. In those calls, according to the sworn statements of both Mr. Wood and Ms. Klamp, Wood did not
discuss the reason that he needed to speak with Ms. Webb or mention that Ms. Webb's mortgage was in default. The
conversation between Ms. Klamp and Green Tree's agent alleged in the [*96] complaint, in which the agent supposedly
threatened Ms. Klamp that her possessions would be removed and that she would be locked out of the Property, never
took place. When Mr. O'Donnell came to the Property, he did not do so as anyone's agent and he never made such
threats. Further, Ms. Klamp was not at the Property when Mr. O'Donnell came, and she and Mr. O'Donnell never spoke,
either in person or on the phone.
For all of the foregoing reasons, Green Tree is entitled to judgment as a matter of law as to Count VI, alleging violations
of the FDCPA. For the same reason, Green Tree is also entitled to judgment as to the negligence count, Count VII,
which is predicated on the same conduct giving rise to the alleged FDCPA violations.
In her Cross-Motion, plaintiff newly argues that Green Tree was negligent in hiring Five Brothers because Five Brothers
fails propertly to train its independent contractors to perform home inspections, and that Green Tree was negligent in
failing to train Mr. Wood about various aspects of foreclosure law or the need to document all contact with a borrower.
See Cross-Motion at 18-19. These allegations do not appear in Count VII as presented in the complaint. [*97] But, even
if I were inclined to permit plaintiff to "amend her complaint through argument in a brief opposing summary judgment,"
Sensormatic Sec. Corp. v. Sensormatic Elecs. Corp., 455 F. Supp. 2d 399, 436 (D. Md. 2006), plaintiff's negligence
claims fail because the undisputed material facts do not disclose that she suffered any damages as a result of this alleged
Page 53Page 53
2013 U.S. Dist. LEXIS 140205, *

negligence. And, "actual damages are a prerequisite for liability in negligence cases . . . ." Peroti v. Williams, 258 Md.
663, 671, 267 A.2d 114, 119 (1970); see MacCubbin v. Wallace, 42 Md. App. 325, 327, 400 A.2d 461, 463 (1979) ("[A]
finding of 'no damages' in a negligence case is not compatible with a 'plaintiff's verdict.' Damage (or injury) is an
essential element of actionable negligence just as are 'duty' and 'breach' essential elements of a negligence plaintiff's
proof."); accord Capital Centre, LLC v. Wilkinson, 2006 U.S. Dist. LEXIS 13121, 2006 WL 827375, at *12 (D. Md.
Mar. 27, 2006) ("Damages is an essential element of any negligence claim under Maryland law . . . ."). Accordingly,
Green Tree is entitled to judgment as to Count VII.

F. Sanctions
In light of the serious variance between the allegations of plaintiff's complaint and the undisputed [*98] facts gleaned
from discovery, Green Tree has moved for imposition of sanctions on plaintiff pursuant to Rule 11 of the Federal Rules
of Civil Procedure.
Rule 11(b) provides, in pertinent part:

By presenting to the court a pleading, written motion, or other paper--whether by signing, filing, submitting, or later advocating it--
an attorney or unrepresented party certifies that to the best of the person's knowledge, information, and belief, formed after an
inquiry reasonable under the circumstances:

(1) it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly
increase the cost of litigation;
***
(3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary
support after a reasonable opportunity for further investigation or discovery; and

"The primary purpose of Rule 11 is to punish violators and deter parties and their counsel from pursuing unnecessary or
unmeritorious litigation." Moody v. Arc of Howard Cnty., Inc., 474 F. App'x 947, 950 (4th Cir. 2012). "[A] complaint
containing allegations unsupported by any information obtained prior to filing, or allegations based on information
[*99] which minimal factual inquiry would disprove, will subject the author to [Rule 11] sanctions." In re Kunstler, 914
F.2d 505, 516 (4th Cir. 1990). In Morris v. Wachovia Securities, Inc., 448 F.3d 268, 277 (4th Cir. 2006), the Fourth
Circuit said plainly: "Factual allegations fail to satisfy Rule 11(b)(3) when they are 'unsupported by any information
obtained prior to filing.'" (Citation omitted).
Fed. R. Civ. P. 11(c)(2) permits a party to file a motion for sanctions against another party for violation of Rule 11(b),
provided that, before filing the motion with the court, the moving party must serve it on the opposing party and give the
opposing party 21 days to withdraw "the challenged paper, claim, defense, contention, or denial." Green Tree served a
draft of its Sanctions Motion on plaintiff in advance of filing it with the Court, as required. See Sanctions Motion at 4.
Moreover, in May 2012, a week after Ms. Klamp's deposition was taken, Green Tree wrote to plaintiff demanding that
she voluntarily dismiss her claims in light of Ms. Klamp's deposition testimony, which directly contradicted the
allegations of plaintiff's complaint in multiple material respects. See ECF 77-3. Plaintiff [*100] rebuffed the demand,
arguing that Ms. Klamp's recollection was mistaken and that the allegations of her complaint were an accurate reflection
of her notes, made contemporaneously with the events. See ECF 77-4.
As noted, Local Rule 105.8(b) provides that a party need not respond to a motion for sanctions under Rule 11 unless
ordered to respond by the court. Under Local Rule 105.8 and Rule 11(c)(1), a court must give a party notice and an
opportunity to respond before imposing sanctions. In my view, the state of the record raises a serious question regarding
plaintiff's compliance with Rule 11(b) in the prosecution of this action. In comparison to the summary judgment record,
discussed at length above, it is difficult to view plaintiff's complaint as anything but an exercise in speculative fiction: a
narrative of events that might have happened, not a statement of events that did happen. Although I do not foreclose the
possibility that plaintiff will be able to demonstrate that she pursued her complaint "to the best of [her] knowledge,
information, and belief, formed after an inquiry reasonable under the circumstances," Fed. R. Civ. P. 11(b), the state of
the record makes it imperative [*101] that plaintiff explain her litigation conduct by responding to defendant's
Sanctions Motion. Therefore, I will direct her to do so.
In the meantime, the Court will enter judgment in favor of Green Tree as to all substantive counts, thereby rendering
final judgment on the merits. Accordingly, I will direct the Clerk to close this case for statistical purposes. If, upon
Page 54Page 54
2013 U.S. Dist. LEXIS 140205, *

receipt of Webb's response to the Sanctions Motion, Green Tree wishes to litigate the Sanctions Motion, it may renew its
Sanctions Motion and reply to plaintiff's response. 47 In the interim, I will deny the Sanctions Motion, without prejudice
to Green Tree's right to renew it.

47 The parties are reminded that whether "to impose Rule 11 sanctions, and the quality and amount of the sanctions imposed," are all matters
within the discretion of the district court. Miltier v. Downes, 935 F.2d 660, 663 (4th Cir. 1991). See Fed. R. Civ. P. 11(c)(1) ("If . . . the court
determines that Rule 11(b) has been violated, the court may impose an appropriate sanction . . . .") (emphasis added). In making a
determination as to the amount of a monetary sanction, a court must consider the Kunstler factors, which include the "'severity of the [*102]
Rule 11 violation,'" the "'reasonableness of the opposing party's attorney's fees,'" the "'minimum to deter,'" and the "'ability to pay.'"
Brubaker v. City of Richmond, 943 F.2d 1363, 1374 (4th Cir. 1991) (quoting In re Kunstler, 914 F.2d 505, 523 (1990), cert. denied sub nom.
Kunstler v. Britt, 499 U.S. 969, 111 S. Ct. 1607, 113 L. Ed. 2d 669 (1991)). Moreover, the "amount of a monetary sanction . . . should always
reflect the primary purpose of Rule 11--deterrence of future litigation abuse." Brubaker, 943 F.2d at 1374.

An Order implementing my rulings follows.


Date: September 30, 2013
/s/ Ellen Lipton Hollander
United States District Judge
Page 56Page 56
2013 Bankr. LEXIS 4045, *

53 of 430 DOCUMENTS

In Re: DAVID TODD LEONARD and MICHELLE LEIGH LEONARD,


DEBTORS. JANICE POSL-BENDSEN, by John R. Kurth, guardian and
conservator; and JOHN R. KURTH, Trustee of the Janice Posl-Bendsen Revocable
Living Trust, PLAINTIFFS v. DAVID TODD LEONARD and MICHELLE LEIGH
LEONARD, DEFENDANTS.

CASE NO. 09-20190, CHAPTER 7, ADV. NO. 09-6043

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS

2013 Bankr. LEXIS 4045

September 26, 2013, Decided

NOTICE: FOR ELECTRONIC PUBLICATION ONLY

SUBSEQUENT HISTORY: Motion denied by Posl-Bendsen v. Leonard (In re Leonard), 2014 Bankr. LEXIS 461
(Bankr. D. Kan., Feb. 3, 2014)
Exception to discharge denied by, Findings of fact/conclusions of law at In re Leonard, 2014 Bankr. LEXIS 2613
(Bankr. D. Kan., June 12, 2014)

CASE SUMMARY:

OVERVIEW: HOLDINGS: [1]-Summary judgment could not be granted on denial of discharge under 11 U.S.C.S. §
523(a)(2)(A), as there was no evidence of false pretences, false representations, or actual fraud; [2]-For purposes of §
523(a)(4), the creditors failed to show a fiduciary relationship; [3]-Allegations that the debtors withdrew and wrote
checks from a creditor's trust account for their personal use did not support denial of discharge under 11 U.S.C.S. §
727(a)(3), as that provision did not apply to their alleged failure to maintain complete records as to the trust's financial
conditions and transactions; [4]-Although there were inaccuracies on, and omissions from, the debtors' schedules, the
uncontroverted facts did not evidence the elements necessary for denial of discharge under § 727(a)(4), as the
materiality of the omissions was not established.

OUTCOME: The court denied the creditors' motion for summary judgment on their complaint objecting to the
discharge of their claim against the Chapter 7 debtors and seeking an order denying their discharge.

CORE TERMS: summary judgment, uncontroverted facts, fiduciary relationship, revocable, deposition, fiduciary,
fitness, financial condition, fiduciary duties, com, materiality, omission, uncontroverted, defalcation, reckless, stock,
express trust, expenditures, bicycles, dollars, business transactions, false pretenses, false representation, false oath,
actual fraud, malicious injury, dischargeability, documentation, fraudulently, ascertained

LexisNexis(R) Headnotes

Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > General Overview
Evidence > Procedural Considerations > Burdens of Proof > Preponderance of Evidence
[HN1] Exceptions to discharge under 11 U.S.C.S. § 523(a) are construed liberally in favor of a debtor. To prevail on an
objection to discharge, a creditor has the burden to prove its case by a preponderance of the evidence.

Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Embezzlement & Fraud
Page 57Page 57
2013 Bankr. LEXIS 4045, *

[HN2] 11 U.S.C.S. § 523(a)(2)(A) excepts from discharge debts for money or property to the extent obtained by false
pretenses, a false representation, or actual fraud, other than a statement respecting a debtor's or insider's financial
condition.

Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Embezzlement & Fraud
[HN3] 11 U.S.C.S. § 523(a)(4) excepts from discharge a debt for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny.

Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Embezzlement & Fraud
Civil Procedure > Federal & State Interrelationships > Erie Doctrine
[HN4] The existence of a fiduciary relationship under 11 U.S.C.S. § 523(a)(4) is determined under federal law;
however, state law is relevant to this inquiry. For purposes of § 523(a)(4), the definition of "fiduciary" is narrowly
construed, meaning that the applicable nonbankruptcy law that creates a fiduciary relationship must clearly outline the
fiduciary duties and identify the trust property. An express or technical trust must be present for a fiduciary
relationship to exist under § 523(a)(4). Therefore, not all fiduciary relationships which exist under common law or state
law rise to the level actionable under § 523(a)(4).

Estate, Gift & Trust Law > Trusts > Creation


[HN5] Under Kansas law, the elements necessary to create an express trust are: (1) an explicit declaration and intention
to create a trust; (2) the transfer of lawful and definite property by a person capable of making transfer thereof; and (3)
a requirement to hold the property as trustee for the benefit of a cestui que trust with directions as to the manner in
which the trust funds are to be applied.

Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Embezzlement & Fraud
[HN6] Neither a general fiduciary duty of confidence, trust, loyalty, and good faith, nor an inequality between the
parties' knowledge or bargaining power is sufficient to establish a fiduciary relationship for purposes of dischargeability
under 11 U.S.C.S. § 523(a)(4).

Estate, Gift & Trust Law > Trusts > Creation


[HN7] A technical trust differs from an express trust in that the intention of the parties is not relevant, and the parties'
fiduciary obligations are imposed by law, not implied by law.

Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Embezzlement & Fraud
[HN8] A denial of discharge requires that the debt excepted from discharge for either fraud or defalcation while acting
as a fiduciary. Fraud, for purposes of 11 U.S.C.S. § 523(a)(4), has generally been interpreted as involving intentional
deceit, rather than implied or constructive fraud. The United States Supreme Court has held that defalcation for
purposes of the exception to discharge requires an intentional wrong. It stated that where the conduct at issue does not
involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong. The Court included
as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the
criminal law often treats as the equivalent.

Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Malicious & Reckless
Behavior
[HN9] 11 U.S.C.S. § 523(a)(6) excepts from discharge debts for a willful and malicious injury by a debtor to another or
to the property of another. An injury is malicious within this exception if it was wrongful and without just cause or
excuse. Malicious conduct is more culpable than recklessness. Willfulness refers to a deliberate and intentional act that
necessarily leads to injury.

Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > General Overview
Evidence > Procedural Considerations > Burdens of Proof > Allocation
[HN10] Grounds for denial of a debtor's discharge are limited to those clearly expressed in the Bankruptcy Code. The
burden of proof for an objection to discharge is on the objector.

Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > Records
Page 58Page 58
2013 Bankr. LEXIS 4045, *

[HN11] 11 U.S.C.S. § 727(a)(3) provides that a debtor shall be granted a discharge unless the debtor has concealed,
destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents,
records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless
such act or failure to act was justified under all of the circumstances of the case. The purpose of the objection is to
ensure documentation to permit an objective determination of the debtor's true financial status. A prima facie case under
§ 727(a)(3) may be made upon showing that (1) the debtor failed to maintain and preserve adequate records; and (2)
such failure makes it impossible to ascertain the debtor's financial condition and material business transactions.

Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > False Accounts & Oaths
[HN12] 11 U.S.C.S. § 727(a)(4)(A) provides that a debtor shall be granted a discharge unless the debtor knowingly and
fraudulently, in or in connection with the case made a false oath or statement. A false statement or omission in a debtor's
schedules may be sufficient for denial of discharge.

Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > False Accounts & Oaths
[HN13] Under the Official Bankruptcy Forms, a debtor is required to verify the completeness and accuracy of any
schedule of assets, debts, or affairs filed in a case. However, since the failure to list an asset must be both knowing and
fraudulent, mere inadvertence is not sufficient to establish an objection. Where there is a knowing failure to list a
substantial asset, an inference of fraudulent intent may be drawn in the absence of mitigating circumstances. The failure
to amend schedules to include omitted information concerning assets is a reckless indifference to the truth, which is
equivalent to fraud. The false oath or account must relate to a material matter. The failure to list a significant asset is the
most frequently established basis for denying discharge under this section, and certainly satisfies the materiality
element. Materiality under 11 U.S.C.S. § 727(a)(4)(A) means that the statement must bear a relationship to the debtor's
financial transactions or to the bankruptcy estate, concern the disclosure of assets, or relate to the disposition of assets.
If there is a failure to list a valuable asset, materiality is established.

Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > Insolvency & Loss of
Assets
[HN14] 11 U.S.C.S. § 727(a)(5) provides that a court shall grant a debtor a discharge, unless the debtor has failed to
explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency
of assets to meet the debtor's liabilities.

COUNSEL: [*1] For David Todd Leonard, Debtor (09-20190): Jeffrey A Koons, Leawood, KS.

For Michelle Leigh Leonard, fka Michelle Leigh Slattery, Joint Debtor (09-20190): Jeffrey A Koons, Leawood, KS.

Trustee (09-20190): Christopher J. Redmond, Kansas City, MO.

For Janice Posl-Bendsen, John Robert Kurth, Plaintiffs (09-06043): Patrick E. Henderson, Henderson Law Office,
Atchison, KS.

David Todd Leonard, Defendant (09-06043), Pro se.

Michelle Leigh Leonard, Defendant (09-06043), Pro se.

JUDGES: Dale L. Somers, United States Bankruptcy Judge.

OPINION BY: Dale L. Somers

OPINION

MEMORANDUM OPINION AND ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY


JUDGMENT
In this adversary proceeding creditors Janice Posl-Bendsen, by John R. Kurth, guardian and conservator, and the Trustee
of the Janice Posl-Bendsen Revocable Living Trust object to the discharge of their claim against Debtors David Todd
Page 59Page 59
2013 Bankr. LEXIS 4045, *

Leonard and Michelle Leigh Leonard under 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6) and also seek an order denying
discharge under 11 U.S.C. §§ 727(a)(3), (a)(4), and (a)(5). Plaintiffs, who appear by Patrick E. Henderson, move for
summary judgment. Debtors, who appear pro se, oppose the motion. The Court has jurisdiction.1 For the reasons
discussed below, [*2] the Court denies the motion.

1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b), and the Standing
Order of the United States District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the District's
bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under
the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this matter because it is a core proceeding
pursuant to 28 U.S.C. §§ 157(b)(2)(I) and (J). There is no objection to venue or jurisdiction over the parties.

UNCONTROVERTED FACTS.
In support of the motion for summary judgment, Plaintiffs rely upon the bankruptcy pleadings, the depositions of the
Debtors which are included in the record,2 and the exhibits to those depositions. Debtors deposition testimony is
uncontroverted.3 No deposition and no statement has been provided by Plaintiff, Janice Posl-Bendsen (Janice). She is
alleged to be a 65 year old woman whose health has been deteriorating over the last several years. John R. Kurth,
Janice's son, has been [*3] appointed guardian and conservator of Janice by order of the District Court of Atchison
County, Kansas.4 Apparently the appointment was in 2008, after the events which are issue in this proceeding.5

2 Dkts. 115 and 116.

3 The Court observes that if this matter proceeds to trial, it is very unlikely that Plaintiffs will prevail on their § 523 claims if they continue
to rely almost exclusively on Debtors' testimony.

4 Dkt. 1 at ¶¶ 8-11.

5 See Dkt. 1 at ¶ 11, stating that the Atchison County District Court case number is 08 PR 55.

Plaintiffs are entitled to summary judgment only if Debtors' uncontroverted testimony show that judgment should be
entered in Plaintiffs' favor as a matter of law. The following is a summary of the events which give rise to this
proceeding as testified to by the Debtors.
Debtor David Todd Leonard (David) is referred to by Janice as Todd Leonard. He was born in 1968. After working as a
fitness trainer, he began employment in the financial industry in 2002. He continued in that employment at various
businesses, including Countrywide Financial, until May 2007, when he began managing Janice's assets on a full time
basis. David and his wife Michelle Leigh Leonard (Michelle) [*4] have four children. Michelle was not employed
outside the home, but she assisted with the administration of David's investment operations.
Janice is David Leonard's second cousin. They had occasional contact while children. In 2000, the relationship was
reestablished, and Janice began visiting Debtors and spending time with Debtors and their children. Janice started
joining in traditional family functions, such as Thanksgiving, Christmas, and birthdays. Janice was very generous,
giving the Leonard family gifts initially worth hundred of dollars and then increasing to gifts worth thousands of
dollars. For example, for Easter 2004, she gave the family members Easter eggs with $10,000 checks in them. She gave
a sapphire bracelet to Michelle Leonard and loaned her other jewelry and a fur coat.
In 2003, Janice inherited stock worth approximately 6 million dollars from her mother, but David did not know of the
inheritance until 2005, when he started to become actively involved in managing Janice's assets. From 2005 through
2007, several entities were formed and accounts were set up to manage both Janice's and Debtors' assets.
In September 2005, Leonard & Bendsen, LLC, which was owned by Janice, [*5] was formed to invest a small portion
of her assets. In November 2005, a MasterTrader.com account was set up for day trading of the Leonard & Bendsen
property. David managed the account. Initially it had a balance of over a hundred thousand dollars. By September 30,
2006, the balance was $32.91.6
Page 60Page 60
2013 Bankr. LEXIS 4045, *

6 Dkt. 116 (Michelle Leonard depo.) at 14.

On May 31, 2006, Janice executed a Revocable Living Trust prepared by an attorney. Janice is the sole trustee. The
trust provides that upon Janice's death, the balance of the trust assets remaining after payment of trust obligations and
taxes shall be distributed to "Todd Leonard and Michelle Leonard, or the survivor of the two of them if one of them dies
before" Janice. Apparently at this time, the majority of Janice's assets were held in an account at Merrill Lynch. Also on
May 31, 2006, Janice executed a General Durable Power of Attorney naming Todd Leonard as her attorney-in-fact.
David denies that any of the actions which are the subject of this proceeding were taken by him under the powers
granted to him by the power of attorney.
Starting in 2005 and continuing until August 2008, checks signed by David on accounts holding Janice's property were
written [*6] to Fitness Quest, LLC, a fitness business owned in part by David. By these investments, Janice was not
purchasing an interest in the business. Rather, she directed that the checks be written so David could invest in the
business, which Janice wanted to succeed. Fitness Quest eventually filed for bankruptcy.7

7 Id. at 13.

In late 2006, Janice had a irreconcilable conflict with her advisors at Merrill Lynch, who had been attempting to restrain
Janice's reckless spending. On December 14, 2006, an account was established at MasterTrader.com in the name of
Janice Posl-Bendsen, Janice Posl-Bendsen Revocable Living Trust. David Leonard is shown as a joint customer on the
account documentation.8 Account statements were addressed as follows:

Janice Posl-Bendsen
Janice Posl-Bendsen Rev. Living Trust
d/t/d 05/31/2005
Janice Posl-Bendsen & Todd Leonard TTEES.9

On January 31, 2007, the balance of the trust MasterTrader.com account was $2,941,248.76, which was the value on
that date of the assets which had been held in the Merrill Lynch account. By November 30, 2007, the value of the
account was $655,464.22. David attributes the majority of the loss in value of investments to Janice's decisions
regarding [*7] the holding of the stock of CROCS, but details as to the investment activities and withdrawals from the
account are not provided.

8 Dkt. 168.

9 E.g., Dkt. 140.

David also established Fit Trade, LLC for the purpose of trading stocks. David was the only member. Debtor testified
that the funds in the account were gifts from Janice. Ultimately, the investments were a total loss, and the account was
closed.
The Complaint alleges the following transfers to Debtors of Janice's assets by checks signed by David or by wire
transfers: Checks to David and Michelle totaling at least $227,000; transfers of at least $60,000 to Fitness Quest; checks
totaling $195,000 and a wire transfer of $55,000 to Fit Trade, LLC; transfers of $48,000 to Debtors' four children;
payment of $500 to Lynda Leonard; payment of $2,500 to Anthony Wilson, and payment of $36,754.82 to Lori Larson,
and payment of $18,039.92 to various vendors. These transfers total $642,794.74.
Debtors admit that these transfers were made with the direct permission and or direct instruction of Janice. As to
transfers to Debtors, when the Merrill Lynch account was closed, David agreed to manage Janice's assets in exchange
for Janice providing $10,000 [*8] per month living expenses and a bonus based upon performance. Michelle also was
significantly involved by providing personal support and companionship to Janice. Payments to Lori Larson were for
her work in organizing Janice's financial records and providing the information necessary for the preparation of three
years worth of past due tax returns.
Page 61Page 61
2013 Bankr. LEXIS 4045, *

Debtors' relationship with Janice was terminated by Janice in November 2007 or earlier, and Debtors have not seen her
since that time. On August 8, 2008, Janice filed suit against the Debtors in the District Court of Johnson County,
Kansas. She alleged that pursuant to the Power of Attorney, David took control of plaintiff's funds for the alleged
purpose of investing and reinvesting the funds for Janice's benefit, but breached his fiduciary duties, by among other
things, misappropriating $582,377.00 of Janice's funds. Causes of action for breach of fiduciary duty, gross negligence,
civil conspiracy, and conversion were alleged. Debtors did not respond to the Petition. An Order of Default Judgment
was entered on October 10, 2008. Debtors were held jointly and severally liable for $582,377, plus interest and costs. In
addition, judgment was [*9] entered in favor of Janice against David for $550.00 plus interest, and David was ordered
to provide an account of all of his transaction regarding Janice's accounts from January 1, 2007 to the date of the
judgment. In this action, Plaintiffs do not rely upon any collateral estoppel effect of the prior judgment.
Debtors filed for relief under Chapter 7 on January 29, 2009. Debtors filled out an information sheet at the request of
their counsel, Jeff Koons, and met with him four times. Mr. Koons completed the schedules. Copies were given to
Debtors when they signed them, but Debtors did not carefully review them. In response to question 1 of the Statement
of Financial Affairs (SOF), income from employment, trade, or business, Debtors listed $361,191 for 2007 and
approximately $300,000 for 2008. David testified that the 2007 income was the amount Debtors received from Janice. 10
For the same year, Debtors federal tax return show income from wages of $36,191 and plus other income totaling less
than $100,000. There was no income reported in response to SOF question 2, income from other sources. SOF question
18 requests information about the nature, location and name of businesses. Debtors' [*10] SOF lists Fitness Quest and
states that David holds a 48% interest and two other individuals own 51% and 1% respectively. The SOF does not
mention Leonard & Bendsen, LLC, which David contends was owned 100% by Janice. Fit Trade, LLC, which Debtor
contends was his business, the assets of which were given to him by Janice, was not listed under question 11, closed
financial accounts, or question 18, businesses. Although there was testimony that Janice's funds had been used to buy
computer equipment, it was not included under SOF 14, property held for another person, or on Schedule B, personal
property. In addition, although there was testimony the funds provided by Janice were used to buy two bicycles and that
Debtor owned two additional bicycles, the bicycles were not included in Schedule B, personal property. In general,
Debtors declined to testify regarding the particulars of the schedules, stating that they wanted to review the issues with
the attorney who prepared the schedules.

10 Dkt. 115 (David Todd Leonard depo.) at 136.

THE ADVERSARY COMPLAINT.


Plaintiffs seek to except their claim, in an unspecified amount, against Debtors from discharge under various
subsections of § 523 and to [*11] deny Debtors a discharge under various subsections of § 727. The Complaint alleges
that in 2007, David undertook to serve as Trustee of the Janice Posl-Bendsen Revocable Living Trust. Debtors admit
this allegation, but state that Debtor was appointed by Janice. The Complaint then alleges the transfers from the trust in
the total amount of $642,794.74 as enumerated above. Debtors admit to all of the alleged transfers, but respond that they
were made with the direct permission or direct instruction of Janice. Plaintiffs also allege that David engaged in a
pattern of reckless stock trading where he lost significant funds from the revocable trust (an allegation which Debtors
deny), but no amount is specified. In Count 1, Plaintiffs allege that David breached his fiduciary duty to Janice by
writing checks to himself, his family, and his friends and seek judgment for at least $585,294.74. The Complaint in
Counts II thorough IV then alleges that Debtors' debt to Plaintiffs, in an amount not specified, is nondischargeable under
§§ 523(a)(2)(money and property obtained by false pretenses, false representation, or actual fraud); (a)(4) (fraud while
acting in a fiduciary capacity, embezzlement, [*12] or larceny); and (a)(6) ( willful and malicious injury to the property
of another). In counts V through VII, Plaintiffs allege that Debtors should be denied a discharge under §§ 727(a)(3)
(concealment, destruction, mutilation, falsification, or failure to keep or preserve recorded information from which
Debtor's financial condition or business transactions might be ascertained); (a)(4) (making a false oath or account
knowingly and fraudulently in or in connection with the bankruptcy case); and (a)(5) (failure to satisfactorily explain the
loss of assets).

DISCUSSION.
Page 62Page 62
2013 Bankr. LEXIS 4045, *

A. If Plaintiffs seek summary judgment on their contention of a claim against Debtors under Count I, judgment
is denied.
Plaintiffs' motion is for summary judgment, not partial summary judgment, so the Court must address all counts,
including Count I, even though it is not discussed in Plaintiffs' brief. Count I alleges a right to recover $585,294.74 from
David for breach of fiduciary duty through writing checks on Janice's trust account without authority payable to
himself, his family, his fiends, or his creditors. Although it is uncontroverted that David wrote the checks as alleged, it is
also uncontroverted for purposes [*13] of summary judgment that Janice directed or authorized the transfers. Plaintiffs
are not entitled to judgment on Count I.

B. Plaintiffs' motion for summary judgment on the objections to discharge of Plaintiffs' claim against debtors is
denied.
[HN1] Exceptions to discharge are construed liberally in favor of the debtor.11 To prevail on an objection to discharge, a
creditor has the burden to prove its case by a preponderance of the evidence.12

11 4 Collier on Bankruptcy, ¶ 523.05 at 523-21 (Alan N. Resnick & Henry J. Sommer eds.-in-chief, 16th ed. rev. 2013).

12 Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991).

1. The uncontroverted facts do not prove the elements required for exception to discharge under § 523(a)(2)(A).
[HN2] Section 523(a)(2)(A) excepts for discharge debts for money or property to the extent obtained by "false
pretenses, a false representation, or actual fraud, other than a statement respecting a debtor's or insider's financial
condition." In this case, there is no evidence of any false pretenses, false representations, or actual fraud. Summary
judgment cannot be granted on denial of discharge under § 523(a)(2)(A).

2. The uncontroverted facts do not prove the elements required for exception to discharge [*14] under § 523(a)
(4).
[HN3] Section 523(a)(4) excepts from discharge a debt for "fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny." Plaintiffs rely upon the fiduciary relationship portion of the exception. [HN4] "The
existence of a fiduciary relationship under § 523(a)(4) is determined under federal law, ... [h]owever, state law is
relevant to this inquiry."13 "For purposes of section 523(a)(4), the definition of 'fiduciary' is narrowly construed, meaning
that the applicable nonbankruptcy law that creates a fiduciary relationship must clearly outline the fiduciary duties and
identify the trust property."14 "[A]n express or technical trust must be present for a fiduciary relationship to exist under
§ 523(a)(4)."15 Therefore, not all fiduciary relationships which exist under common law or state law rise to the level
actionable under § 523(a)(4).

13 Fowler Brothers v. Young (In re Young), 91 F.3d 1367,1371 (10th Cir. 1996).

14 4 Collier on Bankruptcy, ¶ 523.10[1][d] at 523-73.

15 In re Young, 91 F.3d at 1371.

[HN5] "Under Kansas law, the elements necessary to create an express trust are: (1) an explicit declaration and
intention to create a trust; (2) the transfer of lawful and [*15] definite property by a person capable of making transfer
thereof; and (3) a requirement to hold the property as trustee for the benefit of a cestui que trust with directions as to the
manner in which the trust funds are to be applied."16 [HN6] "Neither a general fiduciary duty of confidence, trust,
loyalty, and good faith, nor an inequality between the parties' knowledge or bargaining power is sufficient to establish a
fiduciary relationship for purposes of dischargeability."17 [HN7] "A technical trust differs from an express trust in that
the intention of the parties is not relevant, and the parties' fiduciary obligations are imposed by law, not implied by
law."18
Page 63Page 63
2013 Bankr. LEXIS 4045, *

16 Jenkins v. IBD, Inc., 489 B.R. 587, 598 (D. Kan. 2013), quoting In re Foy, 2010 Bankr. LEXIS 2055, 2010 WL 2584193, *3 (Bankr. D.
Kan. June 21, 2010).

17 In re Young, 91 F.3d at 1372 (citiaitons omitted).

18 Jenkins v. IBD, Inc., 489 B.R. at 598.

The Court finds that Plaintiffs have not sustained their burden of proof to show a fiduciary relationship. When moving
for summary judgment, Plaintiffs appear to be relying primarily upon the admissions of Debtors in their depositions that
they were acting as fiduciaries, or trusted advisors and confidants, for Janice. [*16] But, as examined above, for
purposes of dischargeability, the bankruptcy law requires an express or technical trust - more than a position of trust
and confidence.
The Complaint alleges that in 2007 David "undertook to serve as Trustee of the Janice Posl-Bendsen Revocable Living
Trust,"19 thereby apparently intending to allege the creation of an express trust. The uncontroverted facts establish that
the transfers which are alleged to be the basis of the claim by Plaintiffs against Debtors were, at least for the most part,
made from the account which was established on December 14, 2006 at MasterTrader.com in the name of Janice Posl-
Bendsen, Janice Posl-Bendsen Revocable Living Trust. David and Janice are named as joint customers on the account
documentation,20 and the account statements name both Janice and David as trustees.

19 Dkt. 1 at ¶ 13. Plaintiffs do not rely upon the relationship created by the May 31, 2006 General Durable Power of Attorney naming David
as Janice's attorney in fact and David denies having acted under the authority granted to him by that instrument. General powers of attorney
have been held to create fiduciary relationships for purposes of dischargeability. E.g., [*17] Collier v. Goepp (In re Goepp), 455 B.R. 388
(Bankr. D.N.J. 2011).

20 Dkt. 168.

These facts do not satisfy the criteria for an express trust under Kansas law. First, the creation of the MasterTrader.com
account does not evidence an explicit declaration and intention to create a trust. Second, the assets of the revocable
trust were transferred to a MasterTrader.com account titled in the name of the trust; the assets were not transferred to
David, the alleged trustee. Third, there is no evidence that Janice provided directions to David regarding the
investments. Janice, as well as David, was a customer for the account, with the ability to direct investments. In addition,
there is no basis in the record to find a technical trust.
Further, assuming a fiduciary relationship between Janice and one or both Debtors, [HN8] denial of discharge requires
that the debt excepted from discharge for either fraud or defalcation while acting as a fiduciary. Fraud, for purposes of §
523(a)(6) "has generally been interpreted as involving intentional deceit, rather than implied or constructive fraud." 21
Plaintiffs provide no evidence of intentional deceit. The United States Supreme Court, in Bullock v. BankChampaign,
[*18] N.A.,22 recently held that defalcation for purposes of the exception to discharge requires an intentional wrong. It
stated:

Thus, where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an
intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the
kind that the criminal law often treats as the equivalent.23

Plaintiffs have provided no uncontroverted facts evidencing defalcation.

21 4 Collier on Bankruptcy, ¶ 523.10[1][a] at 523-71.

22 Bullock v. BankChampaign, N.A., U.S. , 133 S.Ct. 1754, 185 L. Ed. 2d 922 (2013).

23 Id. at 1759.

3. The uncontroverted facts do not prove the elements required for exception to discharge under § 523(a)(6).
Page 64Page 64
2013 Bankr. LEXIS 4045, *

[HN9] Section 523(a)(6) excepts from discharge debts "for a willful and malicious injury by the debtor to another or to
the property of another." An injury is malicious within this exception "if it was wrongful and without just cause or
excuse."24 Malicious conduct is more culpable than recklessness.25 Willfulness refers to a deliberate and intentional act
that necessarily leads to injury.26 Plaintiffs have provided no evidence of willful and malicious [*19] injury to Janice's
property.

24 4 Collier on Bankruptcy, ¶523.12[2] at 523-92.

25 Id. at 523-93, citing In re Long, 774 F.2d 875, 881 (8th Cir. 1985).

26 Id., citing H.R. Rep. No. 595, 95th Cong., 1st Sess. 365 (1977).

C. Plaintiffs' motion for summary judgment on the denial of discharge claims is denied.
[HN10] Grounds for denial of discharge are limited to those clearly expressed in the Code.27 "The burden of proof for
an objection to discharge is on the objector."28

27 6 Collier on Bankruptcy, ¶ 727.01[1] at 727-7.

28 Id., ¶ 727.01[2] at 727-8.

1. The uncontroverted facts do not prove the elements required for denial of discharge under § 727(a)(3).
[HN11] Section 727(a)(3) provides that a debtor shall be granted a discharge unless "the debtor has concealed,
destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents,
records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless
such act or failure to act was justified under all of the circumstances of the case." "The purpose of the objection is to
ensure documentation to permit an objective determination of the debtor's true financial status." 29 [*20] "[A] prima facie
case under Code § 727(a)(3) may be made upon showing that (1) the debtor failed to maintain and preserve adequate
records, and (2) such failure makes it impossible to ascertain the debtor's financial condition and material business
transactions."30

29 4 William L. Norton, Jr., and William L. Norton III, Bankruptcy Law & Practice 3d, § 86:9 at 86-29 to 86-30 (Thomson Reuters/West
2013).

30 Id. at 86-29.

In the Complaint, Plaintiffs allege that Debtors withdrew and wrote checks for at least $585,294.74 from Plaintiff's
trust account for their personal use or the benefit of their family, friends, and creditors but have failed to provide an
accounting of these "expenditures."31 The Court understands "expenditures" to be referring to the expenditures of the
trust, not the expenditures of the Debtors. The predicate for denial of discharge is a debtor's failure to keep books from
which the debtor's financial condition can be ascertained. It does not apply to these Debtors' alleged failure to maintain
complete records as to the trust's financial condition and transactions.

31 Dkt. 1 at ¶ 33.

2. The uncontroverted facts do not prove the elements required for denial of discharge under [*21] § 727(a)(4).
[HN12] Section 727(a)(4)(A) provides that a debtor shall be granted a discharge unless "the debtor knowingly and
fraudulently, in or in connection with the case made a false oath or statement." A false statement or omission in a
Page 65Page 65
2013 Bankr. LEXIS 4045, *

debtor's schedules may be sufficient for denial of discharge.32 One commentator summarizes the applicable law as
follows:

[HN13] Under current Official Bankruptcy Forms, the debtor is required to verify the completeness and accuracy of any schedule
of assets, debts, or affairs filed in a case. However, since the failure to list an asset must be both knowing and fraudulent, mere
inadvertence is not sufficient to establish an objection. Where there is a knowing failure to list a substantial asset, an inference of
fraudulent intent may be drawn in the absence of mitigating circumstances. The failure to amend schedules to include omitted
information concerning assets is a reckless indifference to the truth, which is equivalent to fraud.
The false oath or account must relate to a material matter. The failure to list a significant asset is the most frequently established
basis for denying discharge under this section, and certainly satisfies the materiality element. [*22] Materiality under Code §
727(a)(4)(A) means that the statement must bear a relationship to the debtor's financial transactions or to the bankruptcy estate,
concern the disclosure of assets, or relate to the disposition of assets. If there is a failure to list a valuable asset, materiality is
established.33

32 6 Collier on Bankruptcy, ¶727.04[c] at 727-38.

33 4 Norton Bankruptcy Law & Practice, ¶ 86:11at 86-33 to 86-34.

Although the record evidences inaccuracies and omissions from Debtors' schedules, particularly their SOF, which were
signed the Debtors under oath of completeness and accuracy, the uncontroverted facts do not evidence the elements
necessary for denial of discharge. As alleged in Count VI of the Compliant, Debtors did not disclose funds transferred to
them from the Plaintiff's trust in response to SOF question 2,34 but Debtors in response to question 1 did disclose
income from Plaintiffs. The amount is consistent with Debtors' testimony admitting to the receipt of the transfers
alleged in Count I of the Complaint. The discrepancy between the income from Plaintiffs disclosed in the SOF and the
lesser amount reported in Debtors' 2007 federal income tax return raises questions [*23] of accuracy of the disclosures,
but does not prove falsity. Debtor's interest in Fitness Quest, LLC was disclosed. Although Leonard and Bendsen, LLC
was not mentioned in the SOF, Debtor testified that it was owned solely by Janice. Fit Trade, LLC also was not
mentioned in the SOF, but Debtor testified that it, as well as Leonard and Bendsen, LLC had no value. The materiality
of the omissions from the SOF is not established. Likewise, the materiality of the omissions from Schedule B of
computer equipment and bicycles purchased with trust assets is not established.

34 Dkt. 1 at ¶ 37.

In addition, Plaintiffs have not shown by uncontroverted facts that the inaccuracies and omissions were knowing and
fraudulent. Debtors were represented by counsel when the schedules were prepared, but are presently pro se. When
questioned about the schedules during their depositions, Debtors' responses did not establish that they acted either
knowingly or fraudulently. Rather, Debtors recognized the need to consult with their former counsel before responding
to detailed questioning as to the reasons for the manner in which the schedules were completed.

3. The uncontroverted facts do not prove the elements required [*24] for denial of discharge under § 727(a)(5).
[HN14] Section 727(a)(5) provides that the court shall grant the debtor a discharge, unless "the debtor has failed to
explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency
of assets to meet the debtor's liabilities." The uncontroverted facts do not include any evidence to support Plaintiffs'
allegation in Count VII of the Complaint for denial of discharge under this section. The Debtors' deposition testimony,
the only evidence relied upon by Plaintiffs, did not address the Debtors' loss of assets.

CONCLUSION.
For the foregoing reasons, Plaintiffs' motion for summary judgment is denied as to all counts alleged in the Complaint.
IT IS SO ORDERED.
SO ORDERED.
Page 66Page 66
2013 Bankr. LEXIS 4045, *

SIGNED this 26th day of September, 2013.


/s/ Dale L. Somers
Dale L. Somers
United States Bankruptcy Judge
Page 68Page 68
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *

54 of 430 DOCUMENTS

MUSE MOORE JAMES, individually; as Executrix of the Estate of Walton Burton


James, Sr.; as Co-Trustee of the Trust of Walton Burton James, Sr.; and WALTON
BURTON JAMES, JR., individually and on behalf of unknown and unborn issue of
Muse Moore James, Plaintiffs, v. SUE ANNE SCHOONDERWOERD, PATRICK
JAMES HENDERSON, individually; and as Co-Trustee of the Trust of Walton
Burton James, Jr., and MICHAEL HAMPTON HENDERSON, Defendants.

NO. COA 12-1457

COURT OF APPEALS OF NORTH CAROLINA

750 S.E.2d 920; 2013 N.C. App. LEXIS 943

April 23, 2013, Heard in the Court of Appeals


September 17, 2013, Filed

NOTICE: THIS IS AN UNPUBLISHED OPINION. PLEASE REFER TO THE NORTH CAROLINA RULES OF
APPELLATE PROCEDURE FOR CITATION OF UNPUBLISHED OPINIONS.
PUBLISHED IN TABLE FORMAT IN THE SOUTH EASTERN REPORTER.

SUBSEQUENT HISTORY: Review denied by James v. Schoonderwoerd, 2013 N.C. LEXIS 1375 (N.C., Dec. 18,
2013)

PRIOR HISTORY: [*1]


Wake County. No. 10-CVS-3120.

DISPOSITION: AFFIRMED.

CORE TERMS: caveat, statute of limitations, fraud claim, constructive, constructive fraud, summary judgment,
citation omitted, modification, termination, beach, special warranty deed, powers of attorney, fiduciary duty, fiduciary
relationship, attorney-in-fact, co-trustee, deposition, codicil, confidence, spouse, issue of material fact, counterclaim,
genuine, deed, beneficiaries, matter of law, quotation marks, quotation marks, inter vivos, tenancies-in-common

COUNSEL: Ward and Smith, P.A., by Joseph A. Schouten and Gary J. Rickner, for plaintiff-appellants.

Boxley, Bolton, Garber & Haywood, L.L.P., by Ronald H. Garber, and John Hemphill Law, P.C., by John R. Hemphill,
for defendant-appellees.

JUDGES: Robert N. HUNTER JR., Judge. Judges McGEE and STEPHENS concur.

OPINION BY: Robert N. HUNTER JR.

OPINION
Appeal by plaintiffs from order entered 14 August 2012 by Judge Robert H. Hobgood in Wake County Superior Court.
Heard in the Court of Appeals 23 April 2013.
HUNTER JR., Robert N., Judge.
Muse Moore James ("Muse") and Walton Burton James, Jr. ("Walton Jr.") (collectively, "Plaintiffs"), appeal from a trial
court order granting summary judgment in favor of defendants. On appeal, Plaintiffs argue the trial court erred by: (i)
Page 69Page 69
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *

applying a 3-year statute of limitations to Plaintiffs' constructive fraud claim; (ii) applying a 3-year statute of limitations
to Plaintiffs' termination and modification of trust claims; and (iii) finding there was no genuine issue of material fact
as to when Muse knew or should have known about the alleged fraud. Upon review, we affirm.

I. Facts & Procedural History


Muse and Walton Burton James, Sr. ("Walton Sr.") were married [*2] for more than 63 years until Walton Sr.'s death on
27 July 2003. During their marriage, Muse and Walton Sr. had two children: (i) Sue Anne Schoonderwoerd ("Sue
Anne"), born on 25 August 1942; and (ii) Walton Jr., born on 8 January 1951. Sue Anne, in turn, had two children: (i)
Patrick James Henderson ("Patrick"); and (ii) Michael Hampton Henderson ("Michael"). Walton Jr. does not have any
children.
While married, Muse and Walton Sr. purchased four tracts of real property: (i) a home on Wildwood Street in Raleigh
(the "Wildwood Home"); (ii) a beach condominium in Atlantic Beach (the "Atlantic Beach Condo"); (iii) a commercial
property on Glenwood Avenue in Raleigh (the "Glenwood Property"); and (iv) a lot in Harnett County (the "Harnett
Lot"). They owned all four properties as tenants by the entirety. In 1999, Muse and Walton Sr. executed separate wills
(the "1999 Wills"). Each will provided that upon the death of one spouse, all four properties would pass to the other
spouse in fee simple.
Subsequently, Muse was diagnosed with non-Hodgkin's lymphoma. In early June 2001, Muse received inpatient
treatment at UNC Hospital. Additionally, Walton Sr. was diabetic and had suffered strokes. [*3] Given their medical
problems, Muse and Walton Sr. decided to move into Sunrise Assisted Living ("Sunrise") in Raleigh.
On 31 May 2001, Sue Anne contacted attorney Terry Carlton ("Carlton") to draft powers of attorney for her parents. On
5 June 2001, immediately before their move to Sunrise, Muse and Walton Sr. each signed powers of attorney naming
Sue Anne as their general attorney-in-fact. Muse and Walton Sr. then moved to Sunrise in June 2001. At Sunrise, Sue
Anne assisted them with various day-to-day tasks like stocking their refrigerator and filling their medical prescriptions.
Sue Anne also gave her parents financial advice and wrote their checks for them.
Sue Anne continued meeting independently with Carlton. On 12 June 2001, Sue Anne met with Carlton to discuss the
"potential completion of estate planning documents for [her] parents." The following day, Carlton met with Muse and
Walton Sr. to discuss "issues and options regarding potential completion of credit shelter wills." In explaining how
credit shelter wills worked, Carlton indicated Muse and Walton Sr. would have to place their real estate in a trust.
Carlton further explained that this plan would require dissolution of [*4] the tenancies by the entirety in favor of
tenancies-in-common.
On 15 June 2001, Muse called Carlton to tell him: (i) she wanted to leave the Atlantic Beach Condo to Patrick and
Michael in equal shares; (ii) she wanted Walton Sr. to be her primary executor and trustee; and (iii) she wanted Patrick
to be her alternate executor and trustee.
On 18 June 2001, Sue Anne called Carlton to "discuss . . . [the] proposed wills for [her] parents." Later that day, Muse
called Carlton "to review [the] issues/terms of [their] proposed last will and testament." During that conversation, Muse
told Carlton she and Walton Sr. already conveyed the Wildwood Home to Walton Jr. as a gift on 20 March 2001.
However, Muse and Walton Sr. retained a life estate in the Wildwood Home. Muse instructed Carlton not to tell Sue
Anne they had given the Wildwood Home to Walton Jr. When Carlton inquired further, Muse told him to "butt out."
Carlton and Muse spoke again on 19 June 2001. Carlton again suggested telling Sue Anne about giving the Wildwood
Home to Walton Jr., but Muse refused.
On 25 June 2001, Muse and Walton Sr. executed new wills (the "2001 Wills") replacing the 1999 Wills. The 2001 Wills
created a testamentary [*5] trust (the "Trust") upon the death of either spouse. Under the terms of the 2001 Wills, the
deceased spouse's half-interest in the Atlantic Beach Condo, Glenwood Property, and Harnett Lot would become Trust
assets. The surviving spouse would retain his or her half-interest as a tenant-in-common. The surviving spouse and
Patrick would be co-trustees of the Trust assets. The record does not indicate why the final 2001 Wills listed Patrick as
co-trustee rather than alternate trustee. The 2001 Wills listed Sue Anne, Walton Jr., Patrick, and Michael as the Trust's
beneficiaries.
On 25 June 2001, Muse and Walton Sr. executed a special warranty deed for the Glenwood Property creating a tenancy-
in-common. On 10 July 2001, Muse and Walton Sr. executed similar special warranty deeds for the Atlantic Beach
Page 70Page 70
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *

Condo and the Harnett Lot. Muse testified she does not remember signing her 2001 Will or these special warranty
deeds. The 2001 Wills were notarized and signed by two witnesses, and all three special warranty deeds were notarized.
Around 13 July 2001, Patrick became attorney-in-fact for Muse and Walton Sr., rather than Sue Anne. The record does
not indicate why Muse and Walton Sr. chose Patrick [*6] to become their attorney-in-fact.
On 15 August 2002, Muse told Carlton she and Walton Sr. wanted to amend the 2001 Wills by codicil. Specifically, they
wanted to reduce the trust's beneficiaries from four (their children and grandchildren), to two (their children). Muse
said she did not want to change anything else in the 2001 Wills. Carlton prepared the codicils. Muse and Walton Sr.
executed the codicils on 20 August 2002. Muse testified she does not remember signing her codicil. Both codicils were
notarized and signed by three witnesses.
On 27 July 2003, Walton Sr. died. On 24 September 2003, Muse went to Carlton's office to probate Walton Sr.'s estate.
On 18 December 2003, Muse filed a final account of Walton Sr.'s estate, and presumably the estate account was closed.
On 25 September 2003, Muse sold the Atlantic Beach Condo for $169,000. Muse received half this amount based on
her one-half interest as a tenant-in-common. She signed the deed of sale three times: (i) individually; (ii) as Executrix of
the Estate of Walton Sr.; and (iii) as co-trustee of the Trust. Patrick did not sign the deed of sale. 1

1 Although nothing in the record indicates Patrick consented to this sale as co-trustee, [*7] Defendants do not raise any counterclaims
regarding this sale.

In summer 2004, Muse met with attorney Daniel Brady ("Brady") to gain a better understanding of her 2001 Will. Muse
testified she first learned she could not sell the Glenwood Property without Patrick's consent at this meeting.
Specifically, Muse elaborated that:

[Brady] explained to me this trust thing and that's why I went to see him, and he wanted to make up a will at the time for me. I was
flabbergasted when [Brady] explained the trust to me. I had no powers whatsoever. . . . When he told me what was the results of
the trust, well, then I said I don't want to leave Sue Anne anything.

As a result, Muse asked Brady to prepare a new will. On 12 August 2004, Muse executed a new will (the "2004 Will")
leaving all her property to Walton Jr. While the 2004 Will does not address the Trust, it purports to "revoke all Wills
and Codicils heretofore made by me."
Subsequently, Muse tried to gain fee simple in the Trust assets. For instance, on 26 May 2005 Muse drafted, signed and
recorded a deed professing to transfer the Trust's one-half interest in the Glenwood Property to herself. She signed the
deed as co-trustee. Furthermore, in [*8] January 2008 Muse tried to sell the entire Harnett Lot to a contractor. When
Patrick did not consent to the sale, Muse asked him to resign as co-trustee. However, he refused. On 31 March 2008,
Muse conveyed her one-half individual interest in the Glenwood Property to Walton Jr. She retained a life estate.
On 22 February 2010, Muse and Walton Jr. filed a complaint against Sue Anne, Patrick, and Michael 2 (collectively,
"Defendants") in Wake County Superior Court. The complaint alleged: (i) constructive fraud; (ii) fraud; (iii) termination
of trust; (iv) modification of trust; and (v) bad faith/punitive damages. On 15 September 2010, Defendants filed seven
counterclaims: (i) continuing breach of fiduciary duty; (ii) constructive fraud; (iii) conversion; (iv) self-dealing and
breach of duty of loyalty; (v) breach of N.C. Gen. Stat. § 36C-7-703; 3 (vi) action to quiet title/set aside deeds; and (vii)
declaratory judgment. Defendants based these claims on Muse's attempts to unilaterally exercise ownership over the
Trust's assets.

2 Plaintiffs included Patrick and Michael in their complaint because they were remainder beneficiaries of the Trust.

3 N.C. Gen. Stat. § 36C-7-703 prohibits co-trustees [*9] from taking unilateral actions with trust assets.

From 2011 to 2012, Muse, Sue Anne, and Carlton gave depositions. During her deposition, Muse testified that in 2001
she was terminally ill and taking seventeen different medications. She further testified:

A: So I don't know anything that happened between those times.


Page 71Page 71
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *

Q: Between what times?


A: Well, 2000 until about 2004.
Q: You mean you don't remember anything for those four years?
A: That's right, until I came home and got off of some of that medication. But I was appalled when I read the records that I was
taking 17 daily.
Q: Okay. So you don't have any memory of events between 2000 to 2004? Is that what you're saying?
A: 2001.
Q: 2001 to 2004?
A: Yes.

Muse testified she did not remember ever meeting Carlton in 2001 and stated she "didn't even know him when [she]
saw him" at the deposition.
Walton Sr.'s neurologist Dr. Michael Bowman ("Dr. Bowman") also gave a deposition. During his deposition, Dr.
Bowman testified that Walton Sr. suffered from vascular dementia at the end of his life. Dr. Bowman testified he
expected Walton Sr. "to have significant cognitive impairment" that would not permit him to execute legal documents.
Given their alleged [*10] mental incapacity, Muse claims she and Walton Sr. were not able to understand the 2001
Wills and special warranty deeds they executed.
During Carlton's deposition, he testified Sue Anne told him in 2001 that her parents were "very competent." Carlton also
testified that he "found Muse to be very competent" when she signed the 2001 Will.
On 4 May 2012, Defendants filed a motion for summary judgment for all of Plaintiffs' claims and their counterclaim
that Muse breached N.C. Gen. Stat. § 36C-7-703. On 14 August 2012, the trial court entered an order granting
Defendants' motion as to Plaintiffs' claims. The order does not address Defendants' counterclaim. On 14 August 2012,
Plaintiffs filed timely notice of appeal.

II. Jurisdiction & Standard of Review


This Court has jurisdiction to hear the instant case pursuant to N.C. Gen. Stat. § 7A-27(d) (2011). Since Defendants'
counterclaims remain outstanding, this appeal is interlocutory. However, according to N.C. R. Civ. P. 54(b):

When more than one claim for relief is presented in an action . . . the court may enter a final judgment as to one or more but fewer
than all of the claims or parties only if there is no just reason for delay and it is [*11] so determined in the judgment. Such
judgment shall then be subject to review by appeal or as otherwise provided by these rules or other statutes.

N.C. R. Civ. P. 54(b). Here, the trial court issued a Rule 54(b) certification. See id. Upon review, we determine we have
jurisdiction to hear the instant case.
This Court's "standard of review of an appeal from summary judgment is de novo." In re Will of Jones, 362 N.C. 569,
573, 669 S.E.2d 572, 576 (2008). "Under a de novo review, the court considers the matter anew and freely substitutes its
own judgment for that of the lower tribunal." State v. Williams, 362 N.C. 628, 632-33, 669 S.E.2d 290, 294 (2008)
(quotation marks and citation omitted).
On de novo review of a trial court order granting summary judgment, we must determine whether "the trial court
properly concluded that the moving party showed, through pleadings and affidavits, that there was no genuine issue of
material fact and that the moving party was entitled to judgment as a matter of law." Daniel v. Wray, 158 N.C. App. 161,
168, 580 S.E.2d 711, 716 (2003). We must "view all evidence in the light most favorable to the non-movant and draw
all reasonable inferences in his favor." [*12] Campbell v. Anderson, 156 N.C. App. 371, 374, 576 S.E.2d 726, 729
(2003).

III. Analysis
On appeal, Plaintiffs argue the trial court erred by: (i) applying a 3-year statute of limitations to their constructive fraud
claim; (ii) applying a 3-year statute of limitations to their termination and modification of trust claims; and (iii)
determining there was no genuine issue of material fact as to when Muse knew or should have known about the alleged
fraud. Upon review, we affirm.
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750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *

A. Constructive Fraud
Plaintiffs first argue the trial court erred by granting summary judgment in favor of Defendants for their constructive
fraud claim. We disagree.
In North Carolina, the applicable statute of limitations depends on whether plaintiffs bring: (i) a breach of fiduciary duty
claim; or (ii) a constructive fraud claim based on breach of fiduciary duty.

Allegations of breach of fiduciary duty that do not rise to the level of constructive fraud are governed by the three-year statute of
limitations applicable to contract actions contained in N.C. Gen. Stat. § 1-52(1) (2003). However, a claim of constructive fraud
based upon a breach of fiduciary duty falls under the ten-year statute of limitations contained [*13] in N.C. Gen. Stat. § 1-56
(2003).

Babb v. Graham, 190 N.C. App. 463, 480, 660 S.E.2d 626, 637 (2008) (quotation marks and citations omitted).
To survive summary judgment, "a cause of action for constructive fraud must allege (1) a relationship of trust and
confidence, (2) that the defendant took advantage of that position of trust in order to benefit himself, and (3) that
plaintiff was, as a result, injured." White v. Consolidated Planning, Inc., 166 N.C. App. 283, 294, 603 S.E.2d 147, 156
(2004) (citation omitted); see also Fakhoury v. Fakhoury, 171 N.C. App. 104, 110, 613 S.E.2d 729, 733 (2005); Orr v.
Calvert, N.C. App. , , 713 S.E.2d 39, 49 (Hunter, Jr., J., dissenting), rev'd for reasons stated in dissent, 365 N.C.
320, 720 S.E.2d 387 (2011) (citation and quotation marks omitted).
Certain legal relationships create a rebuttable presumption that the relationship is one in which the plaintiff put trust
and confidence in the defendant as a matter of law. 4 If plaintiffs establish the existence of a presumptive fiduciary
relationship, the burden then shifts to the defendant to show he or she "act[ed] openly, fairly and honestly in bringing
about [the transaction]." [*14] N.C.P.I.--Civ. 800.06 (2011); see also Collier v. Bryant, N.C. App. , , 719 S.E.2d
70, 81 (2011). "This means that the defendant must prove, by the greater weight of the evidence, that, with regard to
[the transaction], the defendant made a full, open disclosure of material facts, that [s]he dealt with the plaintiff fairly,
without oppression, imposition or fraud, and that [s]he acted honestly." N.C.P.I.--Civ. 800.06 (2011).

4 These presumptive fiduciary relationships include, but are not limited to, the following: "(1) trustee and cestui que trust dealing in
reference to the trust fund, (2) attorney and client, in respect of the matter wherein the relationship exists, (3) mortgagor and mortgagee in
transactions affecting the mortgaged property, (4) guardian and ward, just after the ward arrives of age, and (5) principal and agent, where
the agent has entire management so as to be, in effect, as much the guardian of his principal as the regularly appointed guardian of an infant."
McNeill v. McNeill, 223 N.C. 178, 181, 25 S.E.2d 615, 617 (1943) (citation omitted).

A fiduciary relationship can also arise based on the facts. In this circumstance, plaintiffs must allege facts showing "a
relationship [*15] of trust and confidence." Fakhoury, 171 N.C. App. at 110, 613 S.E.2d at 733 (citation omitted). Our
Supreme Court has explained:

The relation may exist under a variety of circumstances; it exists in all cases where there has been a special confidence reposed in
one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing
confidence. It . . . extends to any possible case in which a fiduciary relation exists in fact, and in which there is confidence reposed
on one side, and resulting domination and influence on the other.

Hinton v. West, 207 N.C. 708, 716, 178 S.E. 356, 360 (1935) (quotation marks and citation omitted). A fiduciary
relationship based on the facts "need not be legal; it may be moral, social, domestic or merely personal." Id. (quotation
marks and citation omitted).
In 1997, our Supreme Court distinguished constructive fraud claims from breach of fiduciary duty claims by adding the
additional requirement that constructive fraud claims contain an allegation that the defendant benefitted himself. See
Barger v. McCoy Hillard & Parks, 346 N.C. 650, 666, 488 S.E.2d 215, 224 (1997) ("Implicit in the requirement that
[*16] a defendant [take] advantage of his position of trust to the hurt of plaintiff is the notion that the defendant must
seek his own advantage in the transaction; that is, the defendant must seek to benefit himself." (alteration in original)
(citation and quotation marks omitted)); see also White, 166 N.C. App. at 294, 603 S.E.2d at 156 ("The primary
difference between pleading a claim for constructive fraud and one for breach of fiduciary duty is the constructive fraud
requirement that the defendant benefit himself.").
Page 73Page 73
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *

In the present case, Plaintiffs argue the trial court erred by failing to apply a 10-year statute of limitations to their
constructive fraud claim. We disagree.
Here, Plaintiffs issued a summons on 22 February 2010. Therefore, this Court examines transactions in which
Defendants participated during the ten-year period prior to this date. See N.C. Gen. Stat. § 1-56 (2011). Upon
examination of the record, it appears that three relevant transactions are in question involving any of Defendants: (i) Sue
Anne's power of attorney executed on 5 June 2001; (ii) the power of attorney naming Patrick as attorney-in-fact rather
than Sue Anne, executed on 13 July 2001; and (iii) the special [*17] warranty deeds destroying the tenancies by the
entirety for the Atlantic Beach Condo, the Glenwood Property, and the Harnett Lot.
To the extent that Plaintiffs' constructive fraud claim challenges Walton Sr.'s 2001 Will, it is clear that his Will cannot be
the subject of a constructive fraud claim because this type of action may only be brought by caveat. See N.C. Gen. Stat.
§ 31-32 (2011). Caveat actions must be brought within three years of the decedent's death. See id. Because of the unique
nature of caveat proceedings, since Walton Sr.'s 2001 Will was not challenged within this time, the final probate report
terminates any claims by any party or executrix of the Will who takes under the Will.
With regard to the powers of attorney, in no instance does it appear that either Patrick or Sue Ann signed any
instruments transferring property of their principal. It is difficult to comprehend how these powers of attorney can be the
subject of Plaintiffs' constructive fraud claim. A power of attorney does presumptively establish a fiduciary relationship
but it is not, standing alone, a transaction in which the agent of the principal benefits.
Therefore, the only remaining challenge is that [*18] the execution of the special warranty deeds destroying the
tenancies by the entirety and creating tenancies-in-common may have been subject to constructive fraud. If this
transaction had been the subject of constructive fraud, the trial court would apply the above traditional three-part test for
constructive fraud claims.
First, the trial court must consider whether Plaintiffs allege facts indicating a fiduciary relationship between Muse and
either Sue Anne or Patrick. Here, Plaintiffs allege a presumptive fiduciary relationship based on their role as attorneys-
in-fact. See Albert v. Cowart, N.C. App. , , 727 S.E.2d 564, 570 (2012) ("The relationship created by a power of
attorney between the principal and the attorney-in-fact is fiduciary in nature. . . . [A]n attorney-in-fact is presumed to act
in the best interests of the principal." (quotation marks and citation omitted)).
Second, the trial court must consider whether "the defendant took advantage of that position of trust in order to benefit
himself." White, 166 N.C. App. at 294, 603 S.E.2d at 156 (citation omitted). Here, Plaintiffs did not allege "specific
facts creating a triable issue that defendants participated in [*19] a transaction through which they sought to benefit
themselves." Carcano v. JBSS, LLC, 200 N.C. App. 162, 178, 684 S.E.2d 41, 54 (2009). Specifically, we do not see any
evidence indicating how the conversion of the Atlantic Beach Condo, Glenwood Property, and Harnett Lot to tenancies-
in-common benefits either Sue Anne or Patrick. Thus, the only remaining challenged transaction (the execution of the
special warranty deeds) does not state a claim for relief based on constructive fraud.
It is clear that decedent Walton Sr. intended to benefit both of his children by creating the Trust. Although Muse may
alter her Will as she wishes, she may not alter the intentions behind her deceased husband's Will. To transfer Trust
assets to only some of the beneficiaries in unequal shares is not in compliance with the Trust. To do so would be to the
detriment of all the beneficiaries of Patrick's grandfather's Trust. This action is not a transaction which under these facts
can be the subject of the tort of constructive fraud.
Consequently, Plaintiffs fail to allege facts supporting a constructive fraud claim. Even if the 10-year statute of
limitations for constructive fraud claims were used, no claim [*20] has been stated.

B. Termination/Modification of Trust
Plaintiffs next contend that the trial court erred by applying a 3-year statute of limitations to their termination and
modification of trust claims. We disagree.
N.C. Gen. Stat. §§ 36C-4-411 and 36C-4-412 address termination and modification of trusts, respectively. Specifically,
these two statutes allow for: (i) "[m]odification or termination of noncharitable irrevocable trust by consent;" and (ii)
"[m]odification or termination because of unanticipated circumstances or inability to administer trust effectively." See
N.C. Gen. Stat. § 36C-4-411 (2011); N.C. Gen. Stat. § 36C-4-412 (2011). Since neither statute contains a statute of
limitations, they are governed by the ten-year statute of limitations in N.C. Gen. Stat. § 1-56. See id.; see also N.C. Gen.
Stat. § 1-56 (2011).
Page 74Page 74
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *

Caveat actions, on the other hand, are governed by N.C. Gen. Stat. § 31-32.

In general, the purpose of a caveat is to determine whether the paperwriting purporting to be a will is in fact the last will and
testament of the person for whom it is propounded. The filing of a caveat is the customary and statutory procedure for an attack
upon the testamentary value of [*21] a paperwriting which has been admitted by the clerk of superior court to probate in common
form. An attack upon a will offered for probate must be direct and by caveat; a collateral attack is not permitted.

Baars v. Campbell Univ., Inc., 148 N.C. App. 408, 419, 558 S.E.2d 871, 878 (2002) (quotation marks and citation
omitted) (emphasis added). Overall, "a caveat is a proceeding in rem to attack the validity of a will." Casstevens v.
Wagoner, 99 N.C. App. 337, 338, 392 S.E.2d 776, 777 (1990).
Our case law clearly prohibits collateral attacks on wills outside of caveat proceedings. See Baars, 148 N.C. App. 408,
558 S.E.2d 871; Casstevens, 99 N.C. App. 337, 392 S.E.2d 776. For instance, in Baars we held the trial court did not
have subject matter jurisdiction to hear the plaintiff's action challenging both an inter vivos property transfer and a will.
Baars, 148 N.C. App. at 417, 558 S.E.2d at 877. There, the plaintiffs' aunt originally executed a will leaving the
majority of her assets to the plaintiffs, but later executed codicils and inter vivos transfers giving her assets to the
defendant. Id. at 410-11, 558 S.E.2d at 872-73. Following the aunt's death, the plaintiffs initiated: (i) [*22] a caveat
action for the will; and (ii) a civil complaint challenging the inter vivos transfers. Id. at 411, 558 S.E.2d at 873.
There, since the civil complaint regarding the inter vivos transfers addressed the same issues as the caveat action, we
determined the plaintiffs should have only filed a caveat action because the civil complaint was an impermissible
collateral attack on the will's validity. Id. at 419, 558 S.E.2d at 878. Consequently, we affirmed the trial court's dismissal
of the civil complaint based on lack of subject matter jurisdiction. Id. at 414, 417, 558 S.E.2d at 874, 877.
In the present case, Plaintiffs contend their termination and modification of trust claims are not caveat actions and
should be governed by a 10-year statute of limitations rather than the 3-year statute of limitations for caveat actions. We
disagree.
Like the plaintiffs in Baars, Plaintiffs here use § 36C-4-411 and § 36C-4-412 to collaterally attack the 2001 Wills. In the
instant case, the Trust encompasses the bulk of the 2001 Will. Thus, termination or modification of the Trust would
also terminate or modify the bulk of the 2001 Will. Like in Baars, Plaintiffs should have raised their claim in a [*23]
caveat action because "such relief is predicated upon the provisions of [the decedent's] will." Id. at 419, 558 S.E.2d at
878.
Since North Carolina precedent prohibits collateral attacks on wills outside of caveat actions, we affirm the lower
court's application of the 3-year statute of limitations for caveat actions.

C. Fraud
Lastly, Plaintiffs argue the trial court erred by finding there was no genuine issue of material fact as to when Muse knew
or should have known of the alleged fraud. Upon review, we affirm.
In North Carolina, fraud claims have a 3-year statute of limitations. N.C. Gen. Stat. § 1-52(9) (2011). The statute further
clarifies that "the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the
facts constituting the fraud or mistake." N.C. Gen. Stat. § 1-52(9) (2011).
"'[D]iscovery' means either actual discovery or when the fraud should have been discovered in the exercise of
reasonable diligence." State Farm Fire & Cas. Co. v. Darsie, 161 N.C. App. 542, 547, 589 S.E.2d 391, 396 (2003).
Circumstances dictate whether this determination falls to the trial court or jury. Specifically, the decision "is ordinarily
for the jury [to [*24] decide] when the evidence is not conclusive or is conflicting." Huss v. Huss, 31 N.C. App. 463,
468, 230 S.E.2d 159, 163 (1976). However, the trial court may grant summary judgment "as a matter of law where it
was clear that there was both capacity and opportunity to discover the mistake." Id.; see also Grubb Properties, Inc. v.
Simms Inv. Co., 101 N.C. App. 498, 501, 400 S.E.2d 85, 88 (1991) ("[W]here the evidence is clear and shows without
conflict that the claimant had both the capacity and opportunity to discover the mistake or discrepancy but failed to do
so the absence of reasonable diligence is established as a matter of law.").
In the present case, Plaintiffs argue the trial court erred by granting summary judgment for their fraud claim when there
was a genuine issue of material fact as to when Muse discovered or should have discovered Sue Anne's alleged fraud.
We disagree.
Page 75Page 75
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *

After reviewing the evidence in the light most favorable to Plaintiffs, we conclude the latest point at which Muse knew
or should have known about the alleged fraud was after her 2004 meeting with Dan Brady. During her deposition, Muse
testified about that meeting as follows:

A: [Brady] explained to me this [*25] trust thing and that's why I went to see him, and he wanted to make up a will at the time for
me. I was flabbergasted when he explained the trust to me. I had no powers whatsoever. Everything had been taken away from me
and I would have had to have been on welfare or somewhere because that was my income, everything.

The following exchange later occurred:


I thought, well, I need somebody to -- when I found the trust, I need somebody to explain it to me. So I called [Brady] and he saw
me. When he told me what was the results of the trust, well, and I said I don't want to leave Sue Anne anything. That's the way I
felt at that time. But, you know, you change. Your mind changes through the years. But I did. I went to see him.
Q: Okay. So you said you took the trust to him.
A: Yes, he explained it to me and he said, "You don't have any powers at all. Everything is taken away from you." He said Patrick
was the one that had it all. I didn't have any.
Q: And that was the trust that was created by the will --
A: Yes.

These statements demonstrate Muse knew or should have known about the alleged fraud after her 2004 meeting with
Dan Brady. However, Plaintiffs did not file a complaint until 22 February [*26] 2010, after the three-year statute of
limitations for fraud had run. Since Muse either knew or "had both the capacity and opportunity to discover" the alleged
fraud after her 2004 meeting with Brady, we determine the trial court did not err in granting summary judgment based
on the 3-year statute of limitations for fraud. Grubb Properties, Inc., 101 N.C. App. at 501, 400 S.E.2d at 88.

IV. Conclusion
For the forgoing reasons, we conclude the trial court did not err in granting summary judgment for Plaintiffs' claims.
Consequently, the trial court's summary judgment order is
AFFIRMED.
Judges McGEE and STEPHENS concur.
Report per Rule 30(e).
Page 77Page 77
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

55 of 430 DOCUMENTS

MICHAEL KEISTER, Individually, and SUSAN LEWIS-KEISTER, Individually,


and on Behalf of All Others Similarly Situated, Plaintiffs v. NATIONAL COUNCIL
OF THE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE UNITED STATES
OF AMERICA d/b/a YMCA OF THE USA, YMCA OF WESTERN NORTH
CAROLINA, INC., ASHEVILLE YMCA, CORPENING MEMORIAL YMCA,
HENDERSON COUNTY FAMILY YMCA, REUTER FAMILY YMCA and
NEIGHBORHOOD YMCA AT WOODFIN, Defendants

12 CVS 1137

NORTH CAROLINA SUPERIOR COURT, BUNCOMBE COUNTY

2013 NCBC 36; 2013 NCBC LEXIS 32

July 18, 2013, Decided

CASE SUMMARY:

OVERVIEW: HOLDINGS: [1]-Claims by organization members, arising from their witnessing or suffering an assault
on the premises, that the organization deceptively marketed its facilities as providing safe and healthy environments in
violation of N.C. Gen. Stat. § 75-1.1 did not survive challenge by motions to dismiss because the marketing efforts did
not have a tendency to deceive consumers and they were not unfair; [2]-Claims alleging breach of fiduciary duty also
did not survive challenge because there was no fiduciary relationship formed between the parties merely based on the
organization's marketing of its facilities in a certain manner; [3]-A breach of implied-in-fact contract claim failed
because the members' passive receipt of the organization's marketing materials did not form a contract of any type.

OUTCOME: Motions to dismiss granted.

CORE TERMS: cruising, unfair, fiduciary relationship, deceptive, marketing, safe, fiduciary duty, nationwide, civil
action, membership, trade practice, implied-in-fact, misleading, healthy, deceive, consumers, factual allegations, locker
room, misrepresentation, advertising, confidence, undertook, illicit, assaulted, sexual activity, arm's length, mutual
assent, promotional, unsupported, superiority

LexisNexis(R) Headnotes

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to State Claims
Civil Procedure > Pleading & Practice > Pleadings > Rule Application & Interpretation
[HN1] When ruling on a motion to dismiss pursuant to N.C. R. Civ. P. 12(b)(6), a court must determine whether, as a
matter of law, the allegations of the complaint are sufficient to state a claim upon which relief may be granted. To make
this determination, courts are to take the well-pleaded allegations of the complaint as true and admitted, but conclusions
of law or unwarranted deductions are not admitted. Consistent with the system of notice pleading, a court, when
considering a motion to dismiss pursuant to Rule 12(b)(6), should afford the complaint a liberal construction.

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to State Claims
[HN2] Following the standard set by N.C. R. Civ. P. 12(b)(6), a complaint may be properly dismissed if: (a) the
complaint on its face reveals that no law supports plaintiff's claim; (b) the complaint on its face reveals the absence of
facts sufficient to make a good claim; or (c) any fact disclosed in the complaint necessarily defeats plaintiff's claim.

Antitrust & Trade Law > Consumer Protection > Deceptive Acts & Practices > State Regulation
Page 78Page 78
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

Evidence > Procedural Considerations > Burdens of Proof > Allocation


[HN3] To recover under N.C. Gen. Stat. Chapter 75, a plaintiff must show that: (a) the defendant engaged in an unfair or
deceptive practice or act; (b) in or affecting commerce; and (c) such act proximately caused actual injury to the plaintiff.
An act or practice qualifies as "deceptive" under Chapter 75 if it "has a tendency to deceive."

Antitrust & Trade Law > Consumer Protection > Deceptive Acts & Practices > State Regulation
Evidence > Procedural Considerations > Burdens of Proof > Allocation
[HN4] Fraud or misrepresentation occurring during a commercial transaction is not a per se violation of N.C. Gen. Stat.
Chapter 75, but such conduct can be the basis of a claim under Chapter 75. Moreover, when a Chapter 75 claim is
predicated on an alleged misrepresentation by the alleged wrongdoer, the plaintiff must show actual reliance on the
alleged misrepresentation in order to establish that the alleged misrepresentation proximately caused the complained of
injury.

Antitrust & Trade Law > Consumer Protection > Deceptive Acts & Practices > State Regulation
[HN5] The question of whether a particular practice constitutes an unfair or deceptive trade practice is a question of law
for a court. The existence of unfair acts and practices must be determined from the circumstances of each case. A
practice is deceptive if it has a tendency to deceive.

Antitrust & Trade Law > Consumer Protection > Deceptive Acts & Practices > State Regulation
Antitrust & Trade Law > Consumer Protection > False Advertising > State Regulation
[HN6] Unfair competition has been referred to in terms of conduct "which a court of equity would consider unfair." The
fairness or unfairness of a particular conduct is not an abstraction to be derived by logic. Rather, the fair or unfair nature
of particular conduct is to be judged by viewing it against the background of actual human experience and by
determining its intended and actual effects upon others. Advertising which is neither false nor misleading is not an
unfair method of competition or an unfair or deceptive act or practice within the meaning of N.C. Gen. Stat. § 75-1.1.

Antitrust & Trade Law > Consumer Protection > Deceptive Acts & Practices > State Regulation
[HN7] A practice is considered unfair where it offends established public policy as well as when the practice is immoral,
unethical, oppressive, unscrupulous, or substantially injurious.

Business & Corporate Law > Agency Relationships > Agents Distinguished > Fiduciary Relationships > Formation
[HN8] North Carolina law recognizes two general categories of fiduciary relationships, with one category arising from
the legal relationship that exists between the parties and the other arising out of fact. Well-established examples of the
first category of relationships are attorney and client, broker and principal, executor or administrator and heir, legatee or
devisee, factor and principal, guardian and ward, partners, principal and agent, trustee and cestui que trust. The legal
relations that give rise to a fiduciary relationship are often referred to as de jure fiduciary relationships and those arising
out of fact are often referred to as de facto fiduciary relationships.

Business & Corporate Law > Agency Relationships > Agents Distinguished > Fiduciary Relationships > Definitions
Business & Corporate Law > Agency Relationships > Agents Distinguished > Fiduciary Relationships > Formation
[HN9] One of the two categories of fiduciary relationships includes those that exist as fact. The North Carolina Supreme
Court stated that a fiduciary relationship, in addition to arising as a matter of law with certain relationships, can exist in
fact where there is confidence reposed on one side, and resulting domination and influence on the other. Generally,
consumer-type relationships where the parties deal with each other in an arm's length relationship are not fiduciary
relationships. One necessary requirement for a fiduciary relationship to arise out of fact is that one party must exhibit
"resulting superiority and influence" over the other party. Typically, in an arm's length relationship, such as a consumer-
type relationship where the parties have equal bargaining power, resulting superiority and influence does not exist.
Therefore, neither party becomes the fiduciary of the other.

Contracts Law > Contract Interpretation > Intent


Contracts Law > Formation > Meeting of Minds
Contracts Law > Types of Contracts > Implied-in-Fact Contracts
[HN10] To be valid, any contract, express or implied, must be the product of a "meeting of the minds" between the
parties. In determining the terms or existence of any agreement, a court should not consider what either one of the
parties thought the contract was, but by what both agreed it should be. North Carolina recognizes that a contract may be
Page 79Page 79
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

implied in fact where the intention of the parties is not expressed, but an agreement in fact, creating an obligation, is
implied or presumed from their acts. To determine the terms contained in a contract implied in fact, one looks not to
some express agreement, but to the actions of the parties showing an implied offer and acceptance. A contract implied in
fact is enforceable as though it were express, but still requires the existence of mutual assent to the terms of the
agreement.

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to State Claims
Civil Procedure > Pleading & Practice > Pleadings > Rule Application & Interpretation
[HN11] N.C. R. Civ. P. 12(b)(6) allows dismissal of certain claims or an entire complaint if the allegations fail "to state
a claim upon which relief can be granted." Implicit in the Rule 12(b)(6) standard is the requirement that a claim must
actually be asserted against a defendant before the sufficiency of the claim may be examined.

COUNSEL: [**1] Capua Law Firm, P.A., by Paul A. Capua, Esq. and Michael J. Volpe, Esq. for Plaintiffs.

Ogletree, Deakins, Nash, Smoak & Stewart, P.C., by H. Bernard Tisdale III, Esq., Michael L. Wade, Jr., Esq. and
Gregory P. McGuire, Esq. for Defendant National Council of the Young Men's Christian Association of the United
States of America d/b/a YMCA of the USA.

McGuire Woods L.L.P. by H. Landis Wade, Esq., for Defendants YMCA of Western North Carolina, Inc., Asheville
YMCA, Corpening Memorial YMCA, Henderson County Family YMCA, Reuter Family YMCA and Neighborhood
YMCA at Woodfin.

JUDGES: Jolly, Judge.

OPINION BY: Jolly

OPINION

OPINION AND ORDER ON MOTIONS TO DISMISS


THIS MATTER comes before the court upon Defendant National Council of the Young Men's Christian Association of
the United States of America d/b/a YMCA of the USA's Motion to Dismiss ("Y-USA Motion") and Defendants YMCA
of Western North Carolina, Inc., Asheville YMCA, Corpening Memorial YMCA, Henderson County Family YMCA,
Reuter Family YMCA and Neighborhood YMCA at Woodfin's Motion to Dismiss ("Y-WNC Motion") (collectively,
"Motions"); and
THE COURT, having reviewed the Motions, briefs in support of and in opposition to the Motions, arguments of counsel
and other appropriate [**2] matters of record, FINDS and CONCLUDES that the Motions should be GRANTED for
the reasons stated herein.
Jolly, Judge.

PROCEDURAL HISTORY
[*1] On May 7, 2012, Plaintiffs Michael Keister ("Keister") and Susan Lewis-Keister, individually and behalf of all
others similarly situated, filed an Amended Complaint 1 against Defendants National Council of the Young Men's
Christian Association of the United States of America d/b/a YMCA of the USA ("Y-USA"), YMCA of Western North
Carolina, Inc. ("Y-WNC"), Asheville YMCA, Corpening Memorial YMCA, Henderson County Family YMCA, Reuter
Family YMCA and Neighborhood YMCA at Woodfin (collectively, "Y-WNC Facilities").

1 On April 30, 2012, the court, sua sponte, struck Plaintiffs' original Complaint and ordered the Complaint to be sealed due to unnecessary,
extremely offensive, outrageous and explicit allegations contained in the Complaint. In response to the court striking the original Complaint,
Plaintiffs' filed the Amended Complaint, deleting the offensive allegations.

[*2] The Amended Complaint alleges three claims for relief ("Claim(s)") against Y-USA: Count I - Violations of N.C.
Gen. Stat. § 75-1.1 ("First Claim"), Count II - Breach of Fiduciary Duty ("Second [**3] Claim") and Count III - Breach
Page 80Page 80
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

of Implied-in-Fact Contract ("Third Claim"). The Amended Complaint also alleges three Claims against all Defendants:
Count IV - Violations of N.C. Gen. Stat. § 75-1.1 ("Fourth Claim"), Count V - Breach of Fiduciary Duty ("Fifth Claim")
and Count VI - Breach of Implied-in-Fact Contract ("Sixth Claim"). All of Plaintiffs' Claims have been alleged as
purported class claims.
[*3] On July 11, 2012, Y-USA filed the Y-USA Motion, seeking dismissal of all Claims against it, pursuant to Rule
12(b)(6) of the North Carolina Rules of Civil Procedure ("Rule(s)"). On the same day, Y-WNC and Y-WNC Facilities
filed the Y-WNC Motion, also seeking dismissal of all Claims against them pursuant to Rule 12(b)(6).
[*4] On October 4, 2012, the court entered an Order on Motions to Dismiss and Compelling Mediation and Staying
Action, dismissing Y-WNC Facilities from this civil action. 2

2 In that Order, the court stated that "[a]n appropriate Opinion and Order with regard to dismissal of [Y-WNC Facilities] will be published in
due course." This Opinion and Order is entered to rule upon the remaining Motions and to explain the court's rationale in dismissing Y-WNC
Facilities from this civil [**4] action.

[*5] On April 12, 2013, the court entered an Order on Joint Motion for Approval of Pre-Certification Voluntary
Dismissal with Prejudice of all Claims against Y-WNC, approving a settlement entered into between Plaintiffs and Y-
WNC. 3

3 As a result of the settlement, all Claims alleged against Y-WNC have been dismissed. Accordingly, that part of the Y-WNC Motion seeking
dismissal of those Claims is MOOT and requires no further action by this court.

[*6] Accordingly, except for Y-USA, all other Defendants have either been dismissed from this civil action or settled
with Plaintiffs.
[*7] The Y-USA Motion has been fully briefed and argued and is ripe for determination.

FACTUAL BACKGROUND
Among other things, the Amended Complaint alleges the following:
[*8] Y-WNC operates a number of YMCA facilities in western North Carolina, including the five Y-WNC Facilities
named as Defendants. 4

4 Am. Compl. ¶ 4.

[*9] Y-USA governs the operation of YMCA facilities through its by-laws, constitutions, policies and procedures. 5 Y-
WNC and Y-USA advertise their facilities as a safe place for members and their guests. 6 Because of these
advertisements and representations, consumers join the YMCA on the premise that the YMCA provides [**5] a healthy
and safe environment for families. 7 Plaintiffs allege that these representations made by the YMCA are misleading and
deceptive. 8 Additionally, Plaintiffs allege that by virtue of their making such representations, Y-USA and Y-WNC stand
in a fiduciary relationship with their members. 9

5 Id. ¶ 5.

6 Id. ¶¶ 11.

7 Id. 12-14, 39.

8 Id. ¶ 40.

9 Id. ¶¶ 60-61, 81-82.


Page 81Page 81
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

[*10] At times material, Plaintiffs and their family were members of the Asheville YMCA. 10 Sometime in 2009,
Plaintiff Keister witnessed illicit sexual activity in the men's locker room showers at the Asheville YMCA and reported
the activity to an employee at the facility. 11 After this incident, Plaintiff Keister returned to the same facility and was
himself sexually assaulted by a fellow YMCA member. 12 Following this incident, Plaintiff Keister returned to the same
facility and was again sexually assaulted, for the second time, by a fellow YMCA member. 13

10 Id. ¶ 12.

11 Id. ¶¶ 16-18.

12 Id. 19-25.

13 Id. ¶¶ 23-25.

[*11] Each time Plaintiff Keister either witnessed illicit sexual activity or was personally assaulted, he reported the
conduct to a YMCA employee at the facility who assured him the conduct would be addressed. 14 Plaintiffs allege [**6]
that Y-USA and Y-WNC have been aware of similar illicit conduct for decades. 15 Despite knowledge of this type of
activity occurring at various YMCA facilities, Y-USA and Y-WNC continue to advertise their facilities as safe and
family-oriented. 16 Plaintiffs allege that instead of being safe, the YMCA facilities present members with an
unreasonable risk of being sexually assaulted. 17

14 Id. ¶¶ 17-27.

15 Id. ¶ 35. Plaintiff refers to this conduct as "cruising," which he describes as the act of men seeking out other men for sex and other sexual
relations in public places. Id. ¶ 30.

16 Id. ¶ 77.

17 Id. ¶ 43.

[*12] Plaintiffs have not made any specific allegations against Y-WNC Facilities and have alleged no claims for relief
against Y-WNC Facilities.

DISCUSSION
[*13] [HN1] When ruling on a motion to dismiss pursuant to Rule 12(b)(6), the court must determine "whether, as a
matter of law, the allegations of the complaint . . . are sufficient to state a claim upon which relief may be granted."
Harris v. NCNB Nat'l Bank, 85 N.C. App. 669, 670, 355 S.E.2d 838 (1987). To make this determination, courts are to
take the well-pleaded allegations of the complaint as true and admitted, but conclusions of law or unwarranted
deductions are [**7] not admitted. Sutton v. Duke, 277 N.C. 94, 98, 176 S.E.2d 161 (1970). Consistent with the system
of notice pleading, a court, when considering a motion to dismiss pursuant to Rule 12(b)(6), should afford the complaint
a liberal construction. Zenobile v. McKecuen, 144 N.C. App. 104, 110, 548 S.E.2d 756 (2001).
[*14] [HN2] Following the standard set by Rule 12(b)(6), a complaint may be properly dismissed if: (a) the complaint
on its face reveals that no law supports plaintiff's claim; (b) the complaint on its face reveals the absence of facts
sufficient to make a good claim; or (c) any fact disclosed in the complaint necessarily defeats plaintiff's claim. Jackson
v. Bumgardner, 318 N.C. 172, 175, 347 S.E.2d 743 (1986). This Opinion and Order will address Plaintiffs' Claims in
turn.

Plaintiffs' Claims against Y-USA

First Claim
[*15] Plaintiffs' First Claim alleges that Y-USA violated N.C. Gen. Stat § 75-1.1 ("Chapter 75") (hereinafter, references
to the North Carolina General Statutes will be to "G.S.") by engaging in promotional activity that deceptively marketed
Page 82Page 82
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

YMCA facilities nationwide as being, among other things, safe and healthy environments, despite having full
knowledge of illicit sexual activities occurring at YMCA facilities. Y-USA contends [**8] that this Claim should be
dismissed because the alleged representations were neither unfair nor deceptive. Further, Y-USA contends that Plaintiffs
have not alleged actual reliance upon any representation purportedly made by Y-USA.
[*16] [HN3] To recover under Chapter 75, a plaintiff must show that (a) the defendant engaged in an unfair or
deceptive practice or act, (b) in or affecting commerce and (c) such act proximately caused actual injury to the plaintiff.
Governor's Club, Inc. v. Governors Club Ltd. P'ship, 152 N.C. App. 240, 250, 567 S.E.2d 781 (2002) (citing Pleasant
Valley Promenade v. Lechmere, Inc., 120 N.C. App. 650, 664, 464 S.E.2d 47 (1995)). An act or practice qualifies as
"deceptive" under Chapter 75 if it "has a tendency to deceive." Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704
(2001).
[*17] [HN4] Fraud or misrepresentation occurring during a commercial transaction is not a per se violation of Chapter
75, but such conduct can be the basis of a claim under Chapter 75. See, e.g., Morris v. Bailey, 86 N.C. App. 378, 358
S.E.2d 120 (1987) (affirming Chapter 75 violation where defendant made false representations concerning the condition
of a used vehicle and plaintiff relied on such representations). Moreover, when a Chapter 75 claim is predicated on
[**9] an alleged misrepresentation by the alleged wrongdoer, "the plaintiff must show actual reliance on the alleged
misrepresentation in order to establish that the alleged misrepresentation proximately caused" the complained of injury.
Sunset Beach Dev., LLC v. AMEC, Inc., 196 N.C. App. 202, 211, 675 S.E.2d 46 (2009).
[*18] [HN5] The question of whether a particular practice constitutes an unfair or deceptive trade practice is a
question of law for the court. United Lab., Inc. v. Kuykendall, 322 N.C. 643, 664, 370 S.E.2d 375 (1988). The existence
of unfair acts and practices must be determined from the circumstances of each case. Goodrich v. Rice, 75 N.C. App.
530, 331 S.E.2d 195 (1985). A practice is deceptive if it has a tendency to deceive. Marshall v. Miller, 302 N.C. 539,
548, 276 S.E.2d 397 (1981).
[*19] [HN6] Unfair competition has been referred to in terms of conduct "which a court of equity would consider
unfair." Extract Co. v. Ray, 221 N.C. 269, 273, 20 S.E.2d 59 (1942). "[T]he fairness or unfairness of a particular conduct
is not an abstraction to be derived by logic. Rather, the fair or unfair nature of particular conduct is to be judged by
viewing it against the background of actual human experience and by determining its intended and actual effects upon
others." Harrington Mfg. Co. v. Powell Mfg. Co., 38 N.C. App. 393, 400, 248 S.E.2d 739 (1978). [**10] Advertising
"which is neither false nor misleading is not an unfair method of competition or [an] unfair or deceptive act or practice
within the meaning of G.S. 75-1.1." Id.
[*20] As discussed above, Plaintiffs' Unfair and Deceptive Trade Practice Claim is directed toward the marketing and
advertising efforts of Y-USA. Specifically, Plaintiffs argue that the efforts of Y-USA to market YMCAs nationwide as
safe, family friendly and Christian-oriented environments, viewed in light of its alleged knowledge of the practice of
"cruising" at some of its facilities, amounts to an unfair and deceptive trade practice. Specifically, Plaintiffs allege that
the efforts of Y-USA in this regard are deceptive.
[*21] Notably, the Amended Complaint alleges that Y-USA is a "National Resource Office of YMCAs nationwide."
Thus, the marketing and advertising efforts of which Plaintiffs complain appear to be the national marketing efforts of
Y-USA. The question before the court is whether Y-USA's efforts to market YMCAs nationwide as safe, friendly and
Christian-oriented environments amount to an unfair or deceptive trade practice where the Y-USA was aware of
instances of "cruising" within certain discrete YMCA facilities.
[*22] [**11] The material factual allegations of the Amended Complaint are that: (a) Keister witnessed homosexual
activity in a men's YMCA locker room; 18 (b) Keister became the subject of an incident involving sexual misconduct
aimed at Keister; 19 (c) Keister was "molested" in the sauna of a YMCA; 20 (d) Keister's landscaper experienced similar
behavior at the same YMCA 21 and (e) management of the YMCA Keister attended was aware of instances of "cruising"
and sexual activity within certain YMCAs. 22 The Amended Complaint alleges, upon information and belief, that (a) Y-
USA has known about "cruising" at its facilities for decades and has turned a permissive eye toward such behavior 23 and
(b) Y-USA does little to prevent or eliminate "cruising" and does not warn the public about it. 24 The actual extent of
"cruising" at YMCA facilities nationwide is not disclosed by the Amended Complaint. Plaintiffs allege, upon belief
alone, that "cruising" at YMCAs is "becoming more prevalent," 25 and that "cruising" generally "occurs at YMCA
facilities around the country and at North Carolina facilities in particular." 26

18 Id. ¶ 17.
Page 83Page 83
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

19 Id. ¶ 19.

20 Id. ¶ 25.

21 Id. ¶ 28.

22 Id. ¶ 27.

23 Id. ¶ 30.

24 Id. ¶ 33.

25 Id. [**12] ¶ 34.

26 Id. ¶ 38.

[*23] The general allegations that the YMCA takes a permissive stance on "cruising" and otherwise does little to
prevent or eliminate "cruising" is unsupported by factual allegations. On the contrary, the Amended Complaint contains
specific allegations of fact that contradict these general allegations. In this regard, the Amended Complaint alleges that:
(a) the YMCA representative to whom Keister reported his observation of homosexual activity assured Keister she
would take immediate steps to address the issue; 27 (b) in the 1960s the YMCA attempted to curtail cruising; 28 (c) the
YMCA's National Council appointed a committee to study and find positive ways to deal with "cruising" 29 and (d) the
YMCA has taken actions such as the creation of family changing rooms as an alternative to single-sex locker rooms. 30
In light of the specific contradictory factual allegations put forth by Plaintiffs, and pursuant to the standards of 12(b)(6),
as expressed in Sutton and elsewhere, the court is not required to accept as true the general and unsupported deductions
by Plaintiffs that Y-USA permits "cruising" to occur at its facilities and that Y-USA does little to discourage or prevent
[**13] "cruising" at its facilities. The remainder of Plaintiffs' allegations are accepted as true for present purposes and
deemed to be admitted.

27 Id. ¶ 21.

28 Id. ¶ 36.

29 Id. ¶ 37.

30 Id. ¶ 42.

[*24] The court concludes that those factual allegations of the Amended Complaint that are deemed to be admitted are
insufficient to support a finding or conclusion that Y-USA's marketing efforts amount to an unfair or deceptive trade
practice. The fact that Plaintiff, and others, may have been subjected to "cruising" behavior at one or more YMCAs,
coupled with Y-USA's alleged awareness of such behavior, does not render Y-USA's representations that YMCAs are
generally safe, family-friendly and Christian-oriented environments unfair or deceptive. The unilateral decision by some
YMCA members and patrons to use facility locker rooms for "cruising" activities does not render YMCA facilities
inherently unsafe so as to make Y-USA's assertions false, misleading or otherwise deceptive. Further, such unilateral
decisions of personal behavior by some YMCA members and patrons do not somehow make Y-USA's representations
that its facilities are Christian-oriented and family-friendly false, misleading or otherwise deceptive [**14] to an extent
that would support a Chapter 75 claim.
[*25] The court does not read the Y-USA's marketing statements to constitute representations that consumers, as
YMCA members, would never be subjected to behavior they might find unacceptable within the walls of a YMCA.
Rather, YMCA facilities are largely public facilities with numerous members and the YMCA cannot entirely control the
behavior of individuals who elect to make use of those facilities. Joining or using a YMCA is no guarantee of avoiding
behavior that some consumers might find objectionable. Accordingly, the representations of Y-USA do not have a
tendency to deceive consumers.
Page 84Page 84
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

[*26] Viewed against the background of actual human experience, the court concludes that the Y-USA's marketing
efforts are not unfair for the same reason. [HN7] A practice is considered unfair where it "offends established public
policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious. . . ."
Johnson v. Insurance Co., 300 N.C. 247, 263, 266 S.E. 2d 610, 621 (1980). The court finds nothing in the marketing
efforts of the Y-USA that rises to the level of an unfair practice under this standard.
[*27] Words and phrases [**15] such as "safe," a "healthy and safe environment for families" and putting "Christian
principles into practice through programs that build healthy spirit, mind and body for all" are troublesome in the context
of the present action. Such words and phrases defy precise definition and are not capable of objective verification based
on the facts as alleged in the Amended Complaint, if at all. To serve as the basis of Plaintiffs' Chapter 75 Claim,
Plaintiffs would have to show that these representations had, at least, a tendency to deceive or mislead consumers. The
tendency of such representations to deceive YMCA members nationwide, however, cannot be demonstrated solely by
reference to Plaintiff's personal experiences at a specific YMCA. Nor can such a tendency be demonstrated by the
unsupported inference that other YMCA members have experienced incidents similar to those experienced by Plaintiff.
[*28] [**16] Based on the facts of the Amended Complaint, the marketing efforts of Y-USA amount to advertising
that is neither false nor misleading on its face and therefore cannot serve as the basis of Plaintiffs' Chapter 75 Claim.
Accordingly, with respect to the First Claim, the Motion should be GRANTED.

Second Claim
[*29] By way of this Claim, Plaintiffs allege that Y-USA breached a fiduciary duty owed to Plaintiffs in a number of
ways, including failing to uphold the promised safety standards of the YMCA. 31 Y-USA contends that no fiduciary
relationship existed between it and Plaintiffs, and therefore, the Second Claim should be dismissed.

31 Id. ¶ 63.

[*30] [HN8] North Carolina law recognizes two general categories of fiduciary relationships, with one category
arising from the legal relationship that exists between the parties and the other arising out of fact. 32 Well-established
examples of the first category of relationships are "attorney and client, broker and principal, executor or administrator
and heir, legatee or devisee, factor and principal, guardian and ward, partners, principal and agent, trustee and cestui
que trust." BDM Invs. v. Lenhil, Inc., 2012 NCBC 7, ¶ 89 (N.C. Super. Ct. Jan. 18, 2012) (quoting [**17] Abbitt v.
Gregory, 201 N.C. 577, 598, 160 S.E. 896 (1931)) (internal quotations omitted). The relationship that existed between
Plaintiffs and Y-USA is not one of the legal relationships recognized by North Carolina law that gives rise to a fiduciary
relationship. Accordingly, the court must examine the second category of fiduciary relationships.

32 The legal relations that give rise to a fiduciary relationship are often referred to as de jure fiduciary relationships and those arising out of
fact are often referred to as de facto fiduciary relationships.

[*31] [HN9] The second category includes those that exist as fact. In Abbitt, the North Carolina Supreme Court stated
that a fiduciary relationship, in addition to arising as a matter of law with certain relationships, can exist in fact where
"there is confidence reposed on one side, and resulting domination and influence on the other." Abbitt, 201 N.C. at 598.
Generally, consumer-type relationships where the parties deal with each other in an arm's length relationship are not
fiduciary relationships. See Tin Originals, Inc. v. Colonial Tin Works, Inc., 98 N.C. App. 663, 666, 391 S.E.2d 831
(1990). One necessary requirement for a fiduciary relationship to arise out of fact is [**18] that one party must exhibit
"resulting superiority and influence" over the other party. Id. Typically, in an arm's length relationship, such as a
consumer-type relationship where the party's have equal bargaining power, resulting superiority and influence does not
exist. Therefore, neither party becomes the fiduciary of the other.
[*32] As previously discussed, Plaintiffs allege that Y-USA engaged in a marketing and promotional campaign to
establish YMCA facilities as being safe and healthy environments. As a result of that marketing, Plaintiffs allege that
they placed a special confidence in the YMCA to provide such an environment for the members of YMCAs. 33

33 Id. ¶ 60.
Page 85Page 85
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

[*33] The court observes that Plaintiffs have not actually alleged in what manner a special confidence was placed in Y-
USA, other than alleging that Plaintiffs joined one of the YMCAs. Entering into an arm's length contract does not
satisfy the special confidence requirement necessary to allege a fiduciary relationship between the contracting parties.
Additionally, Plaintiffs do not allege that Y-USA was in any superior bargaining position when Plaintiffs decided to
purchase their YMCA membership. Furthermore, Plaintiffs do not [**19] allege that, once Plaintiffs were members of a
YMCA, Y-USA had any superiority or influence over Plaintiffs. In short, Plaintiffs allege nothing more than a
traditional business-consumer relationship between Plaintiffs and Y-USA.
[*34] Plaintiffs assert that a fiduciary relationship can arise in North Carolina with the presence of special
circumstances, chiefly, "where one party undertakes to protect or act for the interests of another." 34 Plaintiffs then cite a
bevy of cases in which special circumstances created a fiduciary relationship. These cases found fiduciary relationships
where a son undertook to provide for the care and comfort of his ailing mother, Holloway v. Holloway, N.C. App. ,
726 S.E.2d 198 (2012), where an individual was listed as a joint account holder on the checking account of a close,
personal friend in order to provide for the friend's daily care, Dixon v. Gist, N.C. App. , 724 S.E.2d 639 (2012),
where a divorced husband undertook to provide support for his ex-wife (also his cohabitant) for the remainder of her
life, Rhue v. Rhue, 189 N.C. App. 299, 658 S.E.2d 52 (2008) and where one cotenant undertook to manage the common
property of all cotenants, Moore v. Bryson, 11 N.C. App. 260, 181 S.E.2d 113 (1971). [**20] In each of those cases, it
was alleged that one party clearly undertook to control or direct the interests of the other party. No such undertaking is
alleged between Y-USA and Plaintiffs. At bottom, all Plaintiffs allege is that Y-USA marketed YMCA facilities in a
certain manner. Such allegations are insufficient to allege the existence, much less the breach, of any recognized
fiduciary duty in North Carolina.

34 Plaintiff's Reply at 14.

[*35] As a result of the foregoing, the court CONCLUDES that Plaintiffs have failed to state a claim for breach of
fiduciary duty against Y-USA. Accordingly, with respect to the Second Claim, the Motion should be GRANTED.

Third Claim
[*36] Plaintiffs also assert a claim for breach of an implied-in-fact contract. Plaintiffs allege that Y-USA's promotional
statements became the basis of the bargain for Plaintiffs' membership agreements. 35 Plaintiffs contend that Y-USA
breached the contract by failing to provide safe facilities, 36 causing damages to Plaintiffs. 37

35 Am. Compl. ¶ 67.

36 Id. ¶ 68.

37 Id. ¶ 70.

[*37] [HN10] To be valid, any contract, express or implied, must be the product of a "meeting of the minds" between
the parties. Mach. Co. v. Chalkley, 143 N.C. 181, 183, 55 S.E. 524 (1906). [**21] In determining the terms or existence
of any agreement, the court should not consider "what either one of the parties thought [the contract] was, but by what
both agreed it should be." Id. North Carolina recognizes that a contract may be implied in fact where "the intention of
the parties is not expressed, but an agreement in fact, creating an obligation, is implied or presumed from their acts."
Snyder v. Freeman, 300 N.C. 204, 217, 266 S.E.2d 593 (1980). To determine the terms contained in "a contract implied
in fact, one looks not to some express agreement, but to the actions of the parties showing an implied offer and
acceptance." Id. at 218. A contract implied in fact is enforceable as though it were express, but still requires the
existence of mutual assent to the terms of the agreement. Miles v. Carolina Forest Ass'n, 167 N.C. App. 28, 36, 604
S.E.2d 327 (2004).
[*38] Here, Plaintiffs have failed to allege any valid contract, express or implied, between Plaintiffs and Y-USA.
Plaintiffs only allege an express contract (i.e., the membership agreement) directly with Y-WNC. Plaintiffs then allege
that "Y-USA breached these contracts," 38 referring to the membership agreement to which Y-USA was not a party. All
Page 86Page 86
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

that has [**22] been alleged is that Y-USA marketed YMCA facilities and Plaintiffs interpreted the marketing
statements as the basis of the bargain between Plaintiffs and Y-WNC.

38 Id. ¶ 68.

[*39] Assuming that the express membership agreement with Y-WNC would not bar the finding of an implied contract
with Y-USA under Snyder, Plaintiffs have still failed to allege any "meeting of the minds," or mutual assent, between
Plaintiffs and Y-USA. An implied in fact contract requires an offer and acceptance. Plaintiffs do not allege any facts to
the effect that Y-USA's marketing campaign was an implied offer to contract directly with Plaintiffs. Even if this court
were to read Y-USA's marketing materials as an offer, Plaintiffs have alleged no acceptance or consideration for Y-
USA's offer sufficient to imply mutual assent to the terms of any alleged agreement between Plaintiffs and Y-USA.
Plaintiffs simply allege that they passively received Y-USA's marketing materials and, on that basis alone, a contract
was formed as to the terms of the marketing campaign.
[*40] The court CONCLUDES that Plaintiffs have failed to state a claim for breach of an implied-in-fact contract with
Y-USA. Accordingly, with respect to the Third [**23] Claim, the Motion should be GRANTED.

Fourth, Fifth and Sixth Claims


[*41] Lastly, the Fourth Claim (Violation of G.S. 75.1-1), Fifth Claim (Breach of Fiduciary Duty) and Sixth Claim
(Breach of Implied-in-Fact Contract) are the same Claims Plaintiffs alleged against Y-USA in Claims One, Two and
Three. The only difference seems to be that the First, Second and Third Claims are alleged against Y-USA directly,
whereas the Fourth, Fifth and Sixth Claims are alleged against all Defendants. Accordingly, for the same substantive
reasons stated above, the court CONCLUDES that Y-USA's Motion should be GRANTED with respect to the Fourth,
Fifth and Sixth Claims.

Plaintiffs' Claims against Y-WNC Facilities39

39 As discussed supra note 2, on October 4, 2012, the court entered an Order on Motions to Dismiss and Compelling Mediation and Staying
Action, dismissing Y-WNC Facilities from this civil action. This portion of this Opinion and Order explains the court's reasoning for
dismissing Y-WNC Facilities.

[*42] Taking the well-pleaded allegations of the Amended Complaint as true, it cannot be said that Plaintiffs
sufficiently have alleged that the enumerated Y-WNC Facilities are independent entities. Plaintiffs state [**24] that Y-
WNC does business as a number of YMCA facilities in western North Carolina. 40 The Amended Complaint merely lists
as Defendants these facilities only "[t]o the extent Y-WNC does not own or control these entities . . . ." 41

40 Am. Compl. ¶ 4.

41 Id.

[*43] Nowhere in the Amended Complaint do Plaintiffs actually allege that Y-WNC Facilities are not owned or
controlled by Y-WNC. Furthermore, Plaintiffs do not allege that they directly entered into any contractual relationship
with any of the Y-WNC Facilities. Even under the most liberal construction of the Amended Complaint, it is clear that
Plaintiffs do not assert any legal claim against any of the enumerated Y-WNC Facilities individually.
[*44] [HN11] Rule 12(b)(6) allows dismissal of certain claims or an entire complaint if the allegations fail "to state a
claim upon which relief can be granted." Implicit in the Rule 12(b)(6) standard is the requirement that a claim must
actually be asserted against a defendant before the sufficiency of the claim may be examined. Here, Plaintiffs scarcely
make reference to Y-WNC Facilities, and those references that do exist in the Amended Complaint do not state a claim
but exist to serve another purpose altogether. [**25] 42 Throughout the Amended Complaint and their memorandum in
opposition to the Motions, Plaintiffs make reference to the allegations against Y-USA, Y-WNC and the "YMCA," which
Page 87Page 87
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

Plaintiffs define as Y-USA and Y-WNC, excluding the individual Y-WNC Facilities. 43 Plaintiffs do not assert that Y-
WNC Facilities are jointly, severally or alternatively liable on any of the theories of liability asserted against the
"YMCA" or that Y-WNC Facilities are liable to Plaintiffs under any other theory of liability.

42 See id. ¶ 44 (using "Y-WNC Facilities" to define the Class); see id. ¶ 74 (noting only that "Y-WNC operates multiple YMCA facilities . . .
."); see id. ¶¶ 81, 87 (alleging that Y-USA and Y-WNC stand in a fiduciary relationship and entered into membership contracts "at Y-WNC
facilities").

43 Id. ¶ 5, n.1.

[*45] Accordingly, even if Plaintiffs sufficiently alleged that Y-WNC Facilities are separate entities, the addition of Y-
WNC Facilities as Defendants, without asserting any claim against them, cannot withstand a motion to dismiss pursuant
to Rule 12(b)(6).
[*46] For these reasons, the Y-WNC Motion should be GRANTED with regard to the Y-WNC Facilities.
NOW THEREFORE, based upon the foregoing FINDINGS [**26] and CONCLUSIONS, it hereby is ORDERED that:
[*47] Defendant National Council of the Young Men's Christian Association of the United States of America d/b/a
YMCA of the USA's Motion to Dismiss is GRANTED with respect to the Plaintiffs' First, Second, Third, Fourth, Fifth
and Sixth Claims, and said Claims are DISMISSED.
[*48] Defendants YMCA of Western North Carolina, Inc., Asheville YMCA, Corpening Memorial YMCA, Henderson
County Family YMCA, Reuter Family YMCA and Neighborhood YMCA at Woodfin's Motion to Dismiss is
GRANTED with respect to any and all Claims alleged in this civil action against these Defendants, and any Claims
alleged against said Defendants are DISMISSED.
[*49] There remaining no viable Claims in this civil action, this matter hereby is DISMISSED.
[*50] Taxable costs in this matter are charged to Plaintiffs.
This the 18th day of July, 2013.
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North Carolina Lawyers Weekly

May 3, 2013 Friday

N.C. Business Court Case Summaries: May 3, 2013


BYLINE: NCLW Staff

SECTION: NEWS

LENGTH: 1959 words

Arbitration Oral Agreement - Unsigned Draft - Attorneys - Partnership Morton v. Ivey, McClellan, Gatton & Talcott,
LLP (Lawyers Weekly No. 13-15-0411, 9 pp.) (James L. Gale, J.) 2013 NCBC 23 Holding: Even though the parties
never signed their partnership agreement, there was a meeting of the minds as to its arbitration provision. The draft
partnership agreement is a sufficient "record" to satisfy G.S. § 1-569.6(a). Defendant's motion to compel arbitration is
granted. The parties orally agreed to a partnership agreement and acted in accordance with it. Plaintiffs were aware of
and consented to the arbitration terms in the unsigned written partnership agreement. Defendant did not waive the right
to arbitrate by threatening litigation. Each of the claims in the complaint arises out of the duties imposed by the
partnership agreement and clearly falls under the broad scope of the agreement's arbitration provision.
Civil Practice Statute of Limitations - Tort/Negligence - Fraud - Discovery - Breach of Fiduciary Duty Deyton v. Estate
of Waters (Lawyers Weekly No. 13-15-0413, 22 pp.) (James L. Gale, J.) 2013 NCBC 25 Holding: Although there is
some evidence that plaintiffs timely received documents which showed improper transfers had been made from their
investment accounts, the evidence would also allow a jury to believe plaintiffs did not know about their son-in-law's
improper transfers until after his suicide. Defendant Multi-Financial Securities Corp. 's (MFSC's) motion for summary
judgment is granted as to plaintiffs' direct claims of breach of fiduciary duty and constructive fraud against MFSC.
Otherwise, the motion is denied. Plaintiffs' son-in-law worked for MFSC and invested plaintiffs' money in several
accounts. The son-in-law embezzled hundreds of thousands of dollars from plaintiffs between 1996 and 2000. He
committed suicide in 2009. Plaintiffs allege they did not learn of the embezzlement until after their son-in-law's suicide.
Plaintiffs would be time barred as to all claims if they were on notice of their claims earlier than June 1, 2007 for any
claims governed by a three-year statute of limitations or before June 1, 2000 for claims governed by a 10-year statute of
limitations. Plaintiffs have forecast evidence adequate to avoid summary judgment on some claims because the court
cannot conclude that the record is sufficiently clear and unequivocal that plaintiffs received Pershing Monthly
Statements (Pershing, LLC served as the clearing agency for plaintiffs' accounts and provided monthly account
statements) or other documents that disclose the improper transfers which began in August 1996. There is a dispute as to
the material issue of whether plaintiffs received documents adequate to put them on notice of their loss prior to June 1,
2007. Plaintiffs have also raised fact issues as to whether MFSC's knowledge justifies estoppel against the use of a
statute of limitations defense. There are questions whether plaintiffs' son-in-law was acting as an agent within the scope
of his authority when he provided account statements to plaintiffs. On balance, the court concludes that the final
resolution of the limitations issue, including whether plaintiffs have an adequate basis to assert estoppel, should await
trial. MFSC's laches defense revolves around the same facts implicated by the statute of limitations issues and therefore
should also be deferred to trial. When a breach of fiduciary duty claim is based on a contract, the claim accrues when
the cause of action arose. In their arguments on whether a fiduciary relationship existed directly between plaintiffs and
MFSC, the parties directed significant attention to whether the accounts were discretionary or included a "wrap fee,"
which plaintiffs contend would then establish a fiduciary duty. There has been no forecast of evidence adequate to
classify plaintiff's personal accounts as discretionary or to indicate that a fee was paid for investment advice regarding
those accounts. As to the personal accounts (from which the improper transfers were made), the only charges were
commissions. Plaintiff Robert Deyton's bare assertion that he trusted his son-in-law's advice is not adequate to
characterize the personal accounts as discretionary. Federal courts have recognized a fiduciary relationship when a
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N.C. Business Court Case Summaries: May 3, 2013 North Carolina Lawyers Weekly May 3, 2013 Friday

broker/dealer has de facto control of the account. There is no similar N.C. case. The evidence is not adequate to
conclude that plaintiffs placed special trust or confidence in MFSC. Even assuming a relationship of trust and
confidence, plaintiffs have shown no personal benefit to MFSC. Plaintiffs contend that they facilitated a prompt
completion of wire transfers to protect their own reputation, which would be adversely impacted by any delay in
facilitating the transactions. Secondly, they contend they received commissions or interest charges, to which MFSC
correctly counters that under N.C. law, payment for work actually performed and cannot constitute a sufficient benefit to
state a claim for constructive fraud. The court does not find adequate evidence to support a special relationship of trust
and confidence as between plaintiffs and MFSC, and even if such a relationship did exist, that MFSC misused the
relationship for their own personal benefit. Accordingly, plaintiffs are not entitled to proceed against MFSC directly on
a claim for breach of fiduciary duty or constructive fraud. With regard to MFSC's potential vicarious liability, a mere
finding that an employee or an agent stole monies is not by itself adequate to compel a finding that he acted outside the
scope of his authority. The dividing line for finding whether an agent can be said to be within or outside his authority is
not clear, and the cases seemingly allow for a factual inquiry into whether the principal knew of some improper conduct
by its agent then left the agent in a place from which the wrong could continue. Here, drawing that line requires a trial
determination. Motion granted in part, denied in part.
Tort/Negligence Attorneys - Legal Malpractice Claim - Prior Lawsuits - Settlement - Fraud - Breach of Fiduciary Duty
SilverDeer, LLC v. Berton (Lawyers Weekly No. 13-15-0412, 27 pp.) (John R. Jolly Jr., Ch.J.) 2013 NCBC 24 Holding:
Where plaintiffs allege that the defendant-attorney - who represented one of plaintiff SilverDeer, LLC's member
managers -- reviewed and revised drafts of settlement agreements on behalf of SilverDeer in two previous lawsuits, and
where plaintiffs also allege that, before facilitating the settlement of the previous lawsuits, the attorney (1) failed to
investigate the facts of the previous actions, (2) failed to consult with SilverDeer's retained counsel, and (3) failed to
consider SilverDeer's ability to satisfy the payment obligations set forth in the settlement agreements, plaintiffs have
adequately alleged that the attorney failed to exercise reasonable care in performing legal services. Defendants' motions
to dismiss are granted in part and denied in part. Since the complaint fails to allege special damages and, at best, alleges
that plaintiffs suffered harm to reputation and were economically injured in an amount to be proved at trial, plaintiff's
allegations are insufficient under Stikeleather v. Willard, 83 N.C. App. 50 (1986), to state a claim for malicious
prosecution. The complaint alleges that defendants defamed plaintiffs from 2008 and at least through the filing of the
previous actions. The previous actions were filed in May 2009, and the complaint in this matter was filed on March 2,
2011. Plaintiffs' defamation claim is barred by the one-year statute of limitations. Plaintiffs' first fraud claims alleges
that defendants entered into settlement agreements, which affected SilverDeer's rights, with SilverDeer managing
member Richard Deckelbaum and then fraudulently concealed those negotiations from plaintiff Jacobson (SilverDeer's
other managing member). Although this claim is viable against the defendants it names, the VisionQuest defendants are
not mentioned in the claim. The VisionQuest defendants' motion to dismiss is granted as to this fraud claim. Plaintiff's
declaratory judgment claim seeks a declaration that the settlement agreements are void. This is outside the scope of the
Declaratory Judgment Act. Although plaintiffs alleged breach of contract against the VisionQuest defendants, plaintiffs
failed to attach the contracts in question to the complaint. The VisionQuest defendants attached those documents. Upon
reading the plain language of the contracts, the court finds that the acts alleged by plaintiffs do not constitute breaches
of the contracts. Plaintiffs' second fraud claim alleges that the VisionQuest defendants defrauded them by making the
representations embodied in a 2007 contract, never intending to perform, and by failing to fulfill those representations.
Plaintiffs do not identify how or why any particular statement is thought to have been false. Aside from a conclusory
allegation of fraudulent intent, plaintiffs only assert the nonperformance of a promissory representation, which is
insufficient to establish intent. Plaintiffs have not satisfied the heightened pleading requirement for fraud under N.C. R.
Civ. P. 9. Plaintiffs allege breach of fiduciary duty against VisionQuest defendant Steven Peters. Plaintiffs have not
alleged or argued that a de facto fiduciary relationship existed. Instead, plaintiffs seem to argue that a de jure fiduciary
relationship existed by virtue of an investment advisor-client relationship between Peters and plaintiffs. The parties cite
no N.C. case law, nor has the court found any, holding that a relationship of an investment advisor-client or consultant-
client creates a de jure fiduciary relationship. Instead, Plaintiffs merely cite G.S. 78C et seq. for the proposition that an
investment advisor owes a duty of disclosure to his clients, which they argue in turn creates a de jure fiduciary
relationship. "North Carolina recognizes certain de jure fiduciary relationships which arise as a matter of law because of
the nature of the relationship, such as attorney and client, broker and principal, executor or administrator and heir,
legatee or devisee, factor and principal, guardian and ward, partners, principal and agent, trustee and cestui que trust. "
BDM Invs. v. Lenhil, Inc., 2012 NCBC 7, ¶ 89 (N.C. Super. Ct. Jan. 18, 2012) (quoting Abbitt v. Gregory, 201 N.C.
577, 598 (1931)). Harrold v. Dowd, 149 N.C. App. 777 (2002), held that an accountant-client relationship is not an
inherently fiduciary one and the mere allegations of the accountant's failure to properly advise his client were
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N.C. Business Court Case Summaries: May 3, 2013 North Carolina Lawyers Weekly May 3, 2013 Friday

insufficient to support a claim for breach of fiduciary duty. The court of appeals upheld the trial court's Rule 12(b)(6)
dismissal of the breach of fiduciary duty claim in that case. Similar to Harrold, plaintiffs here allege that Peters and the
VisionQuest defendants failed to properly advise plaintiffs by "ignoring the best interests of Lakebound" and "putting
the interests of [VisionQuest] ahead of the interests of [Lakebound]. " In the absence of any N.C. appellate authority
holding that an investment advisor-client relationship is a de jure fiduciary one, the court finds Harrold instructive and
concludes that no fiduciary relationship existed between Peters and Plaintiffs. The mere assertion of an investment
advisor-client relationship or reliance upon G.S. 78C et seq. does not give rise to a de jure fiduciary relationship. The
motions to dismiss are granted in part and denied in part.
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98 Cornell L. Rev. 845, *

57 of 430 DOCUMENTS

Copyright (c) 2013 Cornell Law Review


Cornell Law Review

May, 2013

Cornell Law Review

98 Cornell L. Rev. 845

LENGTH: 35725 words

ARTICLE: THE LAST TEMPTATION OF CONGRESS: LEGISLATOR INSIDER TRADING AND THE
FIDUCIARY NORM AGAINST CORRUPTION

NAME: Sung Hui Kim+

BIO: + Assistant Professor of Law, UCLA School of Law. I am grateful for the advice of many generous colleagues and
for the valuable comments on prior drafts from the following: Norm Abrams, Iman Anabtawi, Steve Bainbridge, Sam
Bray, Ingrid Eagly, Laura Gomez, Stephen Galoob, Mitu Gulati, Thomas Hazen, Allison Hoffman, Jerry Kang, Don
Langevoort, Jon Michaels, Hiroshi Motomura, Charles O'Kelley, Robert Prentice, Ronald Rotunda, Joanna Schwartz,
Michael Small, Alexander Stremitzer, Steve Yeazell, Noah Zatz, and participants at the U.C. Berkeley School of Law
and the U.N.C. School of Law faculty workshops. Excellent research assistance was provided by Evan Lee, Grace Lo,
Robert Smith, Jihee Yoo, Sepehr Zangeneh, and the research librarians of the Hugh & Hazel Darling Library at the
UCLA School of Law.

LEXISNEXIS SUMMARY:
... Therefore, if a legislator happens to be advising a corporation in a manner that would imply a duty to keep
confidences, then the fiduciary duty to disclose (prior to trading) would uncontroversially apply to that legislator, who
would be regarded as a fiduciary vis-a-vis the corporation's shareholders. ... However, when legislators trade on
material, nonpublic information, some of those trading counterparties will be citizens. ... In those cases, courts have
recognized a governor, mayors, an elected county clerk, elected county officials, and state legislators as fiduciaries of
citizens. ... Peters, a federal district court found that a partner potentially violated federal insider trading laws under the
misappropriation theory by trading on confidential information entrusted to him by his partner. ... Moreover, courts
have found liability based on the public fiduciary's use of entrusted information for personal gain, without requiring that
harm be demonstrated. * * I have argued that the majority view - that judges could not recognize legislators as
fiduciaries under federal insider trading law - is wrong and continues to be wrong. ... By analyzing congressional ethics
rules, citing relevant cases, and analogizing to trustees, partners, and directors, courts could classify legislators as
fiduciaries and impose the requisite fiduciary duties under federal insider trading law. ... Instead, judges can justify the
analogies on the ground that extending the category of fiduciary to encompass legislators promotes an underlying policy
of fiduciary law, which is to combat corruption. ... In employing traditional analogical reasoning to find legislators to
be fiduciaries for purposes of federal insider trading law, judges can rest assured that they are not stretching fiduciary
law unrecognizably or arbitrarily to pursue some objective that is alien to the doctrine. ... One might object that
applying the federal securities laws to target the public corruption of state legislators (even if it is in the form of
legislator insider trading) represents an unconstitutional exercise of federal power - an invalid federal "incursion on
traditional state power" (i.e., the power to police the conduct of its own officials). ... In sum, the Speech or Debate
Clause creates no substantive liability immunity because insider trading is not a legitimate legislative activity.

HIGHLIGHT:
On April 4, 2012, Congress passed the STOCK Act, which officially banned the practice of insider trading by
members of Congress and formally declared them to be fiduciaries for purposes of federal insider trading law. The
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impetus for the legislation was the perception, held by a majority of commentators, that insider trading by members of
Congress did not violate federal securities law because they were not fiduciaries to anyone. In this Article, I make the
case that the majority view was and continues to be wrong, and why that matters. Specifically, I argue that even if the
STOCK Act had not passed and even if it were to be repealed, judges could build on existing precedents and employ
unextraordinary judicial reasoning to impose the requisite fiduciary duties on legislators. In Part I, I provide a succinct
summary of federal insider trading law, focusing on the controversial element as applied to legislators - the existence
and breach of fiduciary duty. I then explore the standard approach taken by courts in resolving novel instances of
potentially fiduciary relationships: traditional analogical reasoning to well-established cases. In Part II, I employ this
standard approach to make the case that judges could find legislators to be fiduciaries under federal insider trading law.
In Part III, I more deeply justify the analogical reasoning employed in Part II. Specifically, I show that one core purpose
of fiduciary law has been to fight public corruption and that legislator insider trading could be classified as a form of
public corruption. This analysis helps reveal an organic alignment between recognizing legislator insider trading as a
breach of fiduciary duty and an important goal of the common law of fiduciaries - that of deterring corruption. Part IV
addresses various objections.

TEXT:
[*846]
Introduction

On September 18, 2008, at 7 p.m., Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben
Bernanke met with members of Congress in a closed-door briefing that was so secretive even cell phones were banned.
n1
Among those attending was Representative Spencer Bachus, the ranking Republican on the House Financial Services
Committee. n2 As Paulson recounts:

Ben [Bernanke] emphasized how the financial crisis could spill into the real economy. As stocks dropped perhaps a
further twenty percent, General Motors would go bankrupt, and unemployment [*847] would rise ... if we did
nothing... . It [was] a matter of days, [Bernanke] said, before there [would be] a meltdown in the global financial
system. n3

According to Paulson, these dire predictions left members of Congress "ashen-faced." n4 The very next day,
Representative Bachus invested in option funds designed to rise in value when markets fall. n5 Just four days later, he
sold, making more than $ 5,000 in profit, nearly doubling his investment. n6 As a 60 Minutes television report put it:
"While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it
would ... ." n7
Did Representative Bachus engage in what I refer to as "legislator insider trading" - the trading by members of
federal or state legislatures on the basis of material nonpublic information acquired through their positions? Did he trade
on information learned in the closed-door briefing? Or was the timing of his trade mere coincidence? Although he was
cleared of ethical wrongdoing by the Office of Congressional Ethics, n8 we may never know the truth behind Bachus's
suspicious trades.
Publicity surrounding Bachus's trades, however, did focus public attention to what was widely perceived as a
gaping loophole in the federal securities laws. That loophole, according to a majority of commentators opining on the
issue, n9 was that federal insider trading laws generally did not reach members of Congress. n10 For example, as former
[*848] Chairman of the Securities and Exchange Commission (SEC) Arthur Levitt maintained, members of Congress
"benefit from an exemption that the average investor doesn't benefit from. They're immune from insider trading laws."
n11

To be clear, Levitt was not referring to an explicit statutory exemption like the one that was drafted in Title VII. n12
Rather, this so-called immunity flowed from the difficulty of establishing the breach of a fiduciary (or fiduciary-like) n13
duty, a required element of an insider [*849] trading violation. According to this majority view, unlike employees of
the three branches of federal government, who are agents and thus unquestionably subject to federal insider trading
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laws, n14 members of Congress are fiduciaries to no one. n15 Members are "neither employees nor agents of any larger
entity." n16
Because of this majority understanding, President Obama called for a new law banning insider trading by members
of Congress in his 2012 State of the Union address. n17 And Congress, after dragging its feet for years, n18 responded to
public pressure and finally enacted the [*850] Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act),
n19
which affirmed Congress's nonexemption from federal insider trading laws n20 and declared that members owe the
requisite fiduciary duties to Congress, the federal government, and US citizens. n21 In other words, members and
employees of Congress are fiduciaries for purposes of insider trading law, and trading on material nonpublic
information acquired in the course of official duties is deemed a breach of fiduciary duty.
Given this legislative intervention, one might think that nothing interesting remains to be said about legislator
insider trading or the fiduciary status of legislators. But we should not overread the Act's significance and scope. First,
the STOCK Act did not address the fiduciary status of elected officials at the state or local level. There are 7,382
members of state legislatures n22 who are not covered by the STOCK Act and may be trading on inside information right
now. If the majority view remains intact for state legislators, n23 then they are not violating federal securities law because
they are not breaching any fiduciary duty. Indeed, a Minnesota state legislator recently blogged: "It is, in fact,
completely legal for a state lawmaker to use confidential information gained at the [state] Capitol for personal gain." n24
Although members of Congress may have more access to juicier nonpublic information than "mere" state
legislators, we should not [*851] discount the opportunities that legislators of states with influential economies and
important corporate domiciliaries might exploit. For example, consider a California state legislator who hears that a new
state bill forcing internet retailers (such as Amazon.com and Over-stock.com) to collect sales taxes will soon be
introduced. n25 Or consider a Minnesota state legislator who learns about a bill that would authorize the operation of
gaming machines by Canterbury Park Holding Corporation, a publicly traded gaming corporation based in Minnesota.
n26
Might a legislator trade on such nonpublic information? Given the great number of state legislators, it would be
foolish to dismiss the risk of their trading.
Second, the relevant provisions of the STOCK Act only addressed federal insider trading laws. As a result, the
majority view, if left uncorrected, could influence the judicial interpretations of other federal or state laws that are
similarly premised on the breach of fiduciary obligation. For example, the majority of circuits currently require that the
defendant must have breached a fiduciary obligation n27 to the defrauded person or entity in order to be found guilty
under the honest services mail fraud statutes: 18 U.S.C.§§1341 and 1346. n28 If the logic of the majority view is correct,
then elected officials in those circuits cannot be prosecuted for honest services mail fraud. By contrast, if the logic of the
majority view is wrong, then elected officials would be subject to prosecution, which result would be more consistent
with precedents that do not sharply distinguish between elected and appointed officials. n29
[*852] In sum, the STOCK Act makes an important statutory clarification that members of Congress are
fiduciaries who owe the requisite duties under federal insider trading law. However, we should not misread the STOCK
Act as contradicting the majority view or rendering it entirely moot. Indeed, the Act could be cited as support for the
correctness of the majority view - that legislators are not fiduciaries and thus not covered by the federal ban on insider
trading, absent some statutory override. After all, if the majority view were not seen as correct, why would it have been
necessary for Congress to enact the STOCK Act at all? If, however, the majority view is wrong, it remains important not
to canonize a mistaken understanding of the law.
To that end, I argue that the majority view - that judges could not recognize legislators as fiduciaries under federal
insider trading law - has been and continues to be wrong. n30 Even if the STOCK Act had not passed and even if it were
to be repealed, judges could build on existing precedents and employ unextraordinary judicial reasoning to impose the
relevant fiduciary duties on both state and federal legislators as required under federal insider trading law.
In Part I, I provide a clean distillation of federal insider trading law that focuses on the critical element of the
violation: the breach of fiduciary duty. I then explore courts' standard approach in resolving novel instances of
potentially fiduciary relationships: applying traditional analogical reasoning to well-established cases. For centuries,
courts have invoked - either explicitly or implicitly - analogies to more established fiduciaries as the primary means of
deciding hard cases.
[*853] In Part II, I employ analogical reasoning to make the case that a fiduciary duty could be found to apply to
both federal and state legislators. This would have been true for members of Congress prior to the passage of the
STOCK Act, but more importantly, it remains true for state legislators who are not now covered by the STOCK Act. My
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target audience is the judiciary who may be confronted with just such a question in a lawsuit. In addition to analogical
reasoning, I summon an impressive body of judicial precedent which has recognized public officials, including state and
federal legislators, as fiduciaries outside of the insider trading context. n31
Deeper thinkers, whether they be judges or academic commentators, may find the analysis in Part II to be
unsatisfyingly thin. They will likely object that the problem with analogical reasoning is that it is often conclusory and
indeterminate. For example, there is no widely accepted rule that tells us which of the myriad attributes of a person,
object, or concept are relevant for comparison and how much weight should be given them. n32 Even a zebra and a barber
pole are analogous if we are focused on being "striped." n33 To make analogies not merely rhetorically persuasive but
also well reasoned, there must be some appeal, explicit or implicit, to the underlying purpose of the analogical
reasoning.
Part III provides a thicker rationale for recognizing legislators as fiduciaries for purposes of insider trading law. It
more deeply justifies the analogies made in Part II by identifying a core purpose of fiduciary duty law. Although wildly
heterogeneous, fiduciary law holds, as one of its central principles, an anti-corruption norm, with corruption (in the
public sector) defined as the "use of public office for private gain." n34 After explaining why legislator insider trading
should be classified as a form of public corruption, I demonstrate the existence of this anti-corruption norm in fiduciary
law by exploring judicial opinions which have proscribed public fiduciaries from using their public office for private
gain. In the end, this analysis reveals an organic alignment between recognizing legislator insider trading as a breach of
fiduciary duty and one core purpose of the common law of fiduciaries - deterring corruption.
[*854] In Part IV, I answer objections that the judicial extension of a federal securities cause of action against
legislators would be unwise or unconstitutional. Specifically, I discuss whether doing so would amount to judicial
activism, violate principles of federalism (with respect to state legislators), or violate the Speech or Debate Clause. n35
To clarify, this Article's primary purpose is to determine whether judges can rely on ordinary judicial reasoning to
impose the relevant fiduciary duties on state and federal legislators under federal insider trading law and how this might
be done. It is not to inquire, on some blank slate, whether legislator insider trading should be banned on policy grounds,
which is a matter considered in a separate piece. n36 For curious readers, I can share that I believe that legislator insider
trading is normatively problematic on consequentialist grounds. But these policy views are not logically germane to the
arguments I make here. n37
I

Federal Insider Trading Law

A. Federal Insider Trading Doctrine

Section 10(b) of the Securities Exchange Act of 1934 (Section 10(b)) n38 and SEC Rule 10b-5 (Rule 10b-5) n39
promulgated thereunder by the SEC proscribe fraud "in connection with the purchase or sale of any security." n40
Although neither the text of Section 10(b) nor that [*855] of Rule 10b-5 specifically mentions "insider trading," courts
and administrative agencies have, for decades, interpreted these provisions to ban the practice. n41 In rough terms, n42 the
elements of an insider trading cause of action include: (1) trading on (or tipping) (2) material, (3) nonpublic information
(4) in breach of a fiduciary (or fiduciary-like) duty. n43 These elements, including the fiduciary requirement, appear
nowhere in a statute or administrative regulation. They have [*856] been almost entirely judicially manufactured,
albeit with considerable congressional endorsement, if not ratification. n44
What follows is a simplified review of the elements of an insider trading cause of action under Section 10(b) and
Rule 10b-5. n45 The first three elements pose no special hurdle if the defendant happens to be a legislator. It is the fourth
element that is controversial.
1. Trading on (or Tipping) Material Nonpublic Information

The first element - that the defendant "traded on the information" in question - requires a showing that the defendant
possessed the material nonpublic information at the time he or she made the securities trade. n46 Possession at the time of
trading is often difficult to establish, but, once proven, there is usually no further question that the defendant traded in
order to exploit the informational advantage vis-a-vis other marketplace traders. n47
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In the typical case, the required mens rea for liability - scienter n48 - is not difficult to establish. n49 To prove scienter,
the complainant must show that the "defendant knew that the information was material and nonpublic or recklessly
disregarded facts that would indicate that the information in his possession was material and nonpublic." n50 For criminal
prosecutions, which are brought by the Department of Justice, the defendant must have "willfully" committed the
offense. n51 Courts have construed "willfully" to refer to violations that occur with some "realization on the defendant's
part that he was [*857] doing a wrongful act ... and that the knowingly wrongful act involved a significant risk of
effecting the violation that occurred." n52
The defendant can, of course, argue that the trade in question was made for reasons unrelated to the information in
question. For example, the defendant might insist that the trade would have happened regardless of the information
because it was necessary to liquidate assets to pay upcoming bills. If the defendant makes such a showing, courts may
not find liability, especially in those jurisdictions requiring that the defendant use (and not merely possess) the
information. n53
The prohibition covers not only trading but also the practice of tipping, as well as trading on the tip, as detailed
below. For the most part, how this element gets resolved is substantively no different because the defendant happens to
bear the title of Senator or Representative. n54
The second element - that the confidential information be "material" - also presents no new legal issues.
Information is deemed "material" if there is a substantial likelihood that a reasonable investor would consider it
important in making an investment decision. n55 In effect, any information the disclosure of which would likely change
an issuer's securities prices will generally be regarded as material.
With respect to contingent or forward-looking information, materiality is judged by "a balancing of both the
indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the
company activity." n56 Accordingly, if a legislator trades to profit from an anticipated legislative development, the
factfinder must assess the likelihood (at the time of the trade) that the legislative event would come to pass and the
importance of that event to an issuer's business (at the time of the trade).
In theory, this would be a difficult task because most legislative developments (such as the sudden passage of the
STOCK Act bill in 2012) are tough to predict, given the dynamics and vicissitudes of lawmaking. In practice, however,
assessing "materiality" is often not so arduous. The very fact of trading by the defendant may support a finding of
materiality. If the factfinder is persuaded that the defendant traded in the hopes of profiting from the information in
question and that the defendant resembles a "reasonable investor," then [*858] the test of materiality is effectively
satisfied. n57 Finally, the defendant will generally have a hard time convincing the factfinder that the information in
question is not material in the face of the actual occurrence of the legislative event and its resulting impact on the
issuer's securities prices. n58 If securities prices change dramatically following the public release of the information in
question, the element of materiality is presumptively satisfied. n59
The third element - that the information in question must be "nonpublic" - also poses no novel issues. Information
is considered nonpublic if it is not generally available to the investing public - that is, it has not been broadly
disseminated. n60 This element is rarely seriously contested in insider trading cases. With respect to the securities of an
issuer with a large analyst following, once the information in question gets into the hands of a large number of investors
(or a smaller number of institutional investors who direct a large volume of trades), the security's market price will
rapidly reflect the significance of that information, thereby extinguishing the opportunity to profit from insider trading.
As a result, it is difficult to generate quick profits by trading in such a security unless one holds information that the
general investing public does not know. n61
To avoid any confusion, it is important to understand that the requisite nonpublic information is not narrowly
circumscribed to "inside information" - information that emanates directly from within the corporation and specifically
relates to the plans, operations, or assets of the issuer whose securities are being traded. n62 Nonpublic information also
encompasses "market information," which emanates from a source outside the issuer of the traded securities and tends
to be about the supply of and demand for the company's securities. n63 Market [*859] information may be information
that impacts the prices of the specific security that is being traded (e.g., "information that an investment adviser will
shortly issue a 'buy' recommendation or that a large stockholder is seeking to unload his shares or that a tender offer will
soon be made for the company's stock"). n64 But market information may also include more generalized information that
impacts the share prices of an entire industry or the stock market as a whole (e.g., Ben Bernanke's prediction that the
entire economy will tank).
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Of course, legislators have access to both types of nonpublic information. Through legislators' subpoena power,
they may gain access to inside information during the course of a legislative investigation into the matters of a particular
publicly traded company. Even more easily, they can gain access to market information in the form of proposed
legislation, anticipated criminal investigation, or anticipated governmental action, all of which may impact the securities
prices of a single issuer or an entire industry.
Finally, it is important to emphasize that not all persons coming into contact with material, nonpublic information
are potentially liable. For example, if, during my morning jog, I happen to stumble across some random trash containing
a juicy stock tip and then proceeded to trade on the tip, I would not be liable for insider trading. Why? It is because of
the fourth element, which requires a breach of fiduciary duty. n65 In my hypothetical, I have not violated any fiduciary
duty by trading on a random stock tip. n66
So, what about legislators? Do they owe a fiduciary duty and, if so, to whom?
2. In Breach of a Fiduciary (or Fiduciary-Like) Duty

To decide whether a fiduciary duty exists and has been breached requires us to distinguish between two accepted
theories of insider trading liability - classical and misappropriation.
[*860]
a. Classical Theory

Under the classical theory, affirmed in 1980 by the Supreme Court in Chiarella v. United States, n67 a person violates
Rule 10b-5 and Section 10(b) by trading on material, nonpublic information if that person owes a fiduciary duty (of
disclosure) to the counterparty of the trade (later redefined by statute to extend to one or more contemporaneous traders
in the marketplace). n68 This fiduciary duty of disclosure (articulated as a "fiduciary duty to disclose or abstain") n69 does
not arise simply because the trader holds an informational advantage over the counterparty. After all, the Chiarella Court
noted that "Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud. When an
allegation of fraud is based upon nondisclosure [as would be the case with insider trading], there can be no fraud absent
a duty to speak." n70 Therefore, drawing from the common law tort of misrepresentation, the Court maintained that a duty
to disclose material, nonpublic information prior to trading "arises when one party has information 'that the other [party]
is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.'" n71
The Court did not elaborate on what constitutes a "similar relation of trust and confidence." However, courts have
long used that and similar phrases to describe relationships that were not strictly fiduciary as a matter of law but
nonetheless shared some of the characteristics of a fiduciary relationship (such as one party's reposing of confidences in
another) n72 and thus warranted some of the protections [*861] generally applicable to fiduciary relationships. n73 In an
influential opinion, United States v. Chestman, n74 the Second Circuit held that a "relationship of trust and confidence"
must be the "functional equivalent of a fiduciary relationship" and must "share the essential characteristics of a fiduciary
association." n75 Because there is much overlap between fiduciary relationships and such other fiduciary-like
relationships, and the distinction is relevant mostly for allocating burdens of proof, n76 whenever I refer to "fiduciary
duty," I mean to include analogous duties imposed due to a relation of trust and confidence.
Who owes a fiduciary duty to contemporaneous traders in the marketplace? The Chiarella Court suggested that
those under a duty to place shareholder welfare before their own are covered by this fiduciary duty. n77 As a consequence,
the duty applies uncontroversially to traditional corporate insiders (i.e., an issuer's officers, directors, and controlling
shareholders), as the Court specifically acknowledged. n78 The duty also applies uncontroversially to employees and to
the corporate issuer itself. n79 Hence, courts and commentators commonly assumed that the classical theory espoused in
Chiarella only concerned the trading by corporate insiders.
However, the Court never stated that only corporate insiders could be held liable. n80 Indeed, the Chiarella Court
approvingly cited [*862] Affiliated Ute Citizens of Utah v. United States, n81 an earlier Supreme Court opinion which
imposed Rule 10b-5 liability on defendants who were not corporate insiders of the issuer of the traded securities.
Moreover, as Chief Justice Burger pointed out in his dissent in Chiarella, Section 10(b) and Rule 10b-5 literally reach
"any person" who engages "in any fraudulent scheme" n82 in connection with a securities transaction. Accordingly, no
one - not even a member of Congress - is categorically exempt from liability under these provisions.
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In 1983, the Supreme Court in Dirks v. SEC made two important extensions. First, it announced that this fiduciary
duty may apply to certain confidential advisers of the issuer, such as underwriters, attorneys, accountants, or
consultants, who are classified as "temporary" or "constructive" insiders. n83 "The basis for recognizing this fiduciary
duty," the Court clarified, "is not simply that such persons acquired nonpublic corporate information, but rather that they
have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access
to information solely for corporate purposes." n84 The Court further clarified that "for such a duty to be imposed ... the
corporation must expect the outsider to keep the disclosed[,] nonpublic information confidential, and the relationship at
least must imply such a duty." n85 Therefore, if a legislator happens to be advising a corporation in a manner that would
imply a duty to keep confidences, then the fiduciary duty to disclose (prior to trading) would uncontroversially apply to
that legislator, who would be regarded as a fiduciary vis-a-vis the corporation's shareholders.
Second, Dirks extended insider trading liability to cover the practice of tipping and trading on the tip. n86 But it did
so by predicating the tipper's and tippee's liability on the tipper's breach of the fiduciary duty of loyalty, which includes
the duty not to use entrusted information for personal gain. n87 Specifically, if the tipper breaches the fiduciary duty of
loyalty by passing on information to the tippee in anticipation of a personal benefit (broadly defined) n88 and the tippee
[*863] knows or has reason to know of the tipper's breach, n89 then the tippee inherits the duty owed by the tipper. As the
Court explained, "the tippee's obligation has been viewed as arising from his role as a participant after the fact in the
[tipper's] breach of a fiduciary duty." n90 As a result, any subsequent trading by the tippee will subject both the tippee and
the tipper to liability.
To be clear, there is no liability for either the tipper or tippee unless the tipper is already in a fiduciary relationship
with the corporation's shareholders and thus owes the requisite fiduciary duty. Hence, the tipper's duty uncontroversially
applies to corporate insiders and temporary insiders (as Dirks expressly contemplated). In addition, any person to whom
the insider improperly passes information inherits that duty. Therefore, if a legislator knowingly receives an improper
tip from a corporate insider, then the legislator inherits the fiduciary duty owed by the corporate insider. Consequently,
the legislator may not then trade on the tip or tip the information to someone else.
As in Chiarella, the Dirks Court did not foreclose the possibility of classifying legislators as fiduciaries. It noted:

We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside
information "was not [the corporation's] agent, ... was not a fiduciary, [or] was not a person in whom the sellers [of the
securities] had placed their trust and confidence." n91

In this passage, the Court separately catalogues the corporation's agent, fiduciary, and the person in whom trust and
confidence had been placed. This separately itemized list clarifies that "agents" and "fiduciaries" are not redundant or
coextensive categories under the classical theory. Therefore, legislators, who are neither the corporation's nor its
shareholders' agents, are not categorically excluded.
b. Misappropriation Theory

Under the alternative "misappropriation theory," which the Supreme Court endorsed in 1997 in United States v.
O'Hagan, n92 a person may not trade on material, nonpublic information entrusted to that person by the source of that
information without disclosing to that source the person's intention to trade on that information. n93 Drawing on the
common law of agency, n94 the Court held that "a fiduciary's [*864] undisclosed, self-serving use of a principal's
information to purchase or sell securities, in breach of a duty of loyalty and confidentiality," constitutes deception under
Section 10(b) and Rule 10b-5 because such trading "defrauds the principal of the exclusive use of that information." n95
Thus, liability under the misappropriation theory is premised on a preexisting fiduciary relationship between the trader
and the source "who entrusted him with access to confidential information," n96 regardless of whether the source bought
or sold securities or was even a market participant at all.
In addition, lower courts have extended insider trading liability to ban the practice of tipping and trading on the tip
under the misappropriation theory, although the law is not entirely settled in this area. n97 Therefore, if a corporate lawyer
improperly tips to a legislator confidential client information that impacts the securities of the client's competitor, then
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the legislator inherits the fiduciary duty owed by the lawyer to his firm's client. As a result, the legislator may not then
trade (in the competitor's securities) n98 on the tip or tip the information to someone else.
Now that I have introduced both classical and misappropriation theories, notice the critical difference between them
as to whom the requisite duty is owed. Under classical theory, the defendant (as buyer or seller) owes the requisite
fiduciary duty to the counterparty to the trade (as seller or buyer). By contrast, under the misappropriation theory, the
defendant owes the requisite fiduciary duty to the source - the person or entity who entrusted the defendant with access
to the confidential information.
There is also an important difference in the nature of the duty implicated. Under Chiarella's classical theory, the
relevant duty is the duty to disclose, n99 which courts have routinely and widely imposed on all fiduciaries. By contrast,
in both tipping n100 and misappropriation [*865] theory cases, n101 the relevant obligation is the duty not to use entrusted
information for personal gain, n102 the precise scope of which has varied among different courts and different fiduciary
contexts. n103
Also, I should clarify the positive law source of the requisite fiduciary duty. Although there was once much debate
and uncertainty about this issue, n104 it is now clear that the federal insider trading prohibition, which may be "classified
within the genus of federal common law," n105 has a federal source. n106 That said, as with other questions arising under the
federal laws, state common law is relevant to and has informed the task of identifying the requisite federal fiduciary
duty under federal insider trading law. n107
Finally, it is worth noting the implications of tying federal insider trading law to the fiduciary principle. By
choosing to condition liability [*866] on the breach of fiduciary duty, the Chiarella Court selected "an evolving,
dynamic concept which [by its nature] ... cannot be rigidly categorized." n108 In 1982, Donald Langevoort presciently
observed: "Within the broad outlines of the [Chiarella] Court's rationale, there is room for creative interpretation,
permitting the law to continue to develop in accord with perceptions about fairness in the securities marketplace. The
flexibility of the fiduciary principle should not be underestimated." n109 With these clarifications, the fundamental
question becomes: is a legislator in a fiduciary relationship to either the counterparties of the trade (as under classical
theory) or to the person who entrusted the nonpublic information to him (as under the misappropriation theory)? To
make this case, we must first understand how courts have determined who is a fiduciary.
B. The Modus Operandi of Courts

Whether a particular defendant falls into the category "fiduciary" will often be an easy question, given clear precedent
on point. For example, under the classical theory, courts regard officers, directors, controlling shareholders, employees,
and the corporation itself as fiduciaries vis-a-vis shareholders based on well-established precedents. n110 Under the
misappropriation theory, courts treat defendants involved in "hornbook fiduciary relations," n111 such as employer-
employee, principal-agent, or client-attorney, as fiduciaries. But what about harder, novel cases?
Recall that in Chiarella, the Court predicated insider trading liability under the classical theory on the finding of a
duty to disclose, which arises out of a "fiduciary or other similar relation of trust and confidence" between the parties to
a transaction. n112 While the phrase "trust and confidence" signaled the Court's intention to recognize a broader class of
relationships than strictly fiduciary ones, it regrettably told us little more.
Three years later, in Dirks, the Supreme Court extended the fiduciary category to cover certain recipients of
confidential information as temporary insiders. But the Court did so not by identifying key attributes of fiduciaries
generally. Instead, it emphasized that there must be an implicit understanding on the part of the issuer of the traded
securities that the recipient of the information will use that [*867] information solely for the issuer's benefit and will
keep it confidential. n113
Finally, fourteen years later, in O'Hagan, the Supreme Court embraced the misappropriation theory but did so
without any further elaboration of how to identify the existence of a fiduciary relationship. n114 Although it "referenced
the term 'fiduciary' seventeen times," n115 it did little more than point out that the misappropriation theory "is limited to
those who breach a recognized duty." n116
Given minimal guidance from the Supreme Court, lower federal courts have produced decisions that run the gamut.
Some courts have examined the "reasonable and legitimate" expectations of the parties and have inquired as to whether
those parties had "a history or practice of sharing business confidences, and [whether] those confidences generally were
maintained." n117 Some courts have recognized a relationship of trust and confidence where the trader has "expressly
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agreed" to keep the information in question confidential; n118 others have concluded that such an agreement of
confidentiality, standing alone, is not enough. n119
Some courts have highlighted factors emphasizing imbalance in the relationship, such as "dominance" and
"superior influence," n120 or [*868] "de facto control and dominance." n121 Still others have focused more broadly on the
granting of some form of "discretionary authority" and a resulting "dependency" or reliance, n122 and so on. With such
vagueness and variance in working definitions, it should not be surprising to find that federal courts have recognized a
strikingly diverse array of persons as fiduciaries, including an electrician who traded on information overheard on the
job, n123 a member of a business round table who traded on information learned from a fellow member, n124 and a
government affairs consultant who tipped information learned from a Treasury Department briefing. n125 In sum, in
deciding whether to impose a fiduciary duty for purposes of federal insider trading law, federal courts tend to invoke an
ad hoc list of imprecise factors with no clear weightings and no clear explanation as to why the posited factors are
relevant.
This approach is largely consistent with how state courts have for centuries determined new fiduciaries. Instead of
deploying a widely accepted, precise, and rule-like definition, state courts also invoke an ad hoc list of vague factors.
Not surprisingly, the universe of fiduciaries has gradually expanded to include such strange bedfellows as marriage
brokerage agencies, n126 commercial developers of inventions, n127 psychiatrists, n128 life tenants of property, n129 and private
hospitals. n130 As a consequence, experts have described fiduciary law as [*869] "amorphous," n131 "intrinsically non-
rational," n132 "ill-defined," n133 "messy," n134 "atomistic," n135 "slippery," n136 "protean," n137 "confused," n138 "problematic," n139
"result-oriented," n140 and "elusive." n141
In highlighting the indeterminacy of the judicial task of identifying fiduciaries, I am not suggesting that courts are
reaching conclusions without reasoning. In fact, courts often rely on forms of analogical reasoning and compare - either
implicitly n142 or explicitly - the defendant's situation to instances where fiduciary status is well established. For example,
when courts originally encountered members of a corporation's board of directors, they explicitly analogized the
directors to private trustees, n143 agents, n144 or partners n145 - familiar instances of fiduciaries. Of course, over time, courts
came to regard directors themselves as uncontroversial fiduciaries. n146 As fiduciary law [*870] scholars have observed,
analogies have played an especially crucial role in the development of fiduciary law. n147 Indeed, the most cited case in
fiduciary law, Meinhard v. Salmon, involved an explicit analogy to partners. n148 As Deborah DeMott has noted, the
"pervasiveness and persistence" of the use of analogies in the fiduciary context "suggest that it is an inevitable aspect of
fiduciary analysis." n149
So, if a judge is presented with the question, "Are legislators fiduciaries?," how might that judge approach it? One
way is to invoke plausible analogies.
II

Legislators as Fiduciaries

A. Theoretical Outlines

The question of whether a legislator is a "fiduciary" always embeds an ancillary question: fiduciary to whom? Consider
the following potential beneficiaries: citizens, the legislature (and fellow legislators), and the government that the
legislator serves. n150 Depending on the beneficiary, a particular theory of liability applies. For example, suppose that the
beneficiaries are the citizens whom the legislator represents but with whom the legislator has no personal contact. As a
general matter, it is unlikely that legislators are receiving juicy stock tips from ordinary citizens. However, when
legislators trade on material, nonpublic information, some of those trading counterparties will be citizens. This suggests
that for citizens, the classical theory of liability is relevant. One can then analogize the legislator-citizen relationship to
more established fiduciary relationships, for example, the relationship between a trustee and beneficiaries of the trust.
The following schematic summarizes the potential fiduciary relationships and potential analogies that judges could
employ:
[*871]
Table 1: Potential Fiduciary Relationships
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[SEE TABLE IN ORIGINAL]

B. Fiduciary to Citizens

Are legislators fiduciaries to citizens under classical theory? If so, then a legislator who trades on material, nonpublic
information may be breaching a duty to disclose to those "citizen-investors" on the other side of the trade. n151
Alternatively, under Dirks, a legislator who [*872] tips such information to friends or relatives may be breaching the
duty not to use information entrusted to that legislator to benefit citizens for personal gain. n152
1. Analogy: Private Trustee

We can analogize the relationship between the legislator and citizens to the relationship between the trustee and
beneficiaries of a private trust. n153 In the prototypical Anglo-American trust, the settlor contracts with the trustee to
manage a portfolio of assets in the best interests of the beneficiaries, subject to ex ante conditions imposed by the settlor
in the deed of trust. n154 Accordingly, three important features of a trust are (1) its creation through a manifestation of
consent by the settlor, n155 (2) the delegation of broad managerial authority to the trustee over entrusted property, n156 and
(3) the imposition of limitations on the trustee's authority through the instrument that created the trust. n157
We see analogous features in the context of the legislator-citizen relationship. First, just as the trustee-beneficiary
relationship is established through an act of consent, the legislator-citizen relationship arises from an act of consent by
the electorate. Conventional democratic theory posits that the legitimacy of our republic is based on the consent of the
governed. n158 Of course, as Ethan Leib and his colleagues have argued, the "citizenry of even the most liberal and
democratic of states rarely consent meaningfully to the state's authority. Simply casting a ballot - or not voting-with-
one's-feet-through-emigration - is hardly a conferral of consent to those individuals or institutions ruling over citizens'
daily lives." n159 While consent in the electoral context may not be as robust as a settlor's consent in the private trust
context, both sets of relationships (legislator-citizen and trustee-beneficiary) can nonetheless be characterized as
involving a [*873] voluntary expression of willingness by a person or group of persons to entrust responsibility to
another person. n160
Second, just as the private trustee is delegated broad authority to manage the trust assets to benefit the
beneficiaries, legislators have been delegated broad legislative authority over the assets of their government, including
the public fisc, to benefit citizens. At the federal level, this delegation is signified by the first provision of the
Constitution, Article I, Section 1, which established the U.S. Congress and refers to the "legislative Powers herein
granted." n161
Third, just as the deed of trust defines the constraints of a trustee's authority, the federal or state constitutions
define the constraints of legislative authority, either directly through express substantive provisions or indirectly by
setting up procedures and institutions empowered to establish them. Of course, these constraints on the fiduciary are not
all encompassing. Although the purpose of the deed of trust is to protect the interests of the beneficiaries in accordance
with the settlor's intention, the beneficiaries actually remain quite vulnerable to a trustee's predation. Unlike in principal-
agent relationships where the principal can ordinarily intervene freely and dismiss agents at will, the trust beneficiaries
ordinarily must request judicial intervention in order to dismiss a trustee for malfeasance. n162 Similarly, citizens have
limited means of redress against legislators and exercise no meaningful control over them.
If this analogy to the trustee strikes one as odd, consider that a growing body of scholarship recognizes not only
that the Framers intended to impose fiduciary standards on government officials, n163 including [*874] legislators, n164 but
also that the fiduciary concept most commonly invoked during the revolutionary era was trusteeship and "public trust."
n165
For example, the Federalist Papers repeatedly characterizes public officials, including legislators, as trustees, n166 and
the U.S. Constitution refers to "public Trust" n167 and describes public offices as being of "Trust." n168 In invoking the
analogy to the trustee, the Framers were merely continuing a tradition dating back to Cicero, who famously opined that
"the guardianship of the state is a kind of trusteeship." n169 Most of the English colonies were expressly founded on the
basis of trust - that the King had granted a charter for the benefit of the settlers residing in the colonies. n170
Moreover, these references to public trust were not just empty metaphor. Recent legal-historical work supports the
view that the Framers intended even noncriminal breaches of trust by public officials [*875] to be remediable by
impeachment and removal. n171 Also, the tradition of analogizing public officials to trustees continues on in modern
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judicial opinions. For example, the Sixth Circuit Court of Appeals stated in a case affirming the conviction of a public
official under the federal mail fraud statute: "[A] public official acts as 'trustee for the citizens and the State ... and thus
owes the normal fiduciary duties of a trustee, e.g., honesty and loyalty' to the citizens and the State." n172 Even the
Senate's Standing Orders employ the trustee analogy to define senators' duties:

The ideal concept of public office, expressed by the words, 'A public office is a public trust', signifies that the officer
has been entrusted with public power by the people; that the officer holds this power in trust to be used only for their
benefit and never for the benefit of himself or of a few ... . n173

In short, in deciding whether legislators are fiduciaries, judges can find a plausible analogy to the private trust. Just as
trustees owe fiduciary duties to beneficiaries, legislators owe fiduciary duties to citizens, some of whom will be
counterparties to their trades.
2. Analogy: Director (to Shareholders)

Besides the analogy to the private trust, might there be an analogy to the corporation? It is axiomatic that directors of a
corporation are fiduciaries of its shareholders under federal insider trading law, n174 even though directors are neither
trustees n175 nor agents of the corporation or its shareholders. n176 Might we analogize the legislator to a director and the
citizens whom the legislator represents to the corporation's shareholders? n177 For purposes of this analogy, I focus on
paradigmatic public corporations held by numerous and dispersed shareholders.
[*876] An important feature of a widely held public corporation is the separation of ownership from control. n178
Shareholders are traditionally regarded as owners of the corporation, and they do possess a residual claim on the
corporation's assets and earnings. n179 But, unlike other common forms of ownership, shareholders do not exercise any
meaningful control over how corporate assets are managed. The law in most states severely restricts shareholder power
and accords broad discretion over corporate affairs to a collective decision-making body of specialists - the board of
directors, which either alone or through its delegatees makes the vast majority of corporate decisions. n180 While directors
are charged with exercising their authority in the best interests of shareholders, n181 shareholders have limited means of
holding directors accountable. Shareholders ordinarily cannot compel directors to undertake corporate actions or even to
terminate underperforming directors. They can cast a ballot at director elections, but in most cases this will be
ineffective. Shareholders have no direct access to corporate information, relying almost entirely on mandatory
disclosures filed with the SEC. Shareholders are diffuse, dispersed, and face collective action problems in monitoring
director actions. As a result, many shareholders are rationally ignorant about corporate affairs. n182
Our government also features separation of ownership from control. As Richard Painter has observed, "[a]
republican form of government [*877] departs from direct democracy by separating citizen ownership of government
from the politician's control of the process of governing." n183 Similar to directors, legislators are, in essence, a collective
decision-making body of law-making specialists who have been accorded broad discretion to use government power
and assets. Although legislators are charged with exercising their authority in the best interests of citizens, citizens (like
shareholders) have limited means of holding their representatives accountable. Citizens cannot compel their
representatives to adhere to their platforms and cannot revoke their cast votes. n184 Their primary means of residual
control is to vote their representatives out of office in periodic elections. Like shareholders, citizens are also diffuse,
dispersed, and face collective action problems in monitoring their representatives. They can only judge the performance
of their representatives at a distance and only with the imperfect assistance of the media. As a result, many choose to
remain rationally ignorant about their representatives' performance. n185
In sum, directors are to shareholders as legislators are to citizens. If there is a fiduciary relationship recognized in
the former, it is reasonable to recognize a fiduciary relationship in the latter.
3. Cases

Analogies to trustees or directors are nice, but if a judge wants to recognize legislators as fiduciaries, he or she will feel
more comfortable citing to cases, at least as persuasive authority. It is not difficult to locate cases in which government
officials, defined broadly, are rhetorically called public trustees or held to be entrusted with public responsibilities. n186
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And there are many cases in which courts hold government officials to be fiduciaries of citizens. n187 Not surprisingly,
[*878] there are fewer cases in which the government officials at issue are elected and held to owe fiduciary duties to
citizens who elected them, as required under classical theory. In those cases, courts have recognized a governor, n188
mayors, n189 an elected county clerk, n190 elected county officials, n191 and state legislators n192 as fiduciaries of citizens.
For example, in Driscoll v. Burlington-Bristol Bridge Co., n193 a unanimous Supreme Court of New Jersey
announced that a cause of action could lie against elected county officials for "abuse of discretion and breach of trust"
n194
in rubber-stamping a $ 12 million transaction "under the influence of prominent persons seeking to further their
private interests." n195 Although the remedy granted did not depend on a specific finding of a breach of duty, the court
nevertheless trumpeted the fiduciary obligations of both elected and appointed officials: "[Elected and appointed
officials] stand in a fiduciary relationship to the people whom they have been elected or appointed to serve. As
fiduciaries and trustees of the public weal they are under an inescapable obligation to serve the public with the highest
fidelity." n196
The basis for enforcing these obligations, according to the court, rested on the sovereign power of the people of the
State of New Jersey:

These obligations are not mere theoretical concepts or idealistic abstractions of no practical force and effect; they are
obligations imposed by the common law on public officers and assumed by them as a matter of law upon their entering
public office. The enforcement [*879] of these obligations is essential to the soundness and efficiency of our
government, which exists for the benefit of the people who are its sovereign. n197

Just as important, the court clarified that the governor, the attorney general, and even private citizens all had standing to
sue public officials for breaching their obligations. n198
In Fuchs v. Bidwill, n199 the Illinois Appellate Court upheld a complaint alleging that Illinois state legislators violated
their fiduciary duty to use their public office solely in the best interest of the people of Illinois and not for private gain.
n200
The plaintiffs alleged that state legislators secretly profited from unique investment opportunities offered by a
racetrack tycoon in an attempt to influence legislation relating to the licensing, regulating, and taxing of horse racing. n201
The Court noted that "it has long been agreed that public officials occupy positions of public trust" and that they
"cannot use [their office] directly or indirectly for personal profit." n202 Moreover, "they stand in a fiduciary relationship
to the people [by] whom they have been elected or appointed to serve." n203 Finally, the Court held that private plaintiffs
had standing to sue for their breach. n204 It explained:

If the "public trust" doctrine is to have any meaning or vitality at all, the members of the public, at least taxpayers who
are the beneficiaries of that trust, must have the right and standing to enforce it. To tell them that they must wait upon
governmental action is often effectual denial of the right for all time. n205

On appeal, in a deeply divided four-to-three decision, the Illinois Supreme Court reversed on the issue of private rights
of action. n206 However, the majority did not dispute the notion that state legislators were fiduciaries of the citizens of
Illinois. Indeed, notwithstanding [*880] the holding, the majority declared that the Attorney General was entitled to
prosecute a breach of fiduciary duty action on behalf of the State. n207
To be sure, strictly speaking, it is not enough that the courts recognize elected officials as fiduciaries. After all,
one's status as a fiduciary does not mean that one is a fiduciary for all purposes. n208 To create a cognizable claim, courts
must also find that such a relationship implies the requisite fiduciary duty under federal insider trading law. Since
Chiarella, courts have held that a defendant's failure to disclose material, nonpublic information satisfies the necessary
fraud element of Rule 10b-5. n209 Thus, the requisite duty is the duty to disclose. Once fiduciary status is found, imposing
the duty to disclose in this context should not be controversial because courts routinely and widely place the duty to
disclose on all fiduciaries. Judges can cite to cases like United States v. Mandel, in which the Fourth Circuit Court of
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Appeals held that the Governor of the State of Maryland breached his fiduciary duty to disclose his financial interest in
a legislative matter and that such failure "defrauded the public and pertinent public bodies of their intangible right to
honest, loyal, faithful and disinterested government" under the federal mail fraud statute. n210
As I have argued, judges can find legislators to be fiduciaries to the citizens who elected them. Support can be
found in suggestive case law as well as two analogies: to private trustees and to corporate directors. And this is precisely
what is needed under the classical theory: the finding of a breach of fiduciary duty between defendant trader (a
legislator) and the counterparty of the trade (a citizen on the other side of the trade).
C. Fiduciary to Legislature

Now let's switch beneficiaries from citizens to the legislature (and fellow legislators). This switch in beneficiaries
requires a switch in theories of liability, away from classical to misappropriation. Under the misappropriation theory, the
fiduciary relationship runs not to the trading counterparties but to the source of nonpublic information. If [*881] a
fiduciary relationship exists between the legislator and that source, there is a strong basis for imposing the duty not to
use confidential information for personal gain. n211
1. Rule 10b5-2(b) Analysis

In 2000, in an attempt to clarify and perhaps to expand the scope of the misappropriation theory, the SEC promulgated
Rule 10b5-2. Subsection (b) established three nonexclusive categories of relationships that give rise to a fiduciary-like
duty for purposes of the misappropriation theory. It provides that a duty of "trust or confidence" exists where (1) there
is an agreement to maintain confidentiality; (2) parties sharing material, nonpublic information have a "history, pattern,
or practice of sharing confidences" that leads to an actual or reasonable expectation of nondisclosure; or (3) a person
receives confidential information from a close family member (i.e., one's "spouse, parent, child or sibling") unless the
recipient shows that there was no actual or reasonable expectation of nondisclosure. n212
It is not clear the SEC achieved the clarification that it sought because not all courts have deferred to the SEC's
rule. For example, in SEC v. Cuban, a federal district court rejected Rule 10b5-2(b)(1) as going beyond the scope of
Section 10(b). n213 Also, in United States v. Kim, another federal district court raised questions about the validity of Rule
10b5-2(b)(2), although it did not directly rule on the issue. n214 But other courts have responded more positively. For
example, in SEC v. Yun, n215 the Eleventh Circuit Court of Appeals approved in dicta of both Rule 10b5-2(b)(1) and (2),
although it signaled skepticism about the reach of (3). n216 Given this mixed judicial track record, Rule 10b5-2(b) should
not be given talismanic significance in deciding whether a fiduciary-like duty exists. That said, the rule provides some
guidance on factors possibly relevant to the fiduciary question.
[*882] What, then, does a straightforward application of Rule 10b5-2(b) say about legislators? Recall that SEC
Rule 10b5-2(b)(1) emphasizes the existence of an agreement of confidentiality. For Congress, one can find such an
agreement in the Code of Ethics for Government Service, n217 which provides, inter alia, that "any person in Government
Service should ... never use any information coming to him confidentially in the performance of governmental duties as
a means for making private profit." n218 For state legislators, similar obligations may appear in state government ethics
codes.
That said, basing a relationship of trust and confidence on a mere confidentiality agreement remains deeply
controversial n219 and thus may be the least likely of Rule 10b5-2(b)'s three categories to survive further judicial scrutiny.
As various commentators have noted, an agreement to maintain the information's confidentiality is simply not the same
as a duty not to use such information for personal gain, n220 which is the relevant duty under misappropriation theory.
Moreover, nondisclosure agreements are often concluded by parties that are negotiating at arms' length and clearly are
not in any relation of trust and confidence. n221 Such concerns explain the district court's holding in SEC v. Cuban. n222
However, legislators are not merely bound by an agreement of confidentiality. Indeed, it seems highly probable that
they have an actual or reasonable expectation of nondisclosure arising out of a history or pattern of sharing confidences,
in accordance with Rule 10b5-2(b)(2). How do we know whether such an expectation exists? Aside from informal,
[*883] anecdotal evidence, n223 written internal procedures suggest that legislators observe a norm of confidentiality at
least with respect to certain sensitive information.
For example, for Congress, the Senate's Standing Rules strongly suggest a pattern of sharing confidences and an
internally enforceable norm of confidentiality. Rule 29.5 provides:
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Any Senator, officer or employee of the Senate who shall disclose the secret or confidential business or proceedings of
the Senate, including the business and proceedings of the committees, subcommittees[,] and offices of the Senate shall
be liable, if a Senator, to suffer expulsion from the body; and if an officer or employee, to dismissal from the service of
the Senate, and to punishment for contempt. n224

When the Senate was debating the 1992 Amendment to Rule 29.5, one senator referred to norms of both trust and
confidentiality among senators:

Candid discussions among Members depend upon a trust that is based, in part, on a willingness of all Members to
abide by the practices of the Senate... . The unilateral decision by a Member or employee to release confidential
committee information is inconsistent with the Senate's practice of making such decisions openly and collectively.
Arrogation of this responsibility by individuals can destroy mutual trust among Members and be harmful to this
institution. n225

The Standing Rules also provide that committee proceedings may be closed to the public if the matters to be discussed
fall under one of several listed categories where the need for preserving confidentiality is great. n226 One of those
enumerated categories covers trade secrets and other highly confidential financial information, n227 suggesting that
[*884] senators do have ready access to inside information and not just market information.
Turning to the House of Representatives, various House rules suggest that representatives observe a norm of
confidentiality with respect to certain communications. n228 Although official committee and subcommittee meetings "for
the transaction of business" are generally open to the public, n229 other communications may remain hidden from public
view. These other communications are governed by Jefferson's Manual of Parliamentary Procedure, n230 which provides
that "it is entirely within rule and usage for a committee to conduct its proceedings in secret, and the House itself may
not abrogate the secrecy of a committee's proceedings except by suspending the rule" governing secrecy. n231
Also, the House has an internal set of guidelines on what information is confidential. n232 According to these
guidelines, confidential information includes: information, the "inappropriate disclosure of" which would "adversely
reflect on the credibility of the House or office"; information relating to "specific legislative action taken or considered
by the office"; information "provided to the House in confidence or with restrictions on its use (i.e., trade secrets,
commercial or financial information) from an individual, private entity, or state or federal entity"; and "intra-House"
communications. n233
The above evidence suggests that federal legislators observe a norm of secrecy with respect to certain information,
including financial or commercial information, obtained on a confidential basis. State legislative procedures might also
provide evidence of confidentiality norms among state legislators. To the extent that a court agrees [*885] with the
SEC about the relevance of the factors listed in Rule 10b5-2(b)(1) and (2), those factors cut in favor of finding a duty of
trust and confidence between legislators and fellow legislators on the one hand, and between legislators and the
legislature on the other.
2. Analogy: Partner

Regardless of Rule 10b5-2(b), a court could recognize legislators as fiduciaries by analogizing to the relationships
among fellow partners to one another and to the partnership itself. Of course, there are different types of partnerships
with different attributes to be compared. For purposes of this analogy, I am concerned only with the oldest form of
partnership - the general partnership. Under the Revised Uniform Partnership Act (RUPA), which thirty-seven states
have adopted, n234 partners are both agents and principals of the partnership and thereby owe fiduciary duties of care and
loyalty to one another and to the partnership itself, whether or not they are acting as managers or agents. n235
Accordingly, in SEC v. Peters, n236 a federal district court found that a partner potentially violated federal insider
trading laws under the misappropriation theory by trading on confidential information entrusted to him by his partner.
n237
And in O'Hagan, the federal insider trading case in which the Supreme Court affirmed the misappropriation theory
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itself, the Court held that the defendant, a partner of the law firm of Dorsey & Whitney, breached his fiduciary duty
owed to the partnership. n238 The fiduciary nature of the partner-partner/partner-partnership relationship is so well
established that courts often refer to it as the touchstone of comparison in resolving novel cases. For example, in an
insider trading case, SEC v. Sargent, the First Circuit Court of Appeals declared that the two sole shareholders of a
closely held corporation were fiduciaries of each other because their mutual duties "mirrored those owed between
partners in a partnership." n239
[*886] What are the important partnership characteristics? Under RUPA, a partnership is an "association of two or
more persons to carry on as co-owners a business for profit ... whether or not the persons intend to form a partnership."
n240
In most jurisdictions, co-ownership requires a mutual undertaking of the parties to share in the profits and control of
the business. n241 In some jurisdictions, the parties must also agree to share losses. n242
Can we analogize the legislature to a partnership? Let us take Congress as the example, although the analysis is
similar for state legislatures. At first glance, we notice that Congress is not (at least not ostensibly) a profit-making
enterprise, so the requirement that partners agree to share in the profits or losses of the business seems not to be met.
But if we look beyond the technical expression of the rule, we see that the broader purpose of an agreement to share
profits or losses is for the parties to link their economic fates (and thus their future livelihoods) with the fate of the
enterprise as a whole and to one another. If we relax the profit-making assumption, we see that members of Congress,
too, have undertaken a common venture - that of legislating for our nation. Members have left their districts and
voluntarily tied their careers to those of other members and that of Congress as a whole. Legislation that is passed by
both chambers of Congress and not vetoed by the President is binding on individual members, Congress itself, and the
federal government. Also, the general reputation of Congress will impact the fate of the individual legislator come
reelection. In this sense, the fates of members are linked together in the common enterprise of lawmaking.
Further, members of Congress share in the control of the legislature just as partners share in the control of the
business. As a result, in both cases, a division of labor necessarily arises, as no single member or partner can perform all
the tasks required of their common undertaking. For partnerships, some partners will contribute the capital while others
contribute their labor. The default rule for partnerships, however, is that they all vote on partnership matters. n243 [*887]
Similarly, for Congress, members are assigned to and spend much of their time deliberating in various congressional
committees or subcommittees. n244 But all members participate in floor debates and vote on legislation.
None of the above is to say that members of Congress are as a factual matter cordial and collegial to one another.
Just as a partnership can be discordant and dysfunctional, Congress can be and has been discordant and dysfunctional.
But harmony in fact has never been a required element for imposing fiduciary duties. For example, courts have imposed
fiduciary duties on partners already in strained relations n245 and on couples on the brink of divorce. n246 Indeed, a major
purpose of fiduciary law is to protect against abuses arising in such antagonistic contexts. Also, despite popular
perceptions to the contrary, members of Congress are in a nontrivial sense engaged in a joint undertaking and must
come together in order to discuss and pass legislation. Moreover, as the evidence of norms summoned in Part II.C.1
above suggests, members actually do cooperate with one another in keeping certain information confidential.
Under the misappropriation theory, judges can classify legislators as fiduciaries to fellow legislators and to the
legislature itself. The SEC's Rules 10b5-2(b)(1) and (2) provide some support. More importantly, for purposes of this
Article, judges can draw an analogy to a paradigm example of a fiduciary relationship: fellow partners and the
partnership. n247
D. Fiduciary to Government

Let's switch beneficiaries one final time. Under the misappropriation theory, are legislators fiduciaries to the
government they serve?
1. Analogy: Director (to Corporation)

Recall that I've already analogized legislators to directors for purposes of the classical theory. In that discussion, I
argued that just as [*888] directors are fiduciaries to their shareholders, legislators can be seen as fiduciaries to the
citizenry. Here, under the misappropriation theory, I argue that legislators are fiduciaries to the government they serve,
from which they receive material, nonpublic information. The corporate analogy is that directors are fiduciaries to the
corporation. Accordingly, in SEC v. Talbot, n248 the Ninth Circuit Court of Appeals held that a director could violate
federal insider trading laws under the misappropriation theory by trading on confidential information relating to another
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company in breach of a fiduciary duty owed to the corporation, which was the "immediate source and rightful owner of
the information." n249
Because it is well established that directors have a fiduciary obligation to the corporation, the task here is to explain
why we should compare legislators with directors. Under the theory of director primacy, n250 directors reign supreme over
corporate actions. To be sure, on a daily basis, officers make the operational decisions. But, as a formal legal matter,
directors have the ultimate power to make decisions on behalf of the corporation. Legislators arguably stand in a similar
position vis-a-vis the government they serve. Especially relevant is the fact that legislatures tend to have broad
jurisdiction to legislate in the public interest. n251 Moreover, they typically enjoy the power of the purse and control the
funding of government projects. n252
The strongest objection comes from the fact that both federal and state governments separate powers among three
coequal branches of government - not only the legislative but also the judicial and executive. To take Congress as an
example, it is hard to say that Congress reigns supreme over the actions of the federal government when the judiciary
can strike down statutes as unconstitutional. Also, the executive branch in various domains enjoys de jure and de facto
power that rivals Congress's.
That said, it is difficult to suggest that judges and executive officials are more like directors than legislators are.
Judges, even the judges of the highest court, do not fit the mold. Their power is too sharply delimited in terms of
jurisdiction, while their decision-making process is too narrowly cabined by precedent and stare decisis. The President
and high-level executive branch officials also behave more [*889] like corporate officers than directors. On the other
hand, executive branch officials often do not and need not answer to Congress in the way that a corporate officer must
(at least formally) answer to the board. In the end, I can defend only a weaker position - that no other body (including
the other two coequal branches of government) stands in a clearly superior position to the legislature with respect to its
claim to "direct" the nation or the state. If judges are persuaded, then they can analogize a legislator's duty to the
government to a director's duty to the corporation. n253
2. Cases

In addition to this analogy, there are some relevant precedents. Myriad opinions find public officials to be fiduciaries of
their federal, state, or municipal government, or, in some cases, the government agency that employed them. For
example, at the federal level, courts have imposed fiduciary obligations on an army engineer, n254 an employee of the
Department of Agriculture, n255 a foreign service officer, n256 a civilian employee of the United States Engineers, n257 a real
estate appraiser for the Federal Housing Administration, n258 a president and vice president of Export-Import Bank of the
United States, n259 a CIA agent, n260 and an Interior Secretary. n261 At the state and local level, courts have imposed fiduciary
obligations on an attorney and director of the state lottery, n262 a state alcoholic beverage commissioner, n263 [*890] a
state land commissioner, n264 a fire department chief, n265 a city treasurer, n266 a city press secretary and director of public
relations, n267 and a city attorney. n268
Moreover, courts have not reserved the fiduciary status solely for appointed officials. Elected officials, such as a
mayor, n269 a governor, n270 and a city councilman, n271 have also been recognized as fiduciaries of their state or
municipality.
If we focus on Congress, the case of United States v. Podell n272 - which has never been cited in the scholarly
commentary on insider trading n273 - provides clear authority for the proposition that members of Congress are fiduciaries
of the United States. In this case, Congressman Podell pled guilty to federal bribery charges under 18 U.S.C. § 203, n274
after which the federal government filed a civil action to recover the improper payments he had received. n275
In granting the government's summary judgment motion, the federal district court carefully clarified that this civil
action was not grounded in Podell's criminal violation but rather was based on a breach of fiduciary duty "as evidenced
by [the criminal violation]" n276 and "not on any federal statutory authority." n277 The court declared that Podell was a
fiduciary of the US government and, interestingly, did so by invoking an analogy to the master-servant relationship:

A public official stands in a fiduciary relationship with the United States, through those by whom he is appointed or
elected. If he secretly advances interests adverse to those of the government which he serves, it is a breach of
confidence and he must account to his [*891] "master" for the benefits received as a result, irrespective of
consideration of fraud or damage. n278
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In sum, under the misappropriation theory, judges can classify legislators as fiduciaries of the government that they
serve. Support can be found in numerous judicial opinions recognizing public officials, including elected officials, as
fiduciaries. As for members of Congress, Podell provides direct precedent for classifying members as fiduciaries of the
US government. More importantly, judges can draw an analogy to the fiduciary relationship between a director and the
corporation that he serves.
Now that I've marshaled support for finding legislators to be fiduciaries of their legislature, of fellow legislators,
and of their government under the misappropriation theory, the task is to justify imposing the specific duty not to use
entrusted confidential information for personal gain, which is the relevant duty for the misappropriation theory and
tipping cases. Unlike the fiduciary duty to disclose, which is routinely applied to all fiduciaries, the scope of the duty
not to use entrusted information for personal gain may vary from one fiduciary context to another. While it is
uncontroversial to proscribe the exploitation of information that harms or injures the beneficiary, it is slightly more
controversial to proscribe the exploitation of information regardless of whether injury can be demonstrated. n279 The
question about harms is relevant because whether insider trading harms anyone has been the subject of intense scholarly
debate. n280 That debate will not be settled here, although I have discussed the harms of insider trading elsewhere. n281 For
purposes of this Article, suffice it to say that courts have regularly imposed duties on public fiduciaries without
requiring any showing of harm. n282 Moreover, [*892] courts have found liability based on the public fiduciary's use of
entrusted information for personal gain, without requiring that harm be demonstrated. n283
***

I have argued that the majority view - that judges could not recognize legislators as fiduciaries under federal insider
trading law - is wrong and continues to be wrong. Legislators can be deemed fiduciaries to citizens, the legislature (and
fellow legislators), and the government that they serve. By analyzing congressional ethics rules, citing relevant cases,
and analogizing to trustees, partners, and directors, courts could classify legislators as fiduciaries and impose the
requisite fiduciary duties under federal insider trading law. Courts could do so regardless of and in addition to the
STOCK Act. They could do so through ordinary legal reasoning.
III

Against Corruption

A. Deepening Analogies

Part II was mostly an extended exercise in analogical reasoning. The question presented was whether legislators could
be deemed "fiduciaries" under pre-STOCK Act federal insider trading law and how this might be done. The way that I
answered that question was to cite relevant cases - such as Driscoll, Fuchs, and Podell - and also to elaborate point-by-
point analogies to private trustees, corporate directors, and partners. This sort of analogical reasoning is what judges and
lawyers do every day. Its persuasiveness is often intuitive and aesthetic: is there some flash of recognition between
legislators and, say, corporate directors?
But the fact that analogies somehow "click" does not necessarily mean that they are well reasoned. For example,
Tamar Frankel has criticized fiduciary law's reliance on analogies as "uninstructive, because [*893] the courts do not
explain why some similarities ... are relevant and others not." n284 In recent legal academic discussion, various schools of
thought have surfaced on the nature of analogical reasoning. n285 I concur with Judge Richard Posner, who understands
analogies as ultimately rhetorical acts that can be justified only by looking to some underlying policy or purpose of the
law that is to be applied and extended. n286 Accordingly, in order to provide a deeper justification for the analogies
offered above, I need to unpack the underlying policy or purpose that animates fiduciary law.
In this Part, my basic claim is that it is entirely appropriate and consistent with the law of fiduciary obligation to
recognize legislators as fiduciaries and to impose on them the requisite duties. To support this claim, I defend a
plausible definition of (public) corruption as the "use of public office for private gain," and I show how legislator insider
trading fits that definition. I then demonstrate that one core purpose behind the common law of fiduciaries is to deter
corruption. Although prior commentary has casually observed some link between fiduciary principles and preventing
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corruption, n287 this is the first systematic demonstration of that connection. To make this showing, I explore one strand
of cases in fiduciary law targeting corruption in the public sector. These cases forbid the public fiduciaries in question
from using their public positions for private gain. In the end, I show an organic alignment between recognizing
legislator insider trading as a breach of fiduciary duty and one core purpose of the common law of fiduciaries. This
alignment provides a deeper justification for the analogies offered above. n288
In discussing the purposes and policies undergirding fiduciary law and in classifying legislator insider trading as a
form of corruption, [*894] readers may jump to the conclusion that I am making some global, untethered evaluation
that legislator insider trading is bad and thus should be banned. Although I believe this to be true and have argued the
point elsewhere, n289 that is not my task here. As noted in the Introduction, my ultimate task is to ask whether judges, if
confronted with a case of legislator insider trading, could find legislators to be fiduciaries within the meaning of federal
insider trading law using ordinary judicial reasoning. Above, I answered that question in the affirmative. Below, I make
an even stronger case by showing that the analogies invoked did not trade on trivial, coincidental, or arbitrary
similarities like the fact that zebras and barber poles both have stripes. Instead, judges can justify the analogies on the
ground that extending the category of fiduciary to encompass legislators promotes an underlying policy of fiduciary law,
which is to combat corruption. n290
B. Corruption

As Justice Potter Stewart said of obscenity, people seem to know public corruption when they see it, but it is hard to
define. n291 One source of difficulty lies in the fact that what counts as corruption is historically contingent. For example,
today it is uncontroversial to say that a legislator accepting a bribe is corrupt. But in the nineteenth century, members of
Congress openly accepted payments from companies lobbying to obstruct or advance particular legislation. For
instance, [*895] Daniel Webster was on retainer from the Bank of the United States to represent the bank's interests,
and he unabashedly sent written reminders to replenish his bank account. n292 Indeed, it was not until 1853 that
congressional bribery was formally banned. n293 And even after the ban, bribed members went undisciplined until public
outrage erupted over the Credit Mobilier bribery scandal in the 1870s, which impelled Congress to begin censuring
them. n294 Not until more than a century later, in 1980, did the House finally expel a member for bribery. n295
Also, what counts as corruption is culturally contingent. n296 Societies maintain different political systems with
differing notions of accountability, cultivate different institutions of power with varying degrees of maturity and
legitimacy, negotiate different boundaries between public and private domains, and draw on diverse relationships
between power and wealth. Accordingly, societies necessarily experience corruption in diverse ways, making it difficult
to define both precisely and universally. As John Kleinig and William C. Heffernan have concluded: "Both historically
and cross-culturally, instantiations of corruption have been contested, not only with respect to their identity but also, in
certain instances, with respect to their undesirability." n297
[*896] And even within a single society at a particular moment in time, there will be disagreement about what
counts as corruption. For example, elites differ from the general public in what they regard as corrupt. n298 Also, factors
such as race, education, and income affect the likelihood of perceiving the government to be corrupt. n299
Given such contingencies and controversies, my goal is not to proffer and defend some best definition of public
corruption, which would attempt to specify a strict set of necessary and sufficient conditions that capture all instances of
what people regard as corruption with no over-or under-inclusiveness. Indeed, the cognitive science of categorization
casts serious doubt on the success of any such project. n300 Instead, I offer something more modest: a definition that
draws on rough consensus in the political science and political economy literatures, incorporates less contested cultural
understandings, and performs useful analytic work in the narrow context of insider trading.
I start with the "classical" understanding of public corruption in political science. As Dennis Thompson explains:

In the tradition of political theory, corruption is a disease of the body politic. Like a virus invading the physical body,
hostile forces spread through the political body, enfeebling the spirit of the laws and undermining the principles of the
regime. The form the virus takes depends on the form of government it attacks. In regimes of a more popular cast, such
as republics and democracies, the virus shows itself as private interests. Its agents are greedy individuals, contentious
factions, and mass movements that seek to control collective authority for their own purposes. The essence of corruption
in this conception is the pollution of the public by the private. n301
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[*897] Thus, the classical understanding of public corruption is grounded in the notion that private interests somehow
taint the public good. More modern definitions of corruption build on this understanding but tend to drop the organic
metaphors of disease, degeneration, or decay. n302 They also tend to replace substance with procedure - the notion of
substantive public good is replaced by the democratic process, which purifies private interests into legitimate public
purposes. n303 Under most modern definitions, corruption involves an abuse of trust occasioned by an improper
commingling of one's public role and private gain in derogation of predetermined democratic processes - essentially, an
act that disrespects the sacred border between public and private. At minimum, there seems to be an academic
consensus that public corruption entails an "abuse of public roles or resources for private benefit." n304 In short, public
corruption is the use of public office for private gain. n305 Reflecting this [*898] simple core understanding, the very
first page of the House Ethics Manual commands that members, officers, and employees of the House "should not in
any way use their office for private gain." n306
Private gain. Since at least the time of Cicero, it has been "beyond debate that officials of the government are relied
upon to act for the public interest not their own enrichment." n307 But not all forms of personal enrichment are dubious.
After all, members are not required to make a vow of poverty before holding office. n308 Indeed, the Framers endorsed
the idea that members of Congress should be paid salaries on the view that being independently wealthy should not be a
qualification for elected office. n309 Therefore, the notion of private gain must recognize that some forms of personal gain
n310
are necessary or incidental, and thus appropriate, to performing one's political role.
As proposed by Andrew Stark, "private gain" signifies that the public officials are enjoying the gain in question
outside of their official roles. "The modifier private suggests a kind of gain - a trip on a corporate jet, attending an
association meeting at a resort, an all-expense paid trip to a charity event - that does not, or ought not, or need not,
redound to the official as part of his or her job." n311 Thus, [*899] private gain is a form of personal gain that is
supererogatory - neither part of the explicit compensation allocated to the public official nor culturally viewed as an
acceptable or unavoidable perquisite of the role. n312 In other words, only if the personal gain in question is neither
necessary nor incidental to one's official role can the gain qualify as private gain. n313 Conversely, "if the official's
responsibilities required the official to board the corporate aircraft, or be present at the association meeting, or attend the
charity event, then there would be no 'private' gain, just the exercise of office." n314
From Public Office. It is not enough, however, that the gain be private in order for the underlying act to constitute
an abuse of public office. The gain must also somehow flow from the official's public office. In other words, there must
be a proximate causal nexus between the public role and the private enrichment. At minimum, it must be shown that the
official would never have received the invitation to ride the corporate jet, attend the association meeting at the resort, or
participate in the all-expenses paid charity event but for her public role. If the causal nexus is absent, the official's
conduct is not improper because the opportunity did not flow from the public role. For example, if the official can
demonstrate that prior to becoming a public official she had routinely received the same invitation to attend the all-
expenses paid charity event, the causal link would arguably be severed and the alleged private gain would not be viewed
as improper. n315 In addition, the official must have somehow intended n316 to receive the gain in question in order for her
conduct to be deemed improper. n317 [*900] This is merely to acknowledge that inadvertent or accidental accruals of
alleged private gain can hardly be regarded as "corrupt." n318
Even if this "private gain from public office" definition seems plausible, some readers might object that it remains
formalistic without some deeper justification. After all, what is so wrong about using one's public office for private gain
such that it deserves the pejorative label of "corruption"? Why should a public official respect the border between public
and private? What is the harm that is captured by the phrase, "the pollution of the public by the private"? n319
In some cases, the harm to the government or to the general public will not be so clear. Take, for example, bribery
in the public procurement context - the classic case of private gain from public office. One common argument that
bribed officials assert is that there is no victim. n320 After all, it is certainly plausible that the bribed official would have
awarded the contract to the briber anyway, even without the bribe. n321 However, as has been extensively documented in
the corruption literature, private gain from public office generates certain important but sometimes indirect harms. A full
explication of the kinds of harms is beyond the scope of this Article, but I have discussed them elsewhere. n322 For
purposes of this Article, I will briefly summarize one important set of harms - the "temptation costs" incurred by the use
of public office for private gain.
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When public officials - whether elected or appointed - pursue private gain from public office, they are invariably
tempted to make decisions to advance their own financial interests without regard to the interests of the public. This
distortion of incentives risks a serious [*901] misallocation of government financial resources. n323 For example,
empirical work has found high levels of corruption to be associated with underinvestment in education and
overinvestment in public infrastructure. n324 This stems from the fact that education provides fewer opportunities for
bribes. As a result, public officials in responsible positions tend to channel their energies toward public infrastructure
projects, where the opportunities for self enrichment are greater. n325 Gradually and incrementally, the pursuit of private
gain from public office facilitates the pollution of the public by the private.
Having justified this basic definition of corruption, we can now apply it to legislator insider trading. First, any gain
arising out of trading on material, nonpublic information acquired through one's legislative position clearly constitutes
supererogatory financial gain - private gain. Profits earned from insider trading are not part of the explicit compensation
allocated to members. Nor is there anything in the job description of legislators or in the nature of their legislative tasks
that requires them to use their own personal funds to trade in any stocks, let alone based on information gleaned through
their work in the legislature. Further, overwhelming public opinion against legislator insider trading suggests that such
trading is not culturally viewed as one of the acceptable perquisites of legislators' jobs. n326 Moreover, no federal or state
legislator has publicly defended this practice. In fact, when members of Congress were directly confronted by the press
with allegations of insider trading, they reacted defensively and evasively. n327 Second, such trading opportunities flow
from their public office (i.e., they would not have such lucrative trading opportunities but for the information gained by
virtue of their office). Thus, legislator insider trading fits squarely within the definition of public corruption - the use of
public office for private gain.
[*902] Moreover, this definitional fit is neither accidental nor merely formal. The temptation costs that justify the
basic definition clearly apply in this domain. For example, suppose that the Chair of the House Appropriations
Committee believes that a particular military vehicle, manufactured by a small publicly traded corporation, is ultimately
unsuitable for the Defense Department's purposes. But suppose that he thinks it is a close call because there is no
obviously better alternative in the marketplace. Suppose further that his four children, who are each one year apart in
age, will soon be attending college. If he advocates strongly in favor of the military vehicle, there is a good chance that
the expenditure will be approved. And if he also purchases stock in advance, he stands to gain a hefty profit, which
could help pay for college tuition. Because of his personal financial situation, he will be sorely tempted to advocate in
favor of the military expenditure, notwithstanding his understanding of the merits.
The above hypothetical makes clear that legislator insider trading risks distorting the legislator's incentives and
misallocating government financial resources. And it is not just that legislators will be tempted to cast a bad vote.
Temptations, unchecked by law, are likely to pervade all forms of legislative activity, such as making phone calls,
setting agendas, giving speeches, subpoenaing witnesses, asking questions in hearings, and so on. Indeed,
entrepreneurial legislators might more proactively n328 try to hustle up trading opportunities by redirecting research
resources, reorganizing their offices, and rewriting the rules of legislative ethics. n329
In sum, public corruption can plausibly be defined as the use of public office for private gain. This definition makes
sense in light of the temptation costs incurred because of private gain from public office. And legislator insider trading
not only fits the definition but also generates these same costs. As a result, we can view and classify legislator insider
trading as a form of public corruption. Now that I've defended a plausible definition of (public) corruption and shown
that legislator insider trading falls within that definition, the task is to demonstrate that one core purpose of the common
law of fiduciaries is to deter corruption.
[*903]
C. Fiduciary Law's Norm Against Corruption

Fiduciary law encompasses myriad contexts. As I've pointed out, its ad hoc development and resulting fuzzy
boundaries have frustrated the legal scholars who study it. In response, scholars have earnestly searched for unifying
principles that coherently explain why certain relationships are subject to fiduciary obligations n330 - to partial success.
Like others, n331 I doubt that a single set of principles could successfully rationalize the various species of fiduciaries n332
without resorting to extreme imprecision and risking overinclusiveness. n333 As Deborah DeMott has explained: "The
evolution of fiduciary obligation ... owed much to the situation-specificity and flexibility that were Equity's
hallmarks... . As Equity developed to correct and supplement the common law, the interstitial nature of Equity's
doctrines and functions made these doctrines and functions resistant to precise definition." n334 Cognizant of these
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difficulties, my goal is not to propose any grand theory of fiduciary law. All that I seek to demonstrate is that one core
purpose of fiduciary law is anti-corruption.
Although numerous doctrines within fiduciary law appear to target corruption in the private sector, n335 one particular
doctrine best illustrates an anti-corruption norm for the public context (although certainly not limited to the public
sector). In several cases, only a few [*904] of which are discussed below, courts have proscribed the use of public
office for private gain. They have done so by applying the so-called rule against secret profits, n336 which forbids
fiduciaries from accepting bribes or secret commissions. n337
The rule against secret profits (or the rule against bribes and secret commissions) emanates from the "exclusive
benefit principle," n338 which generally requires the fiduciary "not to use her discretionary power to arrogate to herself
personal benefits from her position - even if such benefits do not directly harm the beneficiary." n339 To assure this
fidelity, the law provides that it is appropriate to structure the fiduciary's compensation to promote the proper alignment
of the fiduciary's incentives with the beneficiary's interest. n340 Since a fiduciary's overt compensation represents the
amount thought to be sufficient to induce the desired performance, there would be "no need to permit an indeterminate
amount of additional, covert compensation." n341 And not only are covert rewards viewed as unnecessary, they are also
risky to the beneficiary's interests. Therefore, it is important "to deter those fiduciaries from even approaching the
borders of self-aggrandizing behavior." n342
The following three cases nicely illustrate the anti-corruption norm for the public context. First, consider a
paradigmatic bribe in which there is "an explicit exchange of a specific benefit for a specific official action (or
inaction)." n343 Attorney-General v. Goddard, for instance, [*905] involved the case of an English police sergeant who
was convicted of accepting bribes to ignore crimes that he was responsible for monitoring. n344 In the civil case, the
Crown sued to recover the payments, and the sergeant demurred. n345
According to the court, the question presented was whether the rule against secret profits in agency law applied to
this case, even though the sergeant was not entrusted with a pecuniary interest - i.e., the sergeant was not employed in a
commercial or financial capacity - and there was no pecuniary harm to the Crown. n346 The court concluded that the rule
applied "because it is contrary to equity that the agent or servant should retain money so received without the
knowledge of his master." n347 After all, "this officer was employed at this time as an agent to make inquiries and got this
money in the course of those inquiries." n348 In other words, the officer received the bribe (private gain) by reason of his
position (public office). According to the court, it did not matter whether there was "any injury in fact" or, more
specifically, whether the principal's "pecuniary interest is damaged in fact or not." n349
In overruling the demurrer, the court emphasized that the sergeant's position was a fiduciary one. Specifically, the
court noted that there was a fiduciary relationship "not because he received into his hands any property of his employers
or did not, but because he was under an obligation to use the information which he got for the purpose of his employer,
certainly not to use it for his own profit." n350 In other words, there was an expectation that the sergeant would use his
public office for the exclusive benefit of the Crown and not for private gain.
Goddard involved a case of payment (private gain) in exchange for an official action or, more accurately, official
police inaction (from public office). But courts have extended liability to payment in exchange not for any official
action but simply the use of one's official status. The frequently cited case of Reading v. Attorney-General n351 is
illustrative. In Reading, a smuggling ring paid a British army sergeant in the Royal Army Medical Corps (stationed in
Egypt) to escort contraband around the city of Cairo. By sitting - in full military uniform - on the front seat of a civilian
lorry loaded with the illicit cargo, the [*906] sergeant enabled the smugglers to pass Egyptian police lines and avoid
arrest. n352 The sergeant was subsequently apprehended, court-martialed, and imprisoned for two years. n353 After his
release from prison, he brazenly brought a petition to recover the money that the Crown seized from his apartment. n354
On appeal, the court held that the Crown was entitled to retain the sums confiscated. n355
In granting the Crown's requested remedy, the court pointed to a pattern of cases that had employed the rule against
secret profits to recover an agent's or servant's sums, regardless of whether the master had suffered any detriment in
fact. n356 This was important because "the Crown in this case ... has lost no profits [and] suffered no damage." n357
The court went on to apply the rule to the particular facts presented. Addressing the issue of whether the nexus to
the sergeant's position was sufficient to warrant the remedy, the court noted that it did not matter that the sergeant was
acting outside the scope of his employment and thus outside his official capacity when he earned the money. Rather,
what mattered was that the sergeant used his official position to earn it:
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He nevertheless was using his position as sergeant in His Majesty's Army and the uniform to which his rank entitled
him to obtain the money which he received. In my opinion any official position, whether marked by a uniform or not,
which enables the holder to earn money by its use gives his master a right to receive the money so earned even though it
was earned by a criminal act. n358

In sum, the plurality of the court premised its holding on the sergeant's official status, which enabled him to accept the
bribe. n359 Interestingly, the plurality stopped just short of expressly requiring a fiduciary relationship to justify the
remedy granted. However, it acknowledged that the relationship in question was a fiduciary one in "a wide and loose
sense" n360 and, on that basis, the Crown was alternatively entitled to the money. n361 The concurrence was less equivocal
on this issue. It expressed agreement with the lower court that the sergeant "owes to the Crown a duty as fully fiduciary
as the duty of a servant to his master or of an agent to his principal," n362 despite the [*907] fact that the sergeant was
technically neither an agent nor a servant under the law. n363
Recall that the first case I described, Goddard, was an example of money in exchange for an official's inaction. The
second case, Reading, was an example of money (private gain) in exchange for an unofficial action that nevertheless
exploited some official status (from public office), as signaled by the uniform. Finally, consider, United States v.
Drumm, n364 a case in which a breach of fiduciary duty was found when the fiduciary neither took official action nor
exploited his official status. In Drumm, a United States Department of Agriculture (USDA) poultry inspector
surreptitiously moonlighted by doing part-time consulting for a private poultry processing plant in violation of USDA
policy. n365 The federal government sued for breach of fiduciary duty. The district court directed a verdict in favor of the
defendant, but the appellate court vacated the district court's judgment and remanded the case. n366
In explaining its holding, the appellate court complained that "the defendant had secretly placed himself in a
position of conflicting interests and loyalties. This he had no right to do." n367 The court then went on to highlight the
potential harms that might arise from this conflict of interest: by secretly accepting this second employment "involving
duties adverse to those he owed the government," the defendant "compromised to a great extent his position as an
impartial poultry inspector and his usefulness to the government." n368
Although the court claimed that the defendant's outside private employment carried duties adverse to those owed to
the government, there was no evidence of adverseness. Indeed, the reported facts strongly suggest that the private
company was genuinely interested in improving the quality of its poultry and hired the USDA employee to further that
purpose. n369 Nothing in the factual record suggested that the defendant was discouraged from discharging his main
responsibility as a government poultry inspector - to ensure that federal standards of sanitation and wholesomeness were
met by all companies who voluntarily enrolled in the USDA's inspection program. n370 The defendant had simply earned
some secret money "on the side."
[*908] Nevertheless, according to the court, "the fact that there is no evidence that defendant passed bad poultry
or that the reputation of the government's inspection program was damaged by defendant's conduct would not bar
recovery." n371 After all, the court went on, the "agent has the power to conceal his fraud and hide the injury done his
principal." n372 Accordingly, it would be unwise to require a showing of actual harm where an agent acquired a "secret
benefit ... out of his agency" n373 (that is, a private gain from his public office). The court then noted the crucial
importance of holding public officials to account:

The larger interests of public justice will not tolerate, under any circumstances, that a public official shall retain any
profit or advantage which he may realize through the acquirement of an interest in conflict with his fidelity as an agent.
If he takes any gift, gratuity or benefit in violation of his duty, or acquires any interest adverse to his principal, without a
full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has
received. n374

As the above three cases demonstrate - along a single, consistent doctrinal strand - fiduciary law prohibits public
fiduciaries from taking secret profits. It does so prophylactically, regardless of whether any actual harm to the
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beneficiary can be shown, so long as there is a nexus to the fiduciary's position. The underlying policy is anti-
corruption, preventing private gain from public office.
If we join this insight (that fiduciary law contains an anti-corruption norm) with the prior analysis (concluding that
legislator insider trading counts as corruption), we see the appropriateness of interpreting fiduciary law in a way that
reaches legislators, without regard to whether actual harm to the relevant beneficiaries can be shown. This appeal to
anti-corruption deepens the justification for analogizing legislators to private trustees, directors, and partners. Moreover,
this analysis helps us see that Fuchs and Podell, two cases that have recognized legislators - state and federal - as
fiduciaries, were also targeting corruption. In employing traditional analogical reasoning to find legislators to be
fiduciaries for purposes of federal insider trading law, judges can rest assured that they are not stretching fiduciary law
unrecognizably or arbitrarily to pursue some objective that is alien to the doctrine.
[*909]
IV

Objections

I have argued that courts could find that legislators owe fiduciary duties to certain beneficiaries for purposes of federal
insider trading law. If courts impose such duties, then legislators who trade on material, nonpublic information could be
held liable under classical and misappropriation theories. Now I will answer some objections to my argument. n375
A. Judicial Activism

Some readers may worry that this common-law-like extension of who counts as a "fiduciary" amounts to unwarranted
judicial activism. For example, it's one thing to say that corporate insiders are fiduciaries of their own shareholders who
happen to be on the other side of their trades. It's quite another thing to say (as the objection goes) that state legislators
are fiduciaries of citizen-investors on the other side of their trades. The latter seems to be a far more radical extension of
fiduciary law than the former.
This concern, although understandable, loses much force when one takes a historical view of insider trading law,
examines its evolution, and appreciates how equally radical prior judicial extensions have been. Put another way,
including legislators under a "fiduciary" label is no more activist than various other extensions that courts made long
ago and now view as uncontroversial, black-letter insider trading law.
Consider, for example, the Supreme Court's original affirmation of the classical theory of insider trading in
Chiarella in 1980. At the time, the common law tort of misrepresentation - the basis for Justice Powell's opinion in
Chiarella - provided meager support for the proposition that a corporate insider owes a fiduciary duty to the [*910]
counterparty in an open-market transaction. n376 Prior to Chiarella, the weight of authority found no such duty to
investors trading in the impersonal securities markets. n377 Indeed, the majority rule at the time found no liability for
insider trading executed over an anonymous exchange. n378 At the time, courts opining on this issue distinguished
between face-to-face transactions where, they thought, investors were justified in relying on an insider's duty to disclose
n379
and open-market transactions where, they thought, no such justification existed because it was impossible to know
whether an insider was on the other side of the trade. On an anonymous exchange like the New York Stock Exchange,
there is no bargaining, and the decision to buy and the decision to sell are completely independent. As a result, in such a
transaction, it is impossible to show any reliance or injury stemming from the insider's nondisclosure. n380
Moreover, if we go further back in time, say, to 1951, we see that the majority rule at the time did not even impose
fiduciary obligations in many face-to-face transactions. As Richard Painter and his colleagues have pointed out, the so-
called "majority" rule at the time held that "officers and directors [were] subject to a fiduciary duty to the corporation
and its shareholders only in dealings with or on behalf of the corporation." n381 Hence, in most jurisdictions, officers and
directors could "trade freely in the stock of their own corporation in [*911] an individual capacity without any
affirmative disclosure obligation, so long as they did not engage in active misrepresentations or half-truths." n382
Therefore, as long as they traded stock in their own account and not in their representative capacities, officers and
directors did not owe fiduciary duties of disclosure to the shareholders of their corporation. n383
Even if we accept as uncontroversial the proposition that corporate insiders owe fiduciary duties to individual
shareholders when trading on an exchange, there was almost no common law support for the proposition that a
corporate insider owed a special duty to purchasers and not just sellers of the company's shares. n384 Unless purchasing
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98 Cornell L. Rev. 845, *

investors already own company shares, they are not current but prospective shareholders of the company. Therefore, it
is the consummation of the particular transaction with the insider that brings the investor into a fiduciary relation with
the insider. Accordingly, before that transaction is completed, purchasers are mere strangers to the corporate insider.
The Supreme Court's only response to the problem presented by the common law was to quote Judge Learned
Hand:

The director or officer assumed a fiduciary relation to the buyer by the very sale; for it would be a sorry distinction to
allow him to use the advantage of his position to induce the buyer into the position of a beneficiary although he was
forbidden to do so once the buyer had become one. n385

Judge Hand's statement, although characteristically eloquent, is not an argument. After all, the "sorry distinction" is
grounded in corporate law, which has historically treated shareholders and nonshareholders differently. Moreover, this
"sorry distinction" was the prevailing law of the day. n386
There are more examples of judicial extensions that we currently view to be normal, indeed banal, but that at one
time may have been controversial. For example, for centuries, courts did not regard ordinary employees as fiduciaries
because they exercised very little discretionary authority and did not ordinarily occupy positions of trust and [*912]
confidence toward their employer. n387 This changed somewhat in the twentieth century when a number of cases began
extending the fiduciary status to mere employees, n388 although even today not all states hold that employees are
presumptively fiduciaries. n389 However, it is now clear that courts deem administrative employees to be fiduciaries for
purposes of federal insider trading law. n390 Indeed, courts have held a secretary, n391 a copyholder for a financial printer,
n392
and an aide in the audio-visual department n393 to be fiduciaries under insider trading law.
Of course, one could flip this evidence around to lament that we are on a slippery slope towards ever-expanding
insider trading liability and that we must draw the proverbial line in the sand here and now, with legislators. But such a
plea presumes that the expansions in the past and the expansion at issue here have been bad ones. Until that substantive
case has been made, suffice it to say that, for purposes of this objection, legislator insider trading is normatively
problematic for [*913] the same reasons that public corruption is problematic, as I have argued more extensively
elsewhere. n394 As for general anxiety about judicial activism, I explained in Part III.C that we can justify extending the
category of "fiduciary" to include legislators by reference to a policy that is central to fiduciary law. n395
In sum, the extension that I am calling for is no more radical than prior extensions made under Rule 10b-5, which
the Supreme Court once referred to as a "judicial oak which has grown from little more than a legislative acorn." n396 It is
certainly no more radical than the judicially implied private cause of action under Rule 10b-5 or the judicial creation of
the insider trading causes of actions under the classical and misappropriation theories. I am not asking for the creation
of a brand new cause of action against legislators. I am merely advocating that, should a court find itself in the position
to so hold, legislators could be recognized as fiduciaries under the already existing insider trading cause of action.
B. Federalism

Nevertheless, is there something especially problematic - perhaps constitutionally - with applying federal insider
trading law to state legislators? One might object that applying the federal securities laws to target the public corruption
of state legislators (even if it is in the form of legislator insider trading) represents an unconstitutional exercise of
federal power - an invalid federal "incursion on traditional state power" n397 (i.e., the power to police the conduct of its
own officials). But, as a doctrinal matter, this objection is not tenable given the fact that since the 1980s, the federal
government has successfully prosecuted thousands of state and local officials for acts of corruption. n398 Further, many
such prosecutions were based on federal statutes that have not only survived constitutional scrutiny n399 but also were
jurisdictionally rooted in the Commerce Clause n400 - the same constitutional [*914] grounding for the federal securities
laws, including the insider trading prohibition.
And there should be little doubt that the federal insider trading prohibition rests on constitutionally secure footing.
First, unlike the few federal statutes that have been invalidated on federalism grounds, n401 Section 10(b) and Rule 10b-5
(as does the whole of federal securities laws) n402 regulate what is clearly economic activity involving "instrumentalities
of interstate commerce" n403 and thus substantially relates to interstate commerce. n404 Hence, the relevant statute
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98 Cornell L. Rev. 845, *

indisputably falls within the federal commerce power. Second, Section 10(b) and Rule 10b-5 both contain express
jurisdictional elements that require the trier of fact to find a nexus with interstate commerce. n405 This ensures, through a
case-by-case inquiry, that the activity in question is connected to interstate commerce. n406 Third, the insider trading
prohibition does not commandeer state resources, which would be intrusive to state power; "it neither requires the states
to do anything nor imposes any financial burden on them." n407 Fourth, as my arguments have suggested, the federal ban
on insider trading is nondiscriminatory and generally applicable; the same legislation applies equally to public officials
and private parties. n408 Therefore, the use of federal securities laws to target legislator insider [*915] trading at the
subnational level should survive federalism-based challenges.
C. Speech or Debate Clause

The final major objection, which applies only to members of Congress and is relevant notwithstanding the STOCK Act,
concerns the Speech or Debate Clause, which reads in part: "for any Speech or Debate in either House, [members of
Congress] shall not be questioned in any other Place." n409 This Clause immunizes members of Congress from civil or
criminal liability for "conduct necessary to perform their duties within the sphere of legitimate legislative activity." n410
Such activity includes, for example, speech or debate in either House, voting, drafting committee reports, and conduct at
legislative committee hearings. n411 This Clause was designed to foster legislative independence and to avoid coercion or
intimidation from the executive or judicial branches of government. n412 In addition to securing the independence of the
legislature, the Clause "serves the additional function of reinforcing the separation of powers so deliberately established
by the Founders." n413
The scope of the liability immunity is, however, not all encompassing. And the Speech or Debate Clause was not
intended "simply for the personal or private benefit of Members of Congress, but to protect the integrity of the
legislative process." n414 As such, the immunity only "protects Members against prosecutions that directly impinge upon
or threaten the legislative process." n415 Thus, the actions that are protected "must be an integral part of the deliberative
and communicative processes by which Members participate in committee and House proceedings with respect to the
consideration and passage [*916] or rejection of proposed legislation or with respect to other matters which the
Constitution places within the jurisdiction of either House." n416
To be clear, the Speech or Debate Clause does not grant blanket immunity to members of Congress and does not
convert them into "super-citizens" above the law. n417 As the Supreme Court explained:

Article I, § 6, cl. 1, as we have emphasized, does not purport to confer a general exemption upon Members of Congress
from liability or process in criminal cases. Quite the contrary is true. While the Speech or Debate Clause recognizes
speech, voting, and other legislative acts as exempt from liability that might otherwise attach, it does not privilege either
Senator or aide to violate an otherwise valid criminal law in preparing for or implementing legislative acts. n418

Accordingly, notwithstanding the Clause, members of Congress have been prosecuted for fraud, n419 bribery, n420
extortion, n421 violation of honorarium laws, n422 and embezzlement. n423
There is no reason to treat the trading of securities (in violation of federal law) any differently. Such trades are not
integral to the legislative process and thus do not constitute any part of "legitimate legislative activity" that warrants
protection under the Speech or Debate Clause. In most cases, legislator insider trading will not involve the making of
any speech in Congress, the casting of any vote, or the writing of any report - core legislative actions that the
Constitution shields from prosecutorial scrutiny. Instead, insider trading will involve a market trade made privately,
intentionally without fanfare, and on the basis of material, nonpublic information. The fact that such [*917]
information is obtained through some connection to Congress does not mean that trading on such information suddenly
becomes a legitimate or official act of Congress. n424
United States v. Brewster n425 provides a useful precedent. n426 Brewster, a former Senator, was prosecuted for
violating various federal anti-bribery laws. The Supreme Court wrote:
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98 Cornell L. Rev. 845, *

Taking a bribe is, obviously, no part of the legislative process or function; it is not a legislative act. It is not, by any
conceivable interpretation, an act performed as a part of or even incidental to the role of a legislator. It is not an act
resulting from the nature, and in the execution, of the office. Nor is it a thing said or done by him, as a representative, in
the exercise of the functions of that office ... . n427

Just as a bribe is not a legislative act, neither is insider trading. The Court also wisely observed that if the goal of the
Speech or Debate Clause is legislative independence, then allowing bribes would threaten independence far more than
permitting criminal prosecutions. n428
In addition to providing liability immunity for legislative acts, however, the Speech or Debate Clause provides a
testimonial and an evidentiary privilege. n429 So, even if liability immunity is not available to a member, a member could
decline to testify n430 based on the privilege, and evidence regarding legislative acts or their underlying motivation
[*918] could be excluded from grand and petit juries or at trial. n431 This could impede prosecutorial efforts because
proof of a breach of fiduciary duty would ordinarily require some showing that the member somehow obtained the
nonpublic information in question by reason of the member's connection to Congress. That, in turn, could require
tracing the provenance of the information to the member's performance of a legislative act, n432 e.g., the member's
attendance at a subcommittee briefing in which the information in question was conveyed. Thus, a court could exclude
evidence establishing the member's presence at a critical briefing (e.g., a transcript of the briefing) on the grounds that
such evidence refers to a legislative act that is protected by the Speech or Debate Clause. n433 Indeed, in United States v.
Swindall, the Eleventh Circuit Court of Appeals dismissed certain indictments against a congressman where the
evidence solicited by the prosecution attempted to establish the congressman's membership in certain congressional
committees. n434
That said, there will be many occasions in which the relevant information will not have been obtained in the course
of a member's performance of a legislative act. For example, the member may acquire the information while the
member was engaged in so-called political activities, which do not fall within the core conduct protected by the Speech
or Debate Clause. These activities include a "wide range of legitimate 'errands' performed for constituents, the making
of appointments with Government agencies, assistance in securing Government [*919] contracts, preparing
[newsletters] to constituents, news releases, and speeches delivered outside the Congress." n435
To take a concrete example, imagine that a member meets with a Food and Drug Administration (FDA) official on
behalf of a constituent to discuss the agency's dealings with the constituent. During the meeting, the FDA official tells
the member in confidence that the FDA intends to approve a potential blockbuster drug, manufactured by a particular
publicly held pharmaceutical company. If the member trades on such information, the Speech or Debate Clause should
pose no obstacle for the prosecution's case. Of course, the resolution of any particular case will turn on the specific
facts. Suffice it to say that there will be many cases in which the member obtained the information via a sufficiently
close nexus to the member's official position to justify imposing the insider trading prohibition.
Finally, it should be noted that the Speech or Debate Clause does not immunize members of Congress from
ordinary criminal process, including properly issued search warrants, even of congressional offices. n436 In sum, the
Speech or Debate Clause creates no substantive liability immunity because insider trading is not a legitimate legislative
activity. It may, however, create some evidentiary difficulties, depending on the type of evidence sought. n437
Conclusion

Legislators, federal and state, are not statutorily exempted from federal insider trading law. Instead, the reason why
federal insider trading law is thought not to apply to them is because legislators are thought not to be fiduciaries to
anyone. But as I have argued, that majority view is mistaken. Judges could have and still can find legislators to be
fiduciaries to the people, the legislature (and fellow legislators), and the government that they serve. In support, I have
provided relevant cases and also plausible analogies to the private trustee, the director, and the partner. Even more, I
have explained that those analogies are justified because they further an underlying policy of fiduciary law: stopping
corruption. Finally, I have demonstrated that there are no overwhelming objections, although prosecutors may [*920]
face evidentiary obstacles in making their case, as posed by the Speech or Debate Clause.
It is tempting to think that all of this is academic given the passage of the STOCK Act. But that Act addresses the
majority view only for members of Congress. The conventional wisdom that legislators are not fiduciaries remains
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98 Cornell L. Rev. 845, *

intact for the more than seven thousand state legislators in service. Worse, the Act's passage may solidify and canonize
this mistaken understanding of fiduciary law and thereby of federal insider trading law, with unintended consequences.
Thus, it still matters that judges get federal insider trading law right.

Legal Topics:

For related research and practice materials, see the following legal topics:
GovernmentsFiduciary ResponsibilitiesGovernmentsLocal GovernmentsEmployees & OfficialsLabor & Employment
LawEmployment RelationshipsFiduciary Responsibilities

FOOTNOTES:

n1. 60 Minutes: Congress: Trading Stock on Inside Information? (CBS television broadcast Nov. 13, 2011), available at
http://www.cbsnews.com/video/watch/?id=7388130n.

n2. Bachus became Committee Chairman following the Republican congressional victories of 2010. Peter Schweizer, Throw Them All Out
24 (2011).

n3. Henry M. Paulson, Jr., On the Brink 259 (2010) (internal quotation marks omitted).

n4. Id.

n5. Schweizer, supra note 2, at 28.

n6. Id.

n7. Congress: Trading Stock on Inside Information?, supra note 1.

n8. Mary Orndorff, U.S. Rep. Spencer Bachus Cleared in Ethics Investigation, AL.com (Apr. 30, 2012, 6:42 PM),
http://blog.al.com/sweethome/2012/04/us rep spencer bachus cleared.html. Although Bachus defended his trade by noting that information
about the dire state of the economy was generally known to the public, in my view, that is surely not the relevant market-moving information
in question. The relevant market-moving information was the fact that both the Treasury Secretary and Chair of the Federal Reserve Board
convened a secret emergency meeting proposing unprecedented governmental intervention to avert economic disaster.

n9. See Stephen M. Bainbridge, Insider Trading Inside the Beltway, 36 J. Corp. L. 281, 295-96 (2011)[hereinafter Bainbridge, Inside the
Beltway] (describing the "predominant view"); Andrew George, Note, Public (Self)-Service: Illegal Trading on Confidential Congressional
Information, 2 Harv. L. & Pol'y Rev. 161, 163 (2008) (describing the "conventional wisdom"); infra note 10.

n10. For examples of the majority view, see Richard W. Painter, Getting the Government America Deserves: How Ethics Reform Can Make
a Difference 163 (2009) ("Insider trading law ... may not be sufficiently rigorous to prevent abuses by government officials."); Bainbridge,
Inside the Beltway, supra note 9, at 285 ("The quirks of the relevant laws almost certainly would prevent members of Congress from being
successfully prosecuted."); Insider Trading and Congressional Accountability: Hearing Before the S. Comm. on Homeland Sec. & Gov't
Affairs, 112th Cong. 4 (2011) (statement of John C. Coffee, Jr., Professor of Law, Columbia Univ.) [hereinafter Coffee Testimony] (agreeing
with Professor Bainbridge); Matthew Barbabella et al., Insider Trading in Congress: The Need for Regulation, 9 J. Bus. & Sec. L. 199, 200
(2009) (noting that legislator insider trading that looks the same as corporate insider trading is nonetheless legal); Bud W. Jerke, Comment,
Page 120Page 120
98 Cornell L. Rev. 845, *

Cashing in on Capitol Hill: Insider Trading and the Use of Political Intelligence for Profit, 158 U. Pa. L. Rev. 1451, 1483 (2010) (concluding
that "current law does not support holding government insiders ... liable for insider trading without substantially manipulating current
doctrine"); Alan J. Ziobrowski et al., Abnormal Returns from the Common Stock Investments of the U.S. Senate, 39 J. Fin. & Quantitative
Analysis 661, 676 (2004) ("Current law does not prohibit Senators from trading stock on the basis of information acquired in the course of
performing their normal Senatorial functions.").
For examples of the minority view, see Insider Trading and Congressional Accountability: Hearing Before the S. Comm. on Homeland
Sec. & Gov't Affairs, 112th Cong. 4 (2011) (statement of Donald C. Langevoort, Professor of Law, Georgetown Univ. Law Ctr.) (arguing
that federal insider trading law does not exempt legislators or anyone else); Jonathan R. Macey & Maureen O'Hara, Essay, Regulation and
Scholarship: Constant Companions or Occasional Bedfellows?, 26 Yale J. on Reg. 89, 107 (2009) (arguing that a prohibition on legislator
insider trading is legally plausible and intuitively appealing); Donna M. Nagy, Insider Trading, Congressional Officials, and Duties of
Entrustment, 91 B.U. L. Rev. 1105, 1138 (2011) (arguing that the majority view is rooted in "twin misconceptions") [hereinafter Nagy,
Congressional Officials]; George, supra note 9, at 163 (arguing that congressional insider trading is illegal under misappropriation theory).
To be sure, there is earlier scholarship that concludes that government officials are covered by federal insider trading laws. However,
those articles did not focus on the distinction between elected and appointed officials, which distinction is critical to the majority view. See,
e.g., Herbert T. Krimmel, The Government Insider and Rule 10b-5: A New Application for an Expanding Doctrine, 47 S. Cal. L. Rev. 1491,
1492, 1503-04 (1974); Donald C. Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif. L. Rev. 1,
34-35 (1982) [hereinafter Langevoort, A Post-Chiarella Restatement].

n11. Bloomberg Surveillance: Arthur Levitt, Board Member, Bloomberg LP (Bloomberg Radio broadcast Oct. 13, 2010) (transcript
available through Analyst Wire, 2010 WLNR 20471195).

n12. Originally, Title VII exempted Congress from anti-discrimination and other workforce protection laws. See 42 U.S.C. § 2000e(b)
(2006) (excluding the "United States" from the definition of "employer"). Subsequent statutes have closed this loophole. See 42 U.S.C. §
2000e-16 ("Employment by Federal Government").
In addition, Section 3(c) of the Exchange Act, which grants immunity from the federal securities laws to certain government entities,
only applies to an employee or official when such employee or official is "acting in the course of his official duty." See Krimmel, supra note
10, at 1492. As such, legislator insider trading, which is clearly not an exercise of office, is not covered by the immunity. Id.

n13. As explained in Part I.A.2.a. below, the breach of a fiduciary or other duty arising out of a similar relation of trust and confidence, the
latter of which I refer to as a "fiduciary-like duty," will satisfy this element. Throughout this Article, when referring to "fiduciary duty," I also
include analogous duties imposed due to a relation of trust and confidence.

n14. There is almost no disagreement that employees of the three branches of federal government are fiduciaries and thus subject to federal
insider trading laws. See, e.g., Painter, supra note 10, at 166 (discussing the application of insider trading laws to Executive Branch
employees); Bainbridge, Inside the Beltway, supra note 9, at 297 ("Under current law, no serious doctrinal obstacle precludes applying
misappropriation theory to employees of Congress, the Executive Branch, and other governmental agencies.").

n15. See Coffee Testimony, supra note 10, at 4 ("Members of Congress do not clearly owe a fiduciary duty (or any similar duty requiring
them to be loyal and hold information in confidence) either to their trading partners in a securities (or commodities) transaction or to the
source of the material, nonpublic information."); Painter, supra note 10, at 175 ("Today, federal securities law prohibits securities trading on
information misappropriated from most other workplaces, including government workplaces, yet Congress has apparently managed to create
sufficient ambiguity around fiduciary obligations of members and their employees that the rules may not apply to them."); Bainbridge, Inside
the Beltway, supra note 9, at 295 (ultimately rejecting the suggestion that "the electorate" is the beneficiary of a fiduciary obligation by
members of Congress because "what is needed under insider trading law is either a duty to the person with whom one trades or to the source
of the information, not some generalized duty to members of the public in the abstract"); Barbabella et al., supra note 10, at 215, 217 ("In the
case of Congressional insider trading, ... it is not clear that congressmen or their aides owe any party such a duty in more than a vague
sense... . One imagines that this lack of a concrete duty, rather than the vague sense that congressional representatives ought to place public
interests first, might control if a congressional representative were sued for trading on material nonpublic legislative information under the
current legal regime."); Jerke, supra note 10, at 1483-88 (arguing that government insiders lack the requisite fiduciary duty under classical
theory and noting the lack of consensus about whether members of Congress are employees of the federal government for purposes of
misappropriation theory).
The same "non-fiduciary" argument could be made about any elected official - e.g., president, vice president, governors, elected city
officials, elected judges - as well as certain appointed officials - e.g., state and federal judges. This Article, however, focuses on federal and
state legislators, although it cites to precedent establishing the fiduciary status of other elected officials. See infra Part II.D.2. As a general
matter, presidents and vice presidents tend to voluntarily comply with the financial conflicts of interest statutes, which require divestment of
holdings in certain situations. See Painter, supra note 10, at 61-62. For an argument that judges are fiduciaries, see Ethan J. Leib, David L.
Page 121Page 121
98 Cornell L. Rev. 845, *

Ponet & Michael Serota, A Fiduciary Theory of Judging, 101 Calif. L. Rev. (forthcoming 2013) (manuscript at 15) [hereinafter Leib et. al,
Fiduciary Theory of Judging], available at http://ssrn.com/abstract=2029001.

n16. Coffee Testimony, supra note 10, at 5.

n17. See President Barack Obama's State of the Union Address, N.Y. Times, Jan. 24, 2012, at 9,
http://www.nytimes.com/2012/01/25/us/politics/state-of-the-union-2012-transcript.html ?ref=stateoftheunionmessageus ("Send me a bill that
bans insider trading by members of Congress; I will sign it tomorrow.").

n18. Representatives Brian Baird (Democrat, Washington) and Louise Slaughter (Democrat, New York) previously introduced versions of
the Stop Trading On Congressional Knowledge Act in the 109th, see H.R. 5015, 109th Cong. (2d Sess. 2006); 110th, see H.R. 2341, 110th
Cong. (1st Sess. 2007); and 111th Congresses, see H.R. 682, 111th Cong. (1st Sess. 2009).

n19. STOCK Act, Pub. L. No. 112-105, 126 Stat. 291 (2012) (to be codified in scattered sections of 5 U.S.C. app.). The STOCK Act passed
in the Senate on a 96-to-3 vote on Feb. 2, 2012. Scott Wong, STOCK Act Passes Senate by Vote of 96-3, POLITICO (Feb. 3, 2012, 3:31
PM), http://www.politico.com/news/stories/0212/72391.html. The House passed their version of the STOCK Act by a 417-to-2 vote on Feb.
9, 2012. Seung Min Kim, STOCK Act Passed by House by Vote of 417-2, POLITICO (Feb. 9, 2012, 3:39 PM),
http://www.politico.com/news/stories/0212/72670.html. On April 4, 2012, President Obama signed the STOCK Act into law. Matt Compton,
President Obama Signs the STOCK Act, The White House Blog (Apr. 4, 2012, 5:16 PM),
http://www.whitehouse.gov/blog/2012/04/04/president-obama-signs-stock-act.

n20. STOCK Act § 4(a).

n21. See id. § 4(g)(1); see also id. § 4(b)(1) (stating the purpose of the amendment); id. § 4(b)(2) (codifying a duty of "trust and
confidence" for members and employees of Congress by amending 15 U.S.C. § 78u-1). Corresponding provisions cover executive and
judicial branch officers and employees. For simplicity, I use the term "fiduciary duty" to include similar duties arising out of a relationship of
trust and confidence.

n22. See Number of State Legislators and Length of Terms (in Years), National Conference of State Legislatures,
http://www.ncsl.org/legislatures-elections/legislators-legislative-staff-data/number-of-legislators-and-length-of-terms.aspx (last visited Mar.
16, 2013).

n23. Not only did the STOCK Act fail to address state legislators, but the Act itself makes clear that it shall not "impair or limit the
construction of" the existing securities antifraud provisions. STOCK Act§§4(g)(3), 10.

n24. Joe Atkins, Insider Trading: It's Time to Close a Surprising Loophole, InverGroveHeightsPatch (Dec. 16, 2011, 12:30 PM),
http://invergroveheights.patch.com/blog posts/insider-trading-its-time-to-close-a-surprising-loophole.

n25. Cf. Marc Lifsher, Internet Sales Tax Bill Advances in California Legislature, Los Angeles Times (May 31, 2011, 4:41 PM),
http://latimesblogs.latimes.com/money co/2011/05/internet-sales-tax-bill-advances-in-california-legislature.html (reporting the advancement
of just such a bill).

n26. Cf. Atkins, supra note 24 (noting that Canterbury Park Holding Company "has seen its stock suddenly soar and swoon based on action
at the State Capitol").
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98 Cornell L. Rev. 845, *

n27. See Samantha Hunter, Honest Services Fraud and the Fiduciary Relationship Requirement: How the Ninth Circuit Got It Wrong in
United States v. Milovanovic, 2012 BYU L. Rev. 509, 514-15 (2012) ("The Third, Fourth, Fifth, Sixth, and Eleventh Circuits have all held
that honest services fraud requires the defendant to have breached a fiduciary duty to the victim, while the Second and Eighth Circuits have
rejected such a requirement. The Ninth Circuit [also rejects the requirement] ... ." (citations omitted)).

n28. Honest services fraud refers to "any scheme or artifice to defraud" by "depriving another of the intangible right of honest services"
through the use of the mails. 18 U.S.C. §§1341, 1346 (2006).

n29. For examples of these precedents, see United States v. Weyhrauch, 548 F.3d 1237, 1248 (9th Cir. 2008) (reversing the district court's
exclusion of evidence against a member of the Alaska House of Representatives and holding that the honest services mail fraud statute
"establishes a uniform standard for 'honest services' that governs every public official"), vacated 130 S. Ct. 2971 (2010); United States v.
Lopez-Lukis, 102 F.3d 1164, 1169 (11th Cir. 1997) (reversing the district court's exclusion of evidence against an elected member of the
Board of County Commissioners and noting that "elected officials generally owe a fiduciary duty to the electorate"); United States v. Isaacs,
493 F.2d 1124 (7th Cir. 1974) (per curiam) (upholding conviction of former Governor of Illinois); Shushan v. United States, 117 F.2d 110,
115 (5th Cir. 1941) (upholding mail fraud prosecution of a member of a Louisiana parish levee board for receiving kickbacks and noting that
"no trustee has more sacred duties than a public official").

n30. When I refer to the "majority view," I am referring to the opinion or implication that judges must take extraordinary measures (e.g.,
ignore or overrule existing judicial precedent, or use novel or unusual judicial methods) in order to find legislators actionable under pre-
STOCK Act federal insider trading law. Stated another way, the majority view that I am challenging is one that suggests that there are greater
obstacles to holding legislators liable under federal insider trading law than the mere lack of direct "on point" precedent - the fact that no
other court has yet found a legislator to be a fiduciary in an insider trading case. At the same time, I acknowledge that any attempt to ascribe
a "majority view" label to any cluster of commentators whose characterizations and conclusions are diverse will be vulnerable to a "straw-
man" criticism. No doubt some commentators, which I have categorized as falling under the "majority view," did not address the precise
issue as I have framed it and were instead asking and answering a slightly different question (e.g., whether members of Congress were
"clear" or "established" fiduciaries). Regardless of the how the issue has been framed by various commentators, my Article emphasizes two
important points that can't be ignored in the debate. First, the fiduciary category has never been a fixed one with precise boundaries. Second,
the Supreme Court has long referred to analogous duties imposed due to a relation of trust and confidence. This recognition of fiduciary-like
relationships signals flexibility in defining the reach of the insider trading prohibition.

n31. Also, I perform an analysis of SEC Rule 10b5-2(b). See infra Part II.C.1.

n32. See Gregory L. Murphy & Douglas L. Medin, The Role of Theories in Conceptual Coherence, 92 Psychol. Rev. 289, 292 (1985) ("The
point is that any two entities can be arbitrarily similar or dissimilar by changing the criterion of what counts as a relevant attribute. Unless
one can specify such criteria, then the claim that categorization is based on attribute matching is almost entirely vacuous ... .").

n33. Id.

n34. Part III.B duplicates Part II of Sung Hui Kim, What Governmental Insider Trading Teaches Us About Corporate Insider Trading, in
Research Handbook on Insider Trading (Stephen M. Bainbridge ed., forthcoming 2013) (manuscript at 1, 14-27) [hereinafter Kim,
Governmental Insider Trading] (on file with author).

n35. Due to the space constraints of this Article, the objections sounding in separation of powers or the First Amendment are explored in a
separate appendix, which is available online at the Social Science Research Network. See Sung Hui Kim, Appendix to The Last Temptation
of Congress: Legislator Insider Trading and the Fiduciary Norm Against Corruption (Nov. 5, 2012), available at
http://ssrn.com/abstract=2171336.
Page 123Page 123
98 Cornell L. Rev. 845, *

n36. See generally Kim, Governmental Insider Trading, supra note 34, at 61 (arguing that governmental insider trading - including such
trading by legislators - inflicts temptation, distraction, and legitimacy costs, thereby militating in favor of its banning).

n37. To clarify this point with an analogy, suppose that I am a chef who wants to publish a recipe to show how home cooks can make a
decadent Southern Chicken Fried Steak. It is entirely possible for me to write a clear, concise, and delicious recipe, regardless of my
personal views about whether or not people should eat steak prepared in this manner. Indeed, I can be perfectly agnostic about whether any
individual - for health or other reasons - should cook or eat steak without necessarily undermining the quality of the recipe. In fact, I can rule
out steak in my own diet and still write a useful recipe. In short, my personal normative views about whether anyone should consume steak
are not logically germane to the usefulness of my recipe. Further, I can answer objections to the recipe (e.g., Why did you include safflower
oil in the recipe when coconut oil has a better smoking point?) with reasons based on policies widely accepted by most chefs, regardless of
my own normative views. For readers curious about my normative views on steak, I can share that I am a "pescetarian," which is neither
here nor there.

n38. 15 U.S.C. § 78j(b) (2006).

n39. 17 C.F.R. § 240.10b-5 (2012).

n40. Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) makes it unlawful for any person purchasing or selling securities
"to use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance." 15 U.S.C.
§ 78j(b). Similarly, Rule 10b-5, which was promulgated by the SEC under its regulatory authority granted by Congress under the Exchange
Act, provides, inter alia, that no person may "employ any device, scheme, or artifice to defraud...or...engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17
C.F.R. § 240.10b-5.

n41. See, e.g., United States v. O'Hagan, 521 U.S. 642, 651-56 (1997) (discussing theories of insider trading liability under Section 10(b)
and the case law surrounding them).

n42. There are, of course, exceptions. The Supreme Court has not strictly adhered to the idea that the defendant must already be in a
fiduciary or fiduciary-like relationship in order to state a violation. See Langevoort, A Post-Chiarella Restatement, supra note 10, at 28
("Unlike the trading or tipping insider, the tippee bears no pre-existing fiduciary relationship to the person with whom he trades. The
Supreme Court's apparent endorsement of some tippee liability is an indication that it will not adhere strictly to the idea that only fiduciaries
are obligated to make disclosures when trading."); see also infra text accompanying notes 383-85 (describing corporate insiders' duty to
purchasers of the corporation's stock). Also, although the Supreme Court has yet to signify its agreement, recent case law has created a small
number of exceptions to the fiduciary duty requirement where the deception element of Rule 10b-5 is otherwise satisfied. See, e.g., SEC v.
Dorozhko, 574 F.3d 42, 43 (2d Cir. 2009) (holding that breach of fiduciary duty is not necessary in a Section 10(b) enforcement action for
computer hacking); Thomas Lee Hazen, Identifying the Duty Prohibiting Outsider Trading on Material Nonpublic Information, 61 Hastings
L.J. 881, 885-87 (2010) (discussing "outsider trading" cases where the fiduciary duty requirement has been relaxed); Donna M. Nagy,
Insider Trading and the Gradual Demise of Fiduciary Principles, 94 Iowa L. Rev. 1315, 1336-52 (2009) [hereinafter Nagy, Gradual Demise]
(discussing the "casting aside" of fiduciary duty principles); see also Donald C. Langevoort, Insider Trading: Regulation, Enforcement &
Prevention § 6:14, at 6-50 to -52 (2012) (summarizing exceptions in the case law).

n43. Under misappropriation theory, there is an additional element for establishing a violation - that the defendant failed to disclose to the
source the defendant's intention to trade on the nonpublic information. See O'Hagan, 521 U.S. at 655. To be sure, pretrading disclosure also
precludes liability under the classical theory, but the fact of nondisclosure under classical theory is redundant to the other elements. Under
classical theory, pretrading disclosure to counterparties automatically negates the "breach of fiduciary duty" and "nonpublic" elements of the
cause of action. Under misappropriation theory, pretrading disclosure to the source does not negate those other elements. Compare Richard
W. Painter, Kimberly D. Krawiec & Cynthia A. Williams, Don't Ask, Just Tell: Insider Trading After United States v. O'Hagan, 84 Va. L.
Rev. 153, 180 (1998) (arguing that disclosure of one's plan to trade on material, nonpublic information might be enough to negate liability
under classical theory but suggesting that disclosure must include the content of nonpublic information in order to do so), with Saikrishna
Prakash, Our Dysfunctional Insider Trading Regime, 99 Colum. L. Rev. 1491, 1491 (1999) (arguing that mere disclosure of one's plan to
trade on material, nonpublic information negates liability under the classical theory by negating the deception element).
Page 124Page 124
98 Cornell L. Rev. 845, *

n44. Legislative histories of the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of
1988 suggest that Congress had endorsed (if not ratified) the multiple bases of liability pursued by the SEC and approved by the courts. See
Donald C. Langevoort, Commentary, The Insider Trading Sanctions Act of 1984 and Its Effect on Existing Law, 37 Vand. L. Rev. 1273, 1274
(1984); Steve Thel, Statutory Findings and Insider Trading Regulation, 50 Vand. L. Rev. 1091, 1118-21 (1997).

n45. This Article does not cover two areas of regulation commonly associated with the goal of deterring insider trading: section 16(b) (the
"short swing" profits rule) and SEC Rule 14e-3 of the Exchange Act (relating to tender offers).

n46. See, e.g., SEC v. Adler, 137 F.3d 1325, 1340 (11th Cir. 1998) ("Scienter necessarily requires that the insider have possession of
material nonpublic information at the time the insider trades.").

n47. Langevoort, supra note 42, § 3:13, at 3-32.

n48. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976) (defining "scienter" as "a mental state embracing intent to deceive,
manipulate, or defraud").

n49. Langevoort, supra note 42, § 3:13, at 3-32. In 2000, in order to resolve confusion in the case law about motivation and state of mind,
the SEC adopted Rule 10b5-1, which clarified that trading on material, nonpublic information was unlawful where the defendant trades "on
the basis of" material, nonpublic information, defined as trading "when the person in question was aware of the material nonpublic
information when the person made the purchase or sale." Id. § 3:14, at 3-38 (quotations omitted). That said, some courts have not deferred
much to the Rule. Id. § 3:14, at 3-39.

n50. Id. § 5:5, at 5-25.

n51. Id. § 8:13, at 8-42 to -43.

n52. Id. § 8:13, at 8-43.

n53. See id. § 3:13, at 3-34 to -35, for a discussion of those jurisdictions which adhere to the "use" and not the "possession" standard.

n54. That said, there may be some evidentiary difficulties that arise from the Speech or Debate Clause. See infra Part IV.C.

n55. See TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976).

n56. Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988) (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc)).

n57. See Langevoort, supra note 42, at § 5:2, 5-3 to -4.


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98 Cornell L. Rev. 845, *

n58. Naturally, judges and juries will have a tough time concluding that an event was improbable at the time of trading if they know that the
event has in fact occurred. See Mitu Gulati, Jeffrey J. Rachlinski & Donald C. Langevoort, Fraud by Hindsight, 98 Nw. U. L. Rev. 773, 774
(2004) ("Even in the absence of any misconduct, a bad outcome alone might lead people to believe that corporate managers committed
securities fraud.").

n59. Cf. Langevoort, supra note 42, § 5:2, at 511 to -12 ("If a major market movement promptly follows the formal release to the public of
the information in question, the materiality test is presumptively satisfied.").

n60. Id. at § 5:4, at 5-19.

n61. Id.

n62. See Victor Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L. Rev. 322, 329
(1979) (discussing how "corporate" and "market" information both fall under the insider trading laws).

n63. Id. (defining "market information" as concerning outside "transactions in a corporation's securities that will have an impact on their
future price quite apart from expected changes in the corporation's earnings or assets"). See Roberta S. Karmel, Book Review, The
Relationship Between Mandatory Disclosure and Prohibitions Against Insider Trading: Why a Property Rights Theory of Inside Information
Is Untenable, 59 Brook. L. Rev. 149, 154 (1993), for the distinction between "inside" and "market" information.

n64. United States v. Chiarella, 588 F.2d 1358, 1365 n.8 (2d Cir. 1978), rev'd on other grounds, 445 U.S. 222 (1980); see SEC v. Seibald,
No. 95 Civ. 2081(LLS), 1997 WL 605114, at 4-6 (S.D.N.Y. Sept. 30, 1997) (denying defendants' motion for summary judgment in an insider
trading enforcement action concerning trades made based on an analyst's report).

n65. See Chiarella v. United States, 445 U.S. 222, 232 (1980) (reversing defendant's Section 10(b) conviction because no duty to disclose
existed and noting that defendant was not an "agent [of the target company in a proposed transaction], he was not a fiduciary, he was not a
person in whom the sellers had placed their trust and confidence").

n66. If, however, the tip relates to an anticipated tender offer and I purchase shares in the target company, there is potential liability under
Rule 14e-3.

n67. 445 U.S. at 235.

n68. By passing section 20A of the Exchange Act, Congress granted an express private right of action to those investors trading
contemporaneously with the insider trader. As a result, contemporaneous traders who bought or sold stock in the opposite position of the
defendant trader may sue the insider trader for damages. Insider Trading and Securities Fraud Enforcement Act of 1988, 15 U.S.C. § 78t-1
(2006). On Section 20A, see Langevoort, supra note 42, § 9.3, at 9-9.

n69. The fiduciary duty of disclosure under classical theory has long been articulated as a duty to "disclose or abstain" - either to disclose
the material nonpublic information to the investing public before trading or to abstain from trading while such nonpublic information
remains undisclosed. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968). But because most defendants do not have a right
to disclose confidential information, it is most often "the failure to abstain from trading, rather than the nondisclosure, which is the basis for
imposing liability." Stephen M. Bainbridge, Insider Trading Regulation: The Path Dependent Choice Between Property Rights and Securities
Fraud, 52 SMU L. Rev. 1589, 1616 (1999) [hereinafter Bainbridge, Path Dependent Choice].
Page 126Page 126
98 Cornell L. Rev. 845, *

n70. Chiarella, 445 U.S. at 234-35.

n71. Id. at 228 (emphasis added); see id. at 230 (noting that silence in connection with the sale of securities is only actionable as fraud if
there is already a duty to disclose).

n72. See, e.g., Vai v. Bank of Am. Nat'l Trust & Sav. Ass'n, 364 P.2d 247, 252 (Cal. 1961) ("The prerequisite of a confidential relationship is
the reposing of trust and confidence by one person in another who is cognizant of this fact.").

n73. See Eileen A. Scallen, Promises Broken vs. Promises Betrayed: Metaphor, Analogy, and the New Fiduciary Principle, 1993 U. Ill. L.
Rev. 897, 906-07 (1993) (discussing the distinction between "fiduciary" relationships and nonfiduciary but confidential ones).

n74. 947 F.2d 551 (2d Cir. 1991).

n75. Id. at 568.

n76. See Scallen, supra note 73, at 907 ("[A] key distinction between confidential and fiduciary relationships appears to center on whether a
party seeking redress must prove reliance on the other party.").

n77. See Chiarella v. United States, 445 U.S. 222, 230 (1980) ("Application of a duty to disclose prior to trading guarantees that corporate
insiders, who have an obligation to place the shareholder's welfare before their own, will not benefit personally through fraudulent use of
material, nonpublic information.").

n78. Id. at 227 (noting that the duty "has been traditionally imposed on corporate 'insiders,' particularly officers, directors, or controlling
stockholders" (quoting In re Cady, Roberts & Co., 40 S.E.C. 907, 911 (1961))).

n79. Therefore, if a legislator happens to be moonlighting as a corporate insider, then the duty would uncontroversially apply to him in his
capacity as a corporate insider. Because many state legislative positions are part time, one would expect to find at least a few such cases.
With respect to members of Congress, however, such situations would be rare because members of Congress are statutorily prohibited from
"serving for compensation as an officer or member of the board of any association, corporation, or other entity." 5 U.S.C. § 502 (2006);
Bainbridge, Inside the Beltway, supra note 9, at 290.

n80. See Chiarella, 445 U.S. at 228 (stating only that there is "a relationship of trust and confidence between the shareholders of a
corporation and those insiders who have obtained confidential information by reason of their position with that corporation").

n81. 406 U.S. 128 (1972) (holding that two bank managers violated Rule 10b-5 for buying and re-selling stock in their individual capacities
and based on the implicit undertaking to act in the best interest of the selling shareholders). Affiliated Ute Citizens is cited in Chiarella. See
Chiarella, 445 U.S. at 229-30.

n82. Chiarella, 445 U.S. at 240.


Page 127Page 127
98 Cornell L. Rev. 845, *

n83. See Dirks v. SEC, 463 U.S. 646, 655 n.14 (1983).

n84. Id.

n85. Id.

n86. Id. at 659.

n87. Id. at 659-60.

n88. The type of personal benefit that may satisfy the Dirks test includes pecuniary benefit, reputational benefit, and the benefit that accrues
to oneself when making a gift. See Langevoort, supra note 42, § 4:3, at 4-5 to -6.

n89. Dirks, 463 U.S. at 659-61.

n90. Id. at 659 (quoting Chiarella v. United States, 445 U.S. 222, 230 n.12 (1980)).

n91. Dirks, 463 U.S. at 654 (alterations in original) (quoting Chiarella, 445 U.S. at 222).

n92. 521 U.S. 642, 665 (1997).

n93. Id. at 652.

n94. See id. at 654-55 (referring to the Restatement (Second) of Agency§§390, 395 (1958), on an "agent's disclosure obligation regarding
use of confidential information").

n95. Id. at 652.

n96. Id. For the source to "entrust" a person with access to confidential information does not strictly require that the source place the
information in the fiduciary's hands or even authorize access to the confidential information. Langevoort, supra note 42, § 6:4, at 6-13 n.1.

n97. Courts have differed on whether all of the Dirks elements (relating to tipping and trading on the tip) apply in the misappropriation
context. Compare SEC v. Yun, 327 F.3d 1263, 1276 (11th Cir. 2003) (insisting that standards for tipper-tippee liability are the same under
misappropriation theory as under classical theory), with SEC v. Musella, 748 F. Supp. 1028, 1038 n.4 (1989) ("The misappropriation theory
of liability does not require a showing of a benefit to the tipper ... .").
Page 128Page 128
98 Cornell L. Rev. 845, *

n98. To be sure, the legislator is also proscribed from trading in the law firm's client's securities, but that issue is easily handled by the
classical theory (as extended by Dirks).

n99. See supra text accompanying notes 67-71.

n100. Bainbridge, Path Dependent Choice, supra note 69, at 1615 ("The duty at issue in tipping cases is not a duty to disclose, but rather a
duty to refrain from self-dealing in confidential information owed by the tipper to the source of the information.").

n101. See Nagy, Gradual Demise, supra note 42, at 1360-61 ("O'Hagan, however, made clear that it is the insider trader's undisclosed breach
of trust and loyalty - and not merely his breach of confidentiality - that constitutes the fraud under Rule 10b-5.").

n102. This duty has different articulations and can be found in the penumbrae of other explicit duties. See Restatement (Third) of
Agency§§8.01, 8.02 & cmts. c, d, 8.04, 8.05 (2006); Restatement (Third) of Trusts § 5 cmt. a, illus. g (2003); Restatement (Third) of the
Law Governing Lawyers § 60(2) & cmt. j (1998); Am. Law Institute, Principles of Corporate Governance: Analysis and Recommendations §
5.04 (1992); Restatement (Second) of Agency§§387, 388 & cmt. c, 393, 395 (1958); 1 Floyd R. Mechem, Law of Agency§§1189, 1191,
1209, 1224 (2d ed. 1914).

n103. See, e.g., Freeman v. Decio, 584 F.2d 186, 188-96 (7th Cir. 1978) (discussing the jurisdictions' differing holdings before ultimately
holding that there is no recovery unless the corporation can show injury from insider trading); Schein v. Chasen, 313 So. 2d 739, 741-46
(Fla. 1975) (same); Diamond v. Oreamuno, 248 N.E.2d 910, 912 (N.Y. 1969) (stating that a corporate fiduciary entrusted with valuable
information may not appropriate that information for the fiduciary's own use even when doing so causes no injury to the corporation);
Brophy v. Cities Serv. Co., 70 A.2d 5, 7-8 (Del. Ch. 1948) (noting that loss to the employer need not be alleged where the employee
breached fiduciary duty for trading on confidential information about employer corporation).

n104. See generally Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52
Wash. & Lee L. Rev. 1189, 1192 (1995); Theresa A. Gabaldon, State Answers to Federal Questions: The Common Law of Federal Securities
Regulation, 20 J. Corp. L. 155, 212-13 (1994).

n105. Stephen M. Bainbridge, Corporation Law and Economics 556 (2002).

n106. Cf. Iman Anabtawi, Secret Compensation, 82 N.C. L. Rev. 835, 863-64 (2004) (observing that the Supreme Court suggested a federal
fiduciary law source underlying the federal insider trading prohibition).

n107. See Bainbridge, supra note 105, at 556 (reviewing cases in which courts relied upon state law to resolve questions arising under
federal securities laws and concluding that "the question is not whether state law is relevant to the task of defining insider trading, but rather
the extent to which it should be incorporated into the federal prohibition").
For insider trading cases where federal courts expressly consulted state law on the fiduciary issue, see, for example, SEC v. Talbot, 530
F.3d 1085, 1095 (9th Cir. 2008) (looking to Delaware state law to support the proposition that a director owes a fiduciary duty to the
director's corporation); SEC v. Sargent, 229 F.3d 68, 76 (1st Cir. 2000) (looking to Massachusetts state law to support the proposition that
sole shareholders of a closely held corporation owe fiduciary duties to each other); United States v. Chestman, 947 F.2d 551, 571 (2d Cir.
1991) (holding that marriage does not create a per se fiduciary relationship in New York).

n108. See Scallen, supra note 73, at 902.

n109. Langevoort, A Post-Chiarella Restatement, supra note 10, at 53.


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98 Cornell L. Rev. 845, *

n110. See, e.g., Chiarella v. United States, 445 U.S. 222, 227-30 (1980) (summarizing precedents).

n111. Chestman, 947 F.2d at 568.

n112. Chiarella, 445 U.S. at 228.

n113. See supra text accompanying notes 84-85. Subsequent lower courts interpreting Dirks have clarified that the recipient must have
expressly or impliedly assented to such duties. See, e.g., SEC v. Talbot, 430 F. Supp. 2d 1029, 1050-51 (C.D. Cal. 2006) (noting that mere
receipt of nonpublic information is not enough to establish insider trading liability if the recipient is not in a fiduciary relationship), rev'd and
remanded, 530 F.3d 1085 (9th Cir. 2008); SEC v. Ingram, 694 F. Supp. 1437, 1440 n.3 (C.D. Cal. 1988) (interpreting Dirks as requiring that
the recipient "must have expressly or impliedly entered into a fiduciary relationship with the issuer"). But see SEC v. Lund, 570 F. Supp.
1397, 1403 (C.D. Cal. 1983) (suggesting - more liberally - that a fiduciary relationship vis-a-vis the issuer's shareholders is created when the
recipient of confidential information "knew or should have known that the information he received was confidential and that it had been
disclosed to him solely for legitimate corporate purposes").

n114. See United States v. O'Hagan, 521 U.S. 642, 650, 652 (1997).

n115. Nagy, Gradual Demise, supra note 42, at 1332.

n116. O'Hagan, 521 U.S. at 666.

n117. SEC. v. Yun, 327 F.3d 1263, 1272-73 (11th Cir. 2003).

n118. See, e.g., SEC v. Nothern, 598 F. Supp. 2d 167, 175 (D. Mass. 2009); SEC v. Lyon, 529 F. Supp. 2d, 444, 452 (S.D.N.Y. 2008); SEC
v. Kirch, 263 F. Supp. 2d 1144, 1147 (N.D. Ill. 2003).

n119. See, e.g., SEC v. Cuban, 634 F. Supp. 2d 713, 725 (N.D. Tex. 2009) (stating that "an express or implied promise merely to keep
information confidential" is not enough to create a relationship of trust and confidence; rather, the agreement should also "impose on the
party who receives the information the legal duty to refrain from trading on or otherwise using the information for personal gain"), vacated
and remanded, 620 F.3d 551 (5th Cir. 2010); United States v. Kim, 184 F. Supp. 2d 1006, 1013 (N.D. Cal. 2002).

n120. Kim, 184 F. Supp. 2d at 1011 (citing United States v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991)) (rejecting the finding of a
fiduciary-like relationship for relationships among equals); see United States v. Cassese, 273 F. Supp. 2d 481, 486 (S.D.N.Y. 2003).

n121. Chestman, 947 F.2d at 568 (quoting United States v. Margiotta, 688 F.2d 108, 125 (2d Cir. 1982)).

n122. See, e.g., SEC v. Falbo, 14 F. Supp. 2d 508, 523 (S.D.N.Y. 1998) (citing Chestman, 947 F. 2d at 569); United States v. Victor Teicher
& Co., L.P., 785 F. Supp. 1137, 1148 (S.D.N.Y. 1992) (citing Chestman, 947 F. 2d at 567).
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98 Cornell L. Rev. 845, *

n123. Falbo, 14 F. Supp. 2d at 513.

n124. SEC v. Kirch, 263 F. Supp. 2d 1144, 1147 (N.D. Ill. 2003).

n125. SEC v. Nothern, 598 F. Supp. 2d 167, 170 (D. Mass. 2009).

n126. Fox v. Encounters Int'l, No. 05-1139, No. 05-1404, 2006 WL 952317, at 5-6 (4th Cir. Apr. 13, 2006) (upholding a jury finding that a
marriage brokerage agency who recommended a physically abusive husband was a fiduciary of the woman).

n127. Roberts v. Sears, Roebuck & Co., 573 F.3d 976, 983-84 (7th Cir. 1978) (recognizing sufficient evidence of a confidential relationship
between the commercial developer/employer and the inventor/employee); Stevens v. Marco, 305 P.2d 669, 678-79 (Cal Dist. Ct. App. 1956)
(recognizing a fiduciary relationship between the inventor and commercial developer of the invention). But see City of Hope Nat. Med. Ctr.
v. Genentech, Inc., 181 P.3d 142, 150 (Cal. 2008) (finding no fiduciary relationship between a medical research center and a biotechnology
company despite the parties having entered a contract); Wolf v. Superior Court, 130 Cal. Rptr. 2d 860, 865 (Cal. Ct. App. 2003) (finding no
fiduciary relationship between a movie studio and a novelist despite the parties having entered a contract).

n128. MacDonald v. Clinger, 84 A.D. 2d 482, 482 (N.Y. App. Div. 1982) (holding psychiatrists to be fiduciaries in regards to confidential
information).

n129. Leonard S. Sealy, Fiduciary Relationships, 1962 Cambridge L.J. 69, 77-78 (1962).

n130. Greisman v. Newcomb Hosp., 192 A.2d 817, 823 (N.J. 1963) (holding that a hospital's power to exclude a physician from user-
privileges was to "be viewed judicially as a fiduciary power to be exercised in reasonable and lawful manner for the advancement of the
interests of the medical profession and the public generally" (quoting Falcone v. Middlesex Cnty. Med. Serv., 170 A.2d 791, 799 (N.J.
1961))).

n131. Scallen, supra note 73, at 902.

n132. J. C. Shepherd, The Law of Fiduciaries 3 (1981)

n133. P. D. Finn, Fiduciary Obligations 1 (1977).

n134. D. Gordon Smith, The Critical Resource Theory of Fiduciary Duty, 55 Vand. L. Rev. 1399, 1400 (2002).

n135. Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation, 1988 Duke L.J. 879, 915 [hereinafter DeMott, Beyond
Metaphor].

n136. Peter J. Hammer, Pegram v. Herdrich: On Peritonitis, Preemption, and the Elusive Goal of Managed Care Accountability, 26 J. Health
Pol. Pol'y & L. 767, 771 n.6 (2001).
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98 Cornell L. Rev. 845, *

n137. Leonard I. Rotman, Fiduciary Law 2 (2005).

n138. Leonard I. Rotman, Fiduciary Law's "Holy Grail": Reconciling Theory and Practice in Fiduciary Jurisprudence, 91 B.U. L. Rev. 921,
922 (2011).

n139. Id.

n140. Id. at 924.

n141. DeMott, Beyond Metaphor, supra note 135, at 879.

n142. Courts implicitly invoke analogies when referring to an ad hoc list of factors or attributes deemed to be relevant for determining
whether the defendant is a fiduciary.

n143. See, e.g., Jill E. Fisch, Start Making Sense: An Analysis and Proposal for Insider Trading Regulation, 26 Ga. L. Rev. 179, 193 (1991)
(noting that "in older cases, the position of a corporate insider has been analogized to that of a trustee" and citing cases); see also Farwell v.
Pyle-Nat'l Electric Headlight Co., 124 N.E. 449, 452 (Ill. 1919) (holding that the director was not entitled to retain profits from a self-dealing
transaction because directors "occupy the position of trustees for the collective body of stockholders"); People ex rel. Manice v. Powell, 94
N.E. 634, 637 (N.Y. 1911) ("The relation of the directors to the stockholders is essentially that of trustee and cestui que trust.").

n144. See Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame, [1906] 2 A. 34 (Ch.) at 42-43 (discussing how directors are agents
for certain purposes).

n145. See Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928) (noting that stockholders and directors in a close corporation owe each other
a duty of loyalty as rigorous as that of partners).

n146. See, e.g., Boyer v. Wilmington Materials, Inc., 754 A.2d 881, 907 (Del. Ch. 1999) ("Directors of corporations organized under
Delaware law owe a fiduciary duty to the corporations upon whose boards they serve and to the stockholders of those corporations."
(quoting 1 David A. Drexler et al., Delaware Corporation Law and Practice § 15.02 (1997) (alteration in original))); Guth v. Loft, Inc., 5
A.2d 503, 510 (Del. 1939) ("Corporate officers and directors ... stand in a fiduciary relation to the corporation and its stockholders.");
Schaffhauser v. Arnholt & Schaefer Brewing Co., 67 A. 417, 417 (Pa. 1907) ("There can be no doubt [that the director] does occupy such a
fiduciary relation...that he shall manage the business of the company in such a manner as to promote...the common interests of all the
shareholders.").

n147. See Evan J. Criddle, Fiduciary Foundations of Administrative Law, 54 UCLA L. Rev. 117, 125 (2006) ("Courts have eschewed
formalistic criteria for identifying fiduciary relations and instead reason by analogy to paradigmatic relations ... ."); DeMott, Beyond
Metaphor, supra note 135, at 879, 891 ("The evolution of the law of fiduciary obligation illustrates, perhaps more powerfully than most
bodies of law, the power of analogy in legal argumentation."); Tamar Frankel, Fiduciary Law, 71 Calif. L. Rev. 795, 804 (1983) (discussing
courts' practice of analogizing new fiduciary relations to existing prototypes); Scallen, supra note 73, at 905 ("The use of analogy is the
means by which most innovations in fiduciary law 'traditionally' have been created.").

n148. Meinhard, 164 N.E. at 546 ("Joint adventurers, like copartners, owe to one another...the duty of the finest loyalty.").
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98 Cornell L. Rev. 845, *

n149. DeMott, Beyond Metaphor, supra note 135, at 891.

n150. Notice that the STOCK Act explicitly states that members of Congress owe a fiduciary duty "to the Congress, the United States
Government, and the citizens of the United States." 15 U.S.C. § 78u-1(g)(1) (2011).

n151. Some counterparties will be citizens of the nation (for members of Congress) or domiciled in a particular state (for that state's
legislators). Of course, not every counterparty will have a special relationship to the legislator. For example, the counterparties of federal
legislators could be foreign investors to whom no fiduciary duty is owed or the counterparties of state legislators could be investors
domiciled in other states. However, at least some counterparties will be fellow citizens of the legislator. The notion that government officials
are fiduciaries to citizens in the context of insider trading has been suggested by other scholars. See Langevoort, supra note 42, § 3:9, 3-20 to
-22; Krimmel, supra note 10, at 1503-04; Nagy, Congressional Officials, supra note 10, at 1140-47.
Nagy proposes two theories by which members of Congress could be deemed fiduciaries under classical theory: constructive insiders
and public fiduciaries to "citizen-investors." In my view, the first theory is limited and unpersuasive, which Nagy partially concedes. Recall
that in Dirks, the Supreme Court extended who counts as a fiduciary beyond traditional insiders to "constructive insiders," such as lawyers,
accountants, or underwriters. Dirks v. SEC, 463 U.S. 646, 655 n.14 (1983). Pointing to legislative history of the Insider Trading Sanctions
Act of 1984, Nagy suggests that Congress happily acknowledged the Dirks extension and listed "government officials" as a potential
category that could be pursued, in addition to the "underwriter, accountant, lawyer or consultant." Nagy, Congressional Officials, supra note
10, at 1140. Nagy concludes that adding members of Congress to this list "fits well within the classical framework" and that it would "be
quite reasonable to impute a disclosure obligation" to members of Congress. Id.
This "constructive insider" theory suffers from two weaknesses. First, as Nagy acknowledges, id. at 1142, this theory cannot apply to
various instances of legislator insider trading. For example, if a member of Congress trades based on his nonpublic knowledge of imminent
tax code changes, it would be folly to suggest that somehow that member has become a constructive insider of all those firms whose stock
price is thereby affected. Second - and this is a point not made by Nagy - all the temporary or constructive insiders identified in Dirks were
in clear principal-agent relationships, often of a textbook nature: hired lawyers, investment bankers, and accountants. Put another way, these
constructive insiders were paid to give advice to the issuer. One cannot suggest that legislators are literally hired in this manner or
figuratively stand in some similar consulting relationship. Regardless of how generously one weights verbiage in Committee Reports, a
casual insertion of the term "government officials" cannot counter this fundamental difference. For these reasons, legislators cannot be
considered to be constructive insiders on the authority of Dirks.
By contrast, Nagy's second theory regarding "citizen-investors" holds promise, although my defense is based on different grounds.

n152. Nagy, Congressional Officials, supra note 10, at 1147.

n153. Cf. Deborah A. DeMott, Agency by Analogy: A Comment on Odious Debt, 70 L. & Contemp. Probs. 157, 166-67 (2007) (comparing
government officers to private trustees in the odious debt context).

n154. See Restatement (Third) of Trusts § 2 (2003); Robert H. Sitkoff, An Agency Costs Theory of Trust Law, 89 Cornell L. Rev. 621, 624
(2004); Henry Hansmann & Ugo Mattei, The Functions of Trust Law: A Comparative Legal and Economic Analysis, 73 N.Y.U. L. Rev. 434,
438 (1998).

n155. Restatement (Third) of Trusts § 13 (2003) ("A trust is created only if the settlor properly manifests an intention to create a trust
relationship.").

n156. Id. § 2.

n157. Cf. id. (defining a trust as arising from the parties' intentions with respect to certain property).

n158. See Leib et al., Fiduciary Theory of Judging, supra note 15, at 14.
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98 Cornell L. Rev. 845, *

n159. Id.

n160. In the alternative, one could refer to the theory of popular sovereignty to argue that the consent of "the people" of the thirteen
revolutionary states, as expressed through popular ratification in accordance with Article VII of the Constitution, constitutes the relevant
consent on which the federal legislator-citizen relationship rests. For discussions of the relationship between popular sovereignty and the
legitimacy of our republic, see, for example, Larry D. Kramer, The People Themselves: Popular Constitutionalism and Judicial Review 5
(2004); Christian G. Fritz, Alternative Visions of American Constitutionalism: Popular Sovereignty and the Early American Constitutional
Debate, 24 Hastings Const. L.Q. 287, 306-08 (1997); James A. Gardner, Consent, Legitimacy and Elections: Implementing Popular
Sovereignty Under the Lockean Constitution, 52 U . Pitt. L. Rev. 189, 192 (1990); Sung Hui Kim, "We the (Supermajority of) the People":
The Development of a Rationale for Written Higher Law in North American Constitutions, 137 Proc. Am. Phil. Soc'y 364, 388-89 (1993).

n161. U.S. Const. art. 1, § 1.

n162. Leib et. al, Fiduciary Theory of Judging, supra note 15, at 9.

n163. See, e.g., Robert G. Natelson, Judicial Review of Special Interest Spending: The General Welfare Clause and the Fiduciary Law of the
Founders, 11 Tex. Rev. L. & Pol. 239, 244 (2007) ("The 'general Welfare' limitation [in the Taxing and Spending Clause] was one of a
number of provisions inserted to impose fiduciary-style rules on the new federal government...."); Robert G. Natelson, The Agency Law
Origins of the Necessary and Proper Clause, 55 Case W. Res. L. Rev. 243, 248 (2004) (arguing that the Necessary and Proper Clause was
intended to incorporate "the limitations of fiduciary duty"); Robert G. Natelson, The Constitution and the Public Trust, 52 Buff. L. Rev.
1077, 1087 (2004) [hereinafter Natelson, The Constitution and the Public Trust] ("It really was the 'general purpose' of the founders to
impose fiduciary standards on the federal government."); Robert G. Natelson, The General Welfare Clause and the Public Trust: An Essay in
Original Understanding, 52 U. Kan. L. Rev. 1, 50 (2003) ("Public officials were seen as the people's agents and trustees, and bound by
something akin to private trust standards."); E. Mabry Rogers & Stephen B. Young, Public Office as a Public Trust: A Suggestion that
Impeachment for High Crimes and Misdemeanors Implies a Fiduciary Standard, 63 Geo. L.J. 1025, 1026 (1975).
An impressive and growing body of scholarship calls for imposing fiduciary standards on government. See, e.g., Evan Fox-Decent,
Sovereignty's Promise: The State as Fiduciary 4 (2011) (the state itself as a fiduciary); Kathleen Clark, Do We Have Enough Ethics in
Government Yet?: An Answer from Fiduciary Theory, 1996 U. Ill. L. Rev. 57, 63 (1996) (congressmen need stricter fiduciary duties); Evan J.
Criddle, Fiduciary Administration: Rethinking Popular Representation in Agency Rulemaking, 88 Tex. L. Rev. 441, 448 (2010)
(administrative agencies as fiduciaries); Evan Fox-Decent, The Fiduciary Nature of State Legal Authority, 31 Queen's L.J. 259, 260-61
(2005) (same as Fox-Decent, supra); Ethan J. Leib & David L. Ponet, Fiduciary Representation and Deliberative Engagement with Children,
20 J. Polit. Phil. 178, 179 (2012) [hereinafter, Leib & Ponet, Fiduciary Representation] (discussing recent work on government actors as
fiduciaries); D. Theodore Rave, Politicians as Fiduciaries, 126 Harv. L. Rev. 671, 677 (2013) ("political representatives" as fiduciaries).

n164. See Leib et al., Fiduciary Theory of Judging, supra note 15, at 17 (observing that John Locke, "whose writings heavily influenced the
U.S. founders," viewed legislators as fiduciary trustees); supra note 163.

n165. Natelson, The Constitution and the Public Trust, supra note 163, at 1086-87.

n166. See, e.g., The Federalist No. 46, at 294 (James Madison) (Clinton Rossiter ed., 1961) ("The federal and state governments are in fact
but different agents and trustees of the people ... ."); id. at 316 ("The nature of [legislators'] public trust implies a personal influence among
the people, and that they are more immediately the confidential guardians of the rights and liberties of the people."); id. at 344 ("solemn
trust"); id. at 350 (describing elected officials as holding the people's "public trust"); The Federalist No. 59, at 366 (Alexander Hamilton)
("guardianship" and "trust"); id. at 396 (describing impeachable offenses as "those offenses which proceed from the misconduct of public
men, or, in other words, from the abuse or violation of some public trust").

n167. U.S. Const. art. VI, cl. 3.


Page 134Page 134
98 Cornell L. Rev. 845, *

n168. U.S. Const. art. I, § 3, cl. 7; id. art. I, § 9, cl. 8; id. art. II, § 1, cl. 2.

n169. Marcus Tillius Cicero, On Moral Obligation 69 (John Higginbotham trans., University of California Press 1967).

n170. See Natelson, The Constitution and the Public Trust, supra note 163, at 1134-36.

n171. See id. at 1170-71; Leib et. al, Fiduciary Theory of Judging, supra note 15, at 17-18.

n172. United States v. Gray, 790 F.2d 1290, 1294 (6th Cir. 1986) (quoting in part United States v. Mandel, 591 F.2d 1347, 1363 (4th Cir.
1979)), rev'd, McNally v. United States, superseded by statute, 18 U.S.C. § 1346 (2006); see infra Part II.B.3.

n173. Standing Orders of the Senate Manual, 87 S. Doc. 107-1, at 118-19 (2002).

n174. See, e.g., SEC v. Blackwell, 291 F. Supp. 2d 673, 687 (S.D. Ohio 2003) (noting that a director may be liable for insider trading
violations for breaching the fiduciary duty to the corporation and its shareholders); SEC v. Lenfest, 949 F. Supp. 341, 345 (E.D. Pa. 1996)
(noting that a director has a fiduciary duty to shareholders).

n175. See Restatement (Third) of Trusts § 5(g) cmt. g (2003) ("Corporate ... directors ... do not hold title to the property of the corporation
and therefore are not trustees ... .").

n176. See Restatement (Third) of Agency § 1.01 cmt. f(2) (2006) ("[Corporate] directors are neither the shareholders' nor the corporation's
agents ... .").

n177. Cf. Langevoort, supra note 42, § 6:6, at 6-21 n.5 ("An intriguing question is whether elected officials can properly be treated as
fiduciaries. Certainly, they are not employees; there is no identifiable principal to whom they are responsible... . In this sense, the analogy to
a corporation's board of directors is apt.").

n178. See Adolf A. Berle, Jr. & Gardiner C. Means, The Modern Corporation and Private Property 5-6 (1933). For an illuminating
examination of Berle and Means's contribution, see generally William W. Bratton, Berle and Means Reconsidered at the Century's Turn, 26 J.
Corp. L. 737, 754-56 (2001) (noting that Berle and Means were influential in that they "hit the issue" of separation in entrepreneurial
functioning).

n179. See William W. Bratton & Michael L. Wachter, The Case Against Shareholder Empowerment, 158 U. Pa. L. Rev. 653, 662-65 (2010)
(discussing the shareholders' traditional role and critiques of that role).

n180. See, e.g., Del. Code Ann. tit. 8, § 141(a) (2011) (stating that the corporation's business and affairs are "managed by or under the
direction of a board of directors"). As the leading state of incorporation for large corporations, Delaware's law on this issue is the most
important.
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98 Cornell L. Rev. 845, *

n181. I do not revisit the age-old debate over the proper purpose of the corporation because resolution of that debate is not critical to the
purposes of this Article. For simplicity, this Article assumes the conventional, shareholder-value view of corporate purpose. For a recent
exposition of this debate and a critique of the shareholder value model, see generally Lynn Stout, The Shareholder Value Myth: How Putting
Shareholders First Harms Investors, Corporations, and the Public (2012). For my take on the law of corporate purposes as applied to
corporate diversity, see Sung Hui Kim, The Diversity Double Standard, 89 N.C. L. Rev. 945, 977-88 (2011).

n182. See Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & Econ. 395, 420 (1983) ("There is no reason why
shareholders ... should have any interest or expertise in managing the firm's affairs. Because of the easy availability of the exit option
through the stock market, the rational strategy for dissatisfied shareholders in most cases, given the collective action problem, is to disinvest
rather than incur costs in attempting to bring about change through the voting process.").

n183. Painter, supra note 10, at 2.

n184. See Leib & Ponet, Fiduciary Representation, supra note 163, at 187.

n185. Cf. Donald Green & Ian Shapiro, Pathologies of Rational Choice Theory 94-95 (1994) (discussing the literature on the "rational
ignorance hypothesis").

n186. See, e.g., Trist v. Child, 88 U.S. 441, 450 (1874) ("The theory of our government is, that all public stations are trusts, and that those
clothed with them are to be animated in the discharge of their duties solely by considerations of right, justice, and the public good.");
Providence Tool Co. v. Norris, 69 U.S. 45, 55 (1864) ("These offices are trusts, held solely for the public good, and should be conferred
from considerations of the ability, integrity, fidelity, and fitness for the position of the appointee."); Nuesse v. Camp, 385 F.2d 694, 706 (D.C.
Cir. 1967) ("It is a living tenet of our society and not mere rhetoric that a public office is a public trust.").

n187. See, e.g., United States v. Bryan, 58 F.3d 933, 942, 961 (4th Cir. 1995) (affirming mail and wire fraud convictions of state lottery
director and noting that state officials owe a "fiduciary duty ... to the state and its citizens" (quoting United States v. Barber, 668 F.2d 778,
784 n.4 (4th Cir. 1982) (affirming mail fraud conviction and noting that the Alcoholic Beverage Control commissioner breached a fiduciary
duty "owed to the state and its citizens"))); United States v. Rebrook, 842 F. Supp. 891, 893-94 (S.D.W. Va. 1994) (holding that attorney for
West Virginia Lottery breached fiduciary duty owed to Lottery (a public entity) and citizens of West Virginia by trading on material,
nonpublic information relating to contracts with third party vendors), rev'd, 58 F.3d 961 (4th Cir. 1995).

n188. See, e.g., United States v. Mandel, 591 F.2d 1347, 1363 (4th Cir. 1979) (holding that the governor of Maryland owes fiduciary duties
to Maryland citizens and the State of Maryland). After a series of vacations and rehearings, the Mandel decision was superseded by 18
U.S.C. § 1346 (2006).

n189. See, e.g., Jersey City v. Hague, 115 A.2d 8, 11 (N.J. 1955) (recognizing two mayors and one deputy mayor as fiduciaries of the people
whom they have been elected or appointed to serve).

n190. See Cnty. of Cook v. Barrett, 344 N.E.2d 540, 545 (Ill. App. Ct. 1975) (holding that the county clerk, as "an elected public official,"
was the fiduciary of the people of Cook County).

n191. See Driscoll v. Burlington-Bristol Bridge Co., 86 A.2d 201, 221 (N.J. 1952) ("The members of the board ... are public officers holding
positions of public trust. They stand in a fiduciary relationship to the people whom they have been elected ... to serve.").
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98 Cornell L. Rev. 845, *

n192. See Fuchs v. Bidwill, 334 N.E.2d 117, 119-20 (Ill. App. Ct. 1975) (discussing cases treating state officials as trustees of the people),
rev'd on other grounds, 359 N.E.2d 158 (Ill. 1977).

n193. 86 A.2d 201 (N.J. 1952).

n194. Id. at 222-23. The court also noted that an official was not deserving "of the trust imposed upon him by the people of Burlington
County when they elected him as a member of their board of chosen freeholders." Id. at 212.

n195. Id. at 207.

n196. Id. at 221 (citations omitted).

n197. Id. at 222.

n198. Id. at 222 ("The citizen is not at the mercy of his servants holding positions of public trust nor is he helpless to secure relief from
their machinations except through the medium of the ballot, the pressure of public opinion or criminal prosecution. He may secure relief in
the civil courts either through an action brought in his own name, or through proceedings instituted on his behalf by the Governor ... or by
the Attorney General ... ." (citations omitted)).

n199. 334 N.E.2d 117 (Ill. App. Ct. 1975).

n200. The Illinois Supreme Court, in reversing the appellate court, quoted the complaint, which specifically mentions the fiduciary duty. See
Fuchs v. Bidwill, 359 N.E.2d 158, 160 (Ill. 1976).

n201. Fuchs, 334 N.E.2d at 118-19.

n202. Id. at 119.

n203. Id. at 120 (quoting Jersey City v. Hague, 115 A.2d 8, 11 (N.J. 1955)).

n204. Id. at 122.

n205. Id. (quoting Paepcke v. Pub. Bldg. Comm'n of Chicago, 263 N.E.2d 11, 18 (1970)).

n206. Fuchs v. Bidwill, 359 N.E.2d 158, 162 (Ill. 1976) ("The public interest will not be served in permitting persons, without limitation, to
institute actions of this nature against public officials when the Attorney General has declined to act.").
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98 Cornell L. Rev. 845, *

n207. See id. (noting the Attorney General's ability to prosecute state officials' ethics violations and to "seek an accounting or the imposition
of a constructive trust").

n208. See, e.g., Agasha Mugasha, Evolving Standards of Conduct (Fiduciary Duty, Good Faith and Reasonableness) and Commercial
Certainty in Multi-Lender Contracts, 45 Wayne L. Rev. 1789, 1795-96 (2000) ("In any particular analysis concerning the fiduciary principle,
one has to ascertain the subject matter over which fiduciary obligations extend. A fiduciary for certain purposes need not be a fiduciary for
all purposes; equally, a person who is generally not a fiduciary can be a fiduciary for certain limited purposes." (footnote omitted)).

n209. See supra section 1.A.2.a.

n210. United States v. Mandel, 591 F.2d 1347, 1363-64 (4th Cir. 1979). For direct history of this case, see supra note 172.

n211. There is no requirement that those owed a fiduciary obligation expressly proscribe the exploitation of confidential information.
Langevoort, supra note 42, § 6:6, at 6-20.

n212. SEC Rule 10b5-2, 17 C.F.R. § 240.10b5-2(b) (2011).

n213. 634 F. Supp. 2d 713, 730-31 (N.D. Tex. 2009) (holding that Rule 10b5-2(b)(1) exceeds the SEC's statutory authority). On appeal, the
judgment was vacated on other grounds, with the Fifth Circuit clarifying that it was not reaching the validity of Rule 10b5-2(b)(1). SEC v.
Cuban, 620 F.3d 551, 558 n.40 (5th Cir. 2010).

n214. 184 F. Supp. 2d 1006, 1014-15 (N.D. Cal. 2002).

n215. 327 F.3d 1263 (11th Cir. 2003).

n216. Id. at 1273 n.23 (noting that "the SEC's new rule goes farther than we do in finding a relationship of trust and confidence (e.g., the
new rule creates a presumption of a relationship of trust and confidentiality in the case of close family members)" and finding that prior case
law did not go that far). It should be noted that the case was technically not governed by Rule 10b5-2. See id. at 1281-82 (vacating the
district court's judgment on the basis of a prejudicial error in the jury instructions).

n217. Code of Ethics for Government Service, 72 Stat. B12 (1958), H. Cong. Res. 175, 85th Cong., 104 Cong. Rec. 13556-57 (1958)
[hereinafter Code of Ethics]. The Code of Ethics, which applies to "all Government employees, including officeholders," id. at B12, has been
incorporated into the House Ethics Manual. H. Comm. on Standards of Official Conduct, 110th Cong., House Ethics Manual 20, 355 (2008)
[hereinafter House Ethics Manual], http://ethics.house.gov/Media/PDF/2008 House Ethics Manual.pdf. The Senate Ethics Manual lists the
Code of Ethics as a source of jurisdiction for the Senate Ethics Committee. S. Select Comm'n on Ethics, 108th Cong., Senate Ethics Manual
7-8 (2003), available at http://ethics.senate.gov/downloads/pdffiles/manual.pdf.

n218. Code of Ethics, supra note 217, at B12, P 8; see George, supra note 9, at 167 (recounting the reprimand (based on Code of Ethics
paragraph 8) of Representative Robert Sikes "on charges including the purchase of stock in the privately-held First Navy Bank, whose
establishment he was also actively promoting at a Naval Air Station").
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98 Cornell L. Rev. 845, *

n219. For example, some commentators have argued that congressional ethics rules prescribing confidentiality are distinguishable from
ethics rules commonly found in employee policy manuals. See Bainbridge, Inside the Beltway, supra note 9, at 296. The implication is that
congressional ethics rules may not be enforceable contractual provisions.

n220. See, e.g., Nagy, Gradual Demise, supra note 42, at 1362.

n221. Id.

n222. SEC v. Cuban, 634 F. Supp. 2d 713, 724, 730-31 (N.D. Tex. 2009) (holding that misappropriation theory required that the trader agree
both to keep the information confidential and to not use the information for personal gain). On Cuban, see supra note 213 and accompanying
text.

n223. See Barbabella et al., supra note 10, at 221-22 (reporting evidence that "legislators may feel that trading on information obtained
through their positions is inappropriate, even if they do not believe it is illegal").

n224. Standing Rules of the Senate, S. Doc. No. 106-15, 106th Cong., 1st Sess., Rule XXIX, cl. 5 (2000) [hereinafter Senate Standing
Rules]; see George, supra note 9, at 167-68 (interpreting this Rule).

n225. 138 Cong. Rec. S17835, S17836 (daily ed. Oct. 8, 1992) (statement of Sen. Mitchell). This testimony is also recounted in George,
supra note 9, at 168-69.

n226. The categories include "matters necessary to be kept secret in the interests of national defense or the confidential conduct of the
foreign relations of the United States," Senate Standing Rules, Rule XXVI, cl. 5(b)(1) (2000), matters which "will represent a clearly
unwarranted invasion of the privacy of an individual," id. at cl. 5(b)(3), matters which "will disclose the identity of any informer or law
enforcement agent or will disclose any information relating to the investigation or prosecution of a criminal offense that is required to be
kept secret in the interests of effective law enforcement," id. at cl. 5(b)(4), and "matters required to be kept confidential under other
provisions of law or Government regulations," id. at cl. 5(b)(6).

n227. Id. at cl. 5(b)(5).

n228. See, e.g., Rules of the House of Representatives, H.R. Doc. No. 108-241, 108th Cong. 2d Sess., Rule XVII, cl. 9 (2005) ("When the
Speaker or a Member ... informs the House that he has communications that he believes ought to be kept secret for the present, the House
shall be cleared of all persons except the Members ... for the reading of such communications, and debates and proceedings thereon ... .").

n229. Id. at Rule XI, cl. 2(g)(1) (open meetings and hearings). Closed door meetings are allowed for meetings of the Committee on Ethics
or its subcommittees and where disclosure of information would, among other things, (i) "endanger national security," (ii) "compromise
sensitive law enforcement information," or (iii) "violate a law or rule of the House." Id.

n230. Thomas Jefferson, A Manual of Parliamentary Practice (1801), reprinted in H.R. Doc. No. 107-284, 107th Cong., 2d Sess. (2003),
available at http://www.gpoaccess.gov/hrm/browse 108.html [hereinafter Jefferson, Manual]; see also Orrin G. Hatch, Judicial Nomination
Filibuster Cause and Cure, 2005 Utah L. Rev. 803, 827-28 n.128 (2005) (noting that the Manual still governs the House today).

n231. Jefferson, Manual, supra note 230, at sec. XI (annotation) (citation omitted).
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98 Cornell L. Rev. 845, *

n232. See United States House of Representatives Information Security Publication, Guidelines for Determining Information Sensitivity,
available at http://web.archive. org/web/20061215031815/http:/www.house.gov/cao-opp/PDFSolicitations/HISPUB008. pdf [hereinafter
House Information Sensitivity Guidelines].

n233. George supra note 9, at 169 (quoting House Information Sensitivity Guidelines).

n234. Partnership Act, Uniform Law Commission, available at http://www.uniformlaws. org/Act.aspx?title=Partnership+Act (last visited
Feb. 16, 2013) (showing a map of states that have adopted RUPA).

n235. See RUPA § 404(a) (2006). But cf. Larry E. Ribstein, Are Partners Fiduciaries?, 2005 U. Ill. L. Rev. 209, 251 (2005) (arguing that
partners should be subject to fiduciary duties "only as agents or as managers of centrally managed firms").

n236. 735 F. Supp. 1505 (D. Kan. 1990).

n237. Id. at 1521 (finding enough evidence of a violation to withstand summary judgment, although relevant information did not relate to
the partnership business but to a side business of the partner who confided information); see SEC v. Michel, 521 F. Supp. 2d 795, 826 (N.D.
Ill. 2007) (finding that a partner-partner relationship constituted the relevant relationship of trust and confidence under misappropriation
theory).

n238. United States v. O'Hagan, 521 U.S. 642, 655 & n.7 (1997).

n239. SEC v. Sargent, 229 F.3d 68, 76 (1st Cir. 2000) (citing Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 512 (Mass. 1975)).

n240. RUPA § 202(a).

n241. For an example of the traditional approach, see Ziegler v. Dahl, 691 N.W.2d 271, 275-77 (N.D. 2005); Daniel S. Kleinberger, Agency,
Partnerships, and LLCs: Examples and Explanations 220-21 (3d ed. 2008) (describing the "key characteristics" of a partnership in most
jurisdictions).

n242. See, e.g., Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 403-04 (S.D.N.Y. 2010) (requiring a showing of "the parties'
sharing of profits and losses"); Ingram v. Deere, 288 S.W.3d 886, 894 (Tex. 2009) (requiring an agreement to share losses); Gates v.
Houston, 897 N.E.2d 532 (Ind. Ct. App. 2008) (requiring a voluntary contract of association for the purpose of sharing "profits and losses").

n243. See, e.g., Larry E. Ribstein, The Evolving Partnership 24 (Univ. of Ill. Law & Econ. Working Paper No. LE06-025, 2006), available
at http://papers.ssrn.com/sol3/papers.cfm? abstract id=940653 (summarizing the default rules).

n244. For example, in trial testimony, Congressman Barney Frank once testified that "members of the House of Representatives tend to
specialize and often trust the judgment of colleagues about the contents of noncontroversial bills" and that "a typical Representative might
know the contents of less than ten percent of the bills considered by the House." United States v. Swindall, 971 F.2d 1531, 1541 (11th Cir.
1992).
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98 Cornell L. Rev. 845, *

n245. See, e.g., Johnson v. Peckham, 120 S.W.2d 786, 788 (Tex. 1938).

n246. Vai v. Bank of Am. Nat'l Trust & Sav. Ass'n, 364 P.2d 247, 252 (Cal. 1961) ("But the husband's fiduciary duties in respect to his
wife's interest in the community property continue as long as his control of that property continues, notwithstanding the complete absence of
confidence and trust, and the consequent termination of the confidential relationship.").

n247. Even if one rejects this line of argument as being too facile, the analogy to partners serves as an important reminder that oft-cited
factors - such as "superiority" and "domination" - are not essential to all fiduciary relationships.

n248. 530 F.3d 1085 (9th Cir. 2008).

n249. Id. at 1094.

n250. See Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U. L. Rev. 547, 550-51 (2003)
(describing the director-primacy model).

n251. Congress has wide-ranging authority under the Commerce Clause. U.S. Const. art. I, § 8. State legislatures generally enjoy a wide-
ranging police power to legislate in the public interest. See U.S. Const. amend. X.

n252. Congress's power here stems from the Taxing and Spending Clause, U.S. Const. art. I, § 8, cl. 1.

n253. One can also argue that members are fiduciaries to the government by virtue of being employees of their government. Nagy makes
just this argument, although she concedes that members of Congress are not quite like the employees working on their staffs, a point with
which I agree. See Nagy, Congressional Officials, supra note 10, at 1156-57. I would add that there are many other reasons to think that
legislators are not mere employees and, in fact, look much more like employers. As I have already argued, there is more than a passing
resemblance between legislators and corporate directors, and directors are not generally treated as employees, for example under Title VII.
See, e.g., Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440, 450-51 (2003) (holding that physicians who were both directors
and shareholders of a corporation should not be counted as employees). More generally, "directors are traditionally employer rather than
employee positions." Chavero v. Local 241, Div. of the Amalgamated Transit Union, 787 F.2d 1154, 1157 (7th Cir. 1986).

n254. United States v. Carter, 217 U.S. 286, 305 (1910).

n255. United States v. Drisko, 303 F. Supp. 858, 860 (E.D. Va. 1969).

n256. United States v. King, 469 F. Supp. 167, 167 (D.S.C. 1979).

n257. United States v. Bowen, 290 F.2d 40, 42 (5th Cir. 1961).
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98 Cornell L. Rev. 845, *

n258. United States v. Kenealy, 487 F. Supp. 1379, 1379 (D. Mass. 1980), aff'd, 646 F.2d 699 (1st Cir. 1981).

n259. United States v. Kearns, 595 F.2d 729, 729 (D.C. Cir. 1978).

n260. Snepp v. United States, 444 U.S. 507, 510 (1980).

n261. United States v. Pan-Am. Petroleum Co., 55 F.2d 753, 756, 782-83 (9th Cir. 1932).

n262. United States v. Bryan, 58 F.3d 933, 936 (4th Cir. 1995) (director of state lottery); United States v. Rebrook, 842 F. Supp. 891, 893-94
(S.D.W. Va. 1994) (attorney of state lottery).

n263. United States v. Barber, 668 F.2d 778, 780, 784 n.4 (4th Cir. 1982).

n264. Williams v. State ex rel. Morrison, 315 P.2d 981, 981 (Ariz. 1957).

n265. City of Minneapolis v. Canterbury, 142 N.W. 812, 813-14 (Minn. 1913).

n266. City of Boston v. Dolan, 10 N.E.2d 275, 278, 281 (Mass. 1937).

n267. United States v. Bush, 522 F.2d 641, 641, 643 (1975).

n268. City of Hastings v. Jerry Spady Pontiac-Cadillac, Inc., 322 N.W.2d 369, 369 (Neb. 1982).

n269. City of Boston v. Santosuosso, 30 N.E.2d 278, 306 (Mass. 1940).

n270. United States v. Mandel, 591 F.2d 1347, 1362-63 (4th Cir. 1979); Agnew v. State, 446 A.2d 425, 440-41 (Md. Ct. Spec. App. 1982).

n271. United States v. Keane, 522 F.2d 534, 538, 545 (7th Cir. 1975).

n272. 436 F. Supp. 1039 (S.D.N.Y. 1977).

n273. While not cited in the scholarly literature, this case was mentioned in congressional testimony. See Stop Trading on Congressional
Knowledge Act: Hearing on H.R. 1148 Before the H. Comm. on Fin. Servs., 112th Cong. 2 (2011) (statement of Jack Maskell, Legislative
Att'y, Cong. Research Serv.).
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98 Cornell L. Rev. 845, *

n274. The statute prohibits members of Congress from accepting compensation for "any representational services ... in relation to any ...
matter in which the United States is a party." 18 U.S.C. § 203(a)(1) (2006).

n275. See Podell, 436 F. Supp. at 1040.

n276. Id. at 1042.

n277. Id.

n278. Id. (emphasis added) (citation omitted).

n279. That said, under federal insider trading law, a demonstration of potential injury should be enough. Langevoort, supra note 42, § 6:8, at
6-34.1. Also, the O'Hagan Court's lack of significant discussion about harms - apart from the harms to the integrity of the securities markets -
might be read to suggest that harmfulness of this type of breach of the duty of loyalty is presumed. See id. § 6:8, at 6-34.1 to -35.

n280. See, e.g., Stephen M. Bainbridge, The Insider Trading Prohibition: A Legal and Economic Enigma, 38 U. Fla. L. Rev. 35, 36-37
(1986) (summarizing the debate on whether the insider trading prohibition has a "rational basis" at all); William K.S. Wang, Trading on
Material Nonpublic Information on Impersonal Stock Markets: Who Is Harmed, and Who Can Sue Whom Under SEC Rule 10b-5?, 54 S.
Calif. L. Rev. 1217, 1225-29 (1981) (summarizing the respective cases for and against regulating insider trading).

n281. See supra note 36 and accompanying text.

n282. See, e.g., United States v. Carter, 217 U.S. 286, 305 (1910) ("It is immaterial...whether the complainant was able to show that it had
suffered any actual loss ... ."); Cnty. of Cook v. Barrett, 344 N.E.2d 540, 548 (Ill. App. 1975) ("The absence of an allegation of damage is
immaterial."); Jersey City v. Hague, 115 A.2d 8, 12 (N.J. 1955) ("It would be a dangerous precedent to lay down as law that unless some
affirmative fraud or loss can be shown, the agent may hold on to any secret benefit ... out of his agency." (quoting Carter, 217 U.S. at 306));
see also cases discussed infra Part III.C.

n283. See, e.g., United States v. Keane, 522 F.2d 534, 545 (7th Cir. 1975) (finding that use of governmental information by city councilman
for personal gain amounts to a breach of fiduciary duty which is actionable under mail fraud statute); United States v. Rebrook, 842 F. Supp.
891, 893-94 (S.D.W. Va. 1994) (rejecting defendant's argument that loss must be alleged in order to state a claim under the wire fraud statute
and finding liability under such statute for misuse of confidential information gained by virtue of one's position); Williams v. State ex rel.
Morrison, 315 P.2d 981, 984-85 (Ariz. 1957) (noting that the commissioner "used the information obtained from such examination for his
personal profit" and thus "did not truly and faithfully perform all of his official duties and consequently breached the conditions of his bond,
and the surety is liable"); City of Minneapolis v. Canterbury, 142 N.W. 812, 814 (Minn. 1913) (holding that the fire department chief, as
agent of the city, must disgorge profits accrued from sale of land to the city when he purchased such land based on information gleaned by
virtue of his position, regardless of whether the principal is or is not benefited thereby).

n284. Frankel, supra note 147, at 805.

n285. See, e.g., Scott Brewer, Exemplary Reasoning: Semantics, Pragmatics, and the Rational Force of Legal Argument by Analogy, 109
Harv. L. Rev. 923, 962-66 (1996) (discussing different forms of analogical reasoning); Richard A. Posner, Reasoning by Analogy, 91 Cornell
L. Rev. 761, 761-65 (2006) (reviewing Lloyd L. Weinreb, Legal Reason: The Use of Analogy and Legal Argument (2005)) (concluding that
reasoning by analogy is just a form of judicial and lawyerly rhetoric rather than a substantive statement of law); Cass R. Sunstein,
Page 143Page 143
98 Cornell L. Rev. 845, *

Commentary, On Analogical Reasoning, 106 Harv. L. Rev. 741, 742 (1993) (defending analogical reasoning over various other methods of
legal thought).

n286. As Judge Posner puts it:

There is no such thing as an "analogical argument" in any but a rhetorical sense; you need reasons to determine whether one case should be
thought relevantly similar to another. Analogies are not reasons; reasons are what is necessary to determine whether a similarity shall be
treated as a ground for action, an analogy guiding decision.

Posner, supra note 285, at 768.

n287. See, e.g., Finn, supra note 133, at 214 (observing that fiduciary law's objection to bribes and secret commissions "lies in their
corrupting tendency").

n288. Part III is severable from Part II. If the reader needs nothing more to be convinced to find the fiduciary duty, the reader should skip to
Part IV, where I address objections.

n289. See Kim, Governmental Insider Trading, supra note 34.

n290. Careful readers might object that I have lost track of what is really important, that the relevant policy consideration is not of fiduciary
law generally but of insider trading law, which happens to bar such trading only when it breaches a fiduciary-like duty. But such an objection
implicitly assumes that insider trading law and fiduciary law have substantially different goals. To the contrary, as I have argued below, one
of the important goals of fiduciary law is to stop corruption. And, as I argue in a companion piece, insider trading law can best be
theoretically rationalized as an attempt to stop one form of private corruption. See Sung Hui Kim, Insider Trading as Private Corruption
(Mar. 22, 2013) (unpublished manuscript) (on file with author). Accordingly, extending the fiduciary category to include legislators in a
manner consistent with a core purpose of fiduciary law (anti-corruption) will be consistent with the purpose of federal insider trading law
(also anti-corruption). Finally, it is my view that when the Supreme Court in Chiarella expressly predicated insider trading liability on a
breach of fiduciary duty, it intended to incorporate the purposes of fiduciary law.

n291. See, e.g., Michael A. Genovese, Presidential Corruption: A Longitudinal Analysis, in Corruption and American Politics 135, 136
(Michael A. Genovese & Victoria Farrar-Myers eds., 2010) [hereinafter Corruption and American Politics] ("There is no commonly accepted
definition of what constitutes corruption."); Michael Johnston, The Definitions Debate: Old Conflicts in New Guises, in The Political
Economy of Corruption 11, 12 (Arvind K. Jain ed., 2001) ("No one has ever devised a universally satisfying 'one-line definition' of
corruption."); Nathaniel Persily & Kelli Lammie, Perceptions of Corruption and Campaign Finance: When Public Opinion Determines
Constitutional Law, 153 U. Pa. L. Rev. 119, 126-27 (2004) (noting that corruption means different things to the different Supreme Court
Justices).

n292. Daniel Webster, who served in the House and Senate and as Secretary of State, once reminded the President of the Bank of the United
States: "If it be wished that my relation to the Bank should be continued, it may be well to send me the usual retainers." The Correspondence
of Nicholas Biddle 218 (Reginald C. McGrane ed., 1919) (Webster to Biddle, Dec. 21, 1833).

n293. See Dennis F. Thompson, Ethics in Congress: From Individual to Institutional Corruption 2 (1995).

n294. See id.


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98 Cornell L. Rev. 845, *

n295. The House voted unanimously to expel Michael J. "Ozzie" Myers, a Pennsylvania Democrat who accepted bribes in an undercover
ABSCAM investigation. This was the House's first expulsion for corruption. Id. Four years earlier, the House failed to expel Andrew J.
Hinshaw, a California Republican who had been convicted of accepting a bribe. Id.

n296. See Jens Chr. Andvig & Odd-Helge Fjeldstad with Inge Amundsen, Tone Sissener & Tina Soreide, Corruption: A Review of
Contemporary Research 46 (2001) ("What is seen as corruption varies from one country to another."). That said, as Robert Klitgaard notes,
"over a wide range of 'corrupt' activities, there is little argument that they are wrong and socially harmful," even across societies. Robert
Klitgaard, Controlling Corruption 4 (1988).

n297. John Kleinig & William C. Heffernan, The Corruptibility of Corruption, in Private and Public Corruption 3, 3 (William C. Heffernan
& John Kleinig eds., 2004). The authors note:

Even if we confine ourselves to what we now familiarly speak of as public corruption, it soon becomes clear that what "we" consider to be
corrupt is often contentiously so. One group's perquisite is another's corruption; one group's tradition of patronage is another's nepotism; one
group's campaign contribution is another's bribery; one group's just rectification is another's misappropriation.

Id.

n298. See Matthew J. Streb & April K. Clark, The Public and Political Corruption, in Corruption and American Politics, supra note 291, at
278, 281 (discussing the perception gap in the views of the elites versus the public on corruption).

n299. These factors, however, are less predictive than a respondent's political attitudes. See Persily & Lammie, supra note 291, at 153-67.

n300. Since the 1970s, advances in the fields of cognitive psychology, cognitive linguistics, artificial intelligence, and anthropology have
provided a persuasive account of how humans categorize people, things, and abstract concepts. Such an account discounts the role of
deductive reasoning from abstracted principles. See generally George Lakoff, Women, Fire, and Dangerous Things: What Categories Reveal
About the Mind (1987) (discussing the importance of categorization and describing the variety of ways in which humans categorize). Daniel
Hays Lowenstein, Campaign Contributions and Corruption: Comments on Strauss and Cain, 1995 U. Chi. Legal F. 163, 164 ("Concepts such
as corruption cannot be applied satisfactorily to political life by deduction from general theoretical propositions."). For a specific exploration
of these insights onto the legal profession, see Sung Hui Kim, Lawyer Exceptionalism in the Gatekeeping Wars, 63 SMU L. Rev. 73, 95-111
(2010).

n301. Thompson, supra note 293, at 28 (emphasis added) (footnote omitted). For explorations of alternative, more intuitive understandings
of corruption, including those definitions that emphasize the underlying psychological condition rather than the outward behavior, see
generally Kleinig & Heffernan, supra note 297; Laura S. Underkuffler, Captured by Evil: The Idea of Corruption in Law (2011) (unpublished
manuscript) (on file with the author).

n302. On the modern definitions of corruption, see Thompson, supra note 293, at 29.

n303. See Thompson, supra note 293, at 28 (noting that the modern conception of corruption retains the notion of the "pollution of the
public by the private" but replaces the "consensus on the public good" with the "democratic process").

n304. Michael Johnston, Democracy Without Politics? Hidden Costs of Corruption and Reform in America, in Corruption and American
Politics, supra note 291, at 13, 16 (emphasis omitted).
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98 Cornell L. Rev. 845, *

n305. See, e.g., Susan Rose-Ackerman, Corruption and Government: Causes, Consequences, and Reform 91 (1999) (defining corruption as
the "misuse of public power for private gain"); Kleinig & Heffernan, supra note 297, at 3 ("If there is an orthodox account of corruption, it is
that it consists in the improper use of public office for private gain."); Mark E. Warren, Political Corruption as Duplicitous Exclusion, 37 Pol.
Sci. & Pol. 803, 803 (2006) (noting the "received conception of political corruption" as "the abuse of public office for private gain"); World
Bank Institute, Control of Corruption Index, http://info.worldbank.org/governance/wgi/pdf/cc.pdf (last visited Oct. 22, 2012) ("Control of
corruption captures perceptions of the extent to which public power is exercised for private gain ... .").
Three definitional issues are worth noting at the outset. First, many definitions of corruption emphasize the "misuse" (or "abuse") of
public office for private gain. That, of course, raises the question of what counts as "misuse" versus acceptable "use." The same concern can
be alternatively reframed as involving the distinction between "improper personal gain" (which I call "private gain") and "proper personal
gain," e.g., one's standard salary and approved perquisites. For simplicity's sake, I would rather locate the disapprobation inherent in the term
"misuse" in the term "private gain" and the critical nexus to "public office." Hence, I define corruption simply as the use of public office for
private gain.
Second, the definition of corruption adopted here is in certain respects a narrow one - what political scientists would categorize as
individual corruption. But academics also refer to a broader institutional (or "systemic" form of) corruption. See, e.g., Thompson, supra note
293, at 25 (distinguishing individual and institutional corruption); Michael A. Genovese, The Politics of Corruption and the Corruption of
Politics, in Corruption and American Politics, supra note 291, at 1, 3 (distinguishing individual and systemic corruption, in which public
office is used not for private gain, such as lining one's own pockets, but political gain, such as furthering one's ideological causes, political
party's fate, or even personal political ambitions). The notion of institutional (or systemic) corruption certainly resonates with much of the
electorate (e.g., the popular rhetoric on "corrupting" but lawful campaign contributions). However, there is much less consensus about what
constitutes institutional corruption and whether anything should be done about it. Compare Bruce E. Cain, Moralism and Realism in
Campaign Finance Reform, 1995 U. Chi. Legal F. 111, 112 (criticizing the notion of institutional corruption), and David A. Strauss, What Is
the Goal of Campaign Finance Reform?, 1995 U. Chi. Legal. F. 141, 142, with Lawrence Lessig, Republic, Lost: How Money Corrupts
Congress - and a Plan to Stop It 226-47 (2011) (highlighting the importance of focusing on more systemic forms of corruption, referred to as
"dependence corruption"). Consequently, trying to draw a bright line between institutional corruption and hardball politics is difficult.
Thankfully, legislator insider trading falls squarely in the more easily defined category of individual corruption. For purposes of my analysis,
I mean to emphasize private gain (as defined here) and not political gain, which raises another set of complex questions about what
constitutes the proper (and improper) pursuit of political gain. See infra text accompanying notes 310-18.
Third, the definition of corruption advanced here is not coextensive with illegality. Indeed, there may be conduct falling under my
definition that is not currently illegal but nonetheless arguably corrupt. This makes sense in light of the fact that there is almost always a gap
between prevailing cultural understandings and what the law contemporaneously proscribes.

n306. House Ethics Manual, supra note 217, at 1; see id. at 185 (citing Rule 23, cl. 3 for the proposition that the House Code of Official
Conduct prohibits a House member or other employee "from using his or her official position for personal gain").

n307. John T. Noonan, Jr., Bribes 704 (1984).

n308. Cf. Thompson, supra note 293, at 50 (noting that a governor convicted of political corruption was nevertheless "right in assuming
public office is not like entering a monastery").

n309. Id.

n310. By "personal gain," I mean to include gain that not only directly benefits the official in question but also inures to the official's family
or friends.

n311. Andrew Stark, Conflict of Interest in American Public Life 76 (2000) (defining the term "private gain from public office").

n312. Two clarifications are in order. First, by referring to private gain as being "superogatory," I do not suggest that private gain is in any
sense virtuous, which is a common connotation of that term. Second, the definition of "private gain" that I adopt would generally exclude
longstanding explicit perquisites of congressional office because they ordinarily serve an important political function. For example, the
proper purpose of the franking privilege is to aid communication with constituents. However, if the franking privilege is misused by
members to for personal purposes in contravention of rules, it would amount to "private gain" under this definition. For discussion of the
franking privilege, see Thompson, supra note 293, at 73. Also, my definition of "private gain" would exclude certain noneconomic forms of
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98 Cornell L. Rev. 845, *

personal gain, such as enhanced prestige or increased name recognition, because they are unavoidable consequences of, and thus incidental
to, holding office and for those reasons deemed unobjectionable.

n313. For simplicity, I have chosen to locate the disapprobation that attaches to "corruption" within the definition of "private gain" and the
nexus to "public office." For a further explanation, see supra note 305.

n314. Cf. Stark, supra note 311, at 76 ("To then say that such private gain flows from public office implies that the official enjoys such gain
only because she happens to occupy that official role." (emphasis added)).

n315. Id. at 76.

n316. Cf. Underkuffler, supra note 301, at 9 (arguing that corruption requires "intentional misconduct" (emphasis omitted)).

n317. A de minimis level of intention is implied by the intentionality-laden word "use" in the phrase "use of one's public office for private
gain."

n318. Because my definition of corruption is not coextensive with civil or criminal illegality, I do not wish to further specify any mens rea
conditions attaching to the intentionality of conduct, as those conditions will differ depending on whether the case is civil or criminal.
Moreover, it is possible that conduct can be regarded as corrupt but not unlawful.

n319. The phrase comes from Thompson, supra note 293, at 28. This is not to say that private gain from public office is normatively
problematic for consequentialist reasons only. There may also be deontological objections to private gain from public office, which may not
be well captured by terms such as "costs" or "harms."

n320. Omar Azfar et al., The Causes and Consequences of Corruption, 573 Annals Am. Acad. Pol. & Soc. Sci. 42, 47 (2001).

n321. Under federal law, acceptance of a bribe is illegal, regardless of whether the bribe actually influenced the official's conduct. See, e.g.,
United States v. Valle, 538 F.3d 341, 346 (2008); United States v. Quinn, 359 F.3d 666, 675 (2004); see also United States v. Muhammad,
120 F.3d 688, 693 (1997) ("[A] defendant violates [the federal antibribery statute] by merely seeking or demanding a bribe, regardless of
whether he accepts or even agrees to accept it.").

n322. See Kim, Governmental Insider Trading, supra note 34, at 60-61 (discussing the "temptation, distraction and legitimacy costs" of
public corruption in the form of governmental insider trading and drawing linkages with findings in the political science and economic
literatures).

n323. See, e.g., Klitgaard, supra note 296, at 38 (summarizing studies of harms of public corruption); Tanja Rabl, Private Corruption and Its
Actors: Insights into the Subjective Decision Making Processes 62-64 (2008) (discussing studies on the harms of corrupt procurements).

n324. See Rose-Ackerman, supra note 305, at 2-3 (summarizing findings).

n325. See id.


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n326. A recent public opinion poll reports that the "vast majority of Americans (86%) believe insider trading laws should be enforced
against members of Congress." New Judicial Watch-Harris Interactive Poll Sends Warning to Washington Politicians, Judicial Watch (Jan.
20, 2012), http://www.judicialwatch.org/press-room/weekly-updates/new-poll-and-stealing-democracy/.

n327. See, e.g., Confronting Pelosi on Insider Trading, CBSNews (June 17, 2012, 3:55 PM), http://www.cbsnews.com/8301-504803 162-
57323518-10391709/confronting-pelosi-on-insider-trading/?tag=segementExtraScroller;housing (discussing how no congressmen were
willing to meet with 60 Minutes reporters to discuss insider-motivated investments and showing Representatives John Boehner and Nancy
Pelosi actively avoiding questions on the issue).

n328. For example, with respect to bribery, economic research indicates that once bribery becomes pervasive in a society, government
officials do not remain passive recipients of cash but rather become active extortionists of fees. Klitgaard, supra note 296, at 41-42. Citizens,
too, increasingly "invest their energies in the pursuit of illicit favors." Id. at 44.

n329. Cf. Susan Rose-Ackerman, Corruption: Greed, Culture, and the State, 120 Yale L.J. Online 125, 135 (2010) (describing the potential
effects of unchecked corruption).

n330. See, e.g., Fox-Decent, supra note 163, at 4; Tamar Frankel, Fiduciary Law 4-6 (2011); Frank H. Easterbrook & Daniel R. Fischel,
Contract and Fiduciary Duty, 36 J.L. & Econ. 425, 427 (1993); Leib & Ponet, Fiduciary Representation, supra note 163, at 183; Lawrence E.
Mitchell, The Death of Fiduciary Duty in Close Corporations, 138 U. Pa. L. Rev. 1675, 1684 (1990).

n331. See, e.g., Finn, supra note 133, at 1 (arguing that use of the term "fiduciary" merely provides "a veil behind which individual rules and
principles have been developed" and that it is "meaningless to talk of fiduciary relationships as such"); DeMott, Beyond Metaphor, supra
note 135, at 915 ("Described instrumentally, the fiduciary obligation is a device that enables the law to respond to a range of situations in
which, for a variety of reasons, one person's discretion ought to be controlled because of characteristics of that person's relationship with
another. This instrumental description is the only general assertion about fiduciary obligation that can be sustained."); Sealy, supra note 129,
at 73 (noting that "we cannot proceed any further in our search for a general definition of fiduciary relationships," suggesting that fiduciary
relationships must be defined "class by class," and positing four categories of fiduciary relationships).

n332. See Sealy, supra note 129, at 74-79, for a description of four categories of fiduciary relationships.

n333. See Frankel, supra note 147, at 797 ("The differences among fiduciaries may be so great that treating them as a group would require a
very high level of generality, rendering a unified examination of little use.").

n334. DeMott, Beyond Metaphor, supra note 135, at 881 (footnote omitted).

n335. An anti-corruption norm (as applied to the private sector) is apparent in cases which illustrate a judicial impulse against pursuing
selfish gain through one's fiduciary position. For cases restricting the fiduciary's ability to obtain or use lease renewals and reversions,
opportunities, and confidential information for selfish gain, see, for example, Irving Trust Co. v. Deutsch, 73 F.2d 121 (2d Cir. 1934);
Zeiden v. Oliphant, 54 N.Y.S.2d 27 (N.Y. Sup. Ct. 1945); Keech v. Sanford, (1726) 25 Eng. Rep. 223 (Ch.) 223. For a definition of private
corruption, see Kim, Governmental Insider Trading, supra note 34, at 46-48.

n336. See Robert C. Clark, Agency Costs Versus Fiduciary Duties, in Principals and Agents: The Structure of Business 55, 73-74 (John W.
Pratt & Richard J. Zeckhauser eds., 1985) (noting that in older case law on corporate managers, courts expressed this rule as a duty not to
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98 Cornell L. Rev. 845, *

take "secret profits," i.e., compensation that is not "expressly provided to the manager in the governing statutes, charter and bylaws, and
employment contracts (if any)").

n337. See, e.g., Restatement (Third) of Agency § 8.02 (2006) (prohibiting an agent from acquiring "a material benefit from a third party in
connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent's use of the agent's
position").

n338. Victor Brudney, Contract and Fiduciary Duty in Corporate Law, 38 B.C. L. Rev. 595, 601 (1997) [hereinafter Brudney, Fiduciary
Duty] (defining the "exclusive benefit principle" as the notion "that the fiduciary's duty of loyalty requires the trustee or agent to act as the
beneficiary's (or principal's) alter ego and act only as the latter would act for himself"); see Restatement (Third) of Agency § 8.01, (2006)
("An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship"); Restatement
(First) of Trusts § 170 (1935) (noting that the duty of a trustee is "to administer the trust solely in the interest of the beneficiary").

n339. Leib & Ponet, Fiduciary Representation, supra note 163, at 188-89.

n340. See Restatement (Third) of Agency § 8.01, cmt. b (2006) ("A principal may choose to structure the basis on which an agent will be
compensated so that the agent's interests are concurrent with those of the principal.").

n341. Victor Brudney & Robert Charles Clark, A New Look at Corporate Opportunities, 94 Harv. L. Rev. 997, 999 (1981) (emphasis
added).

n342. Brudney, Fiduciary Duty, supra note 338, at 602.

n343. Daniel H. Lowenstein, Political Bribery and the Intermediate Theory of Politics, 32 UCLA L. Rev. 784, 787 (1985).

n344. Attorney-General v. Goddard, [1929] 98 L.J.K.B. 743 at 744 (Eng.).

n345. Id.

n346. Id. at 745.

n347. Id. at 746.

n348. Id.

n349. Id. at 745.

n350. Id.
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98 Cornell L. Rev. 845, *

n351. [1951] A.C. 507 (Eng.); see Reading v. The King, [1948] 2 K.B. 268 (Eng.) (prior history).

n352. Reading v. The King, [1948] 2 K.B. 268 at 268.

n353. Id. at 269.

n354. Reading v. Attorney General, [1951] A.C. 507 at 508.

n355. Id.

n356. Id. at 515.

n357. Id. at 516.

n358. Id. at 514.

n359. Id. at 508.

n360. Id. at 516.

n361. Id. at 508.

n362. Id. at 517.

n363. Id. at 517 (Lord Normand, concurring).

n364. 329 F.2d 109 (1st Cir. 1964).

n365. Id. at 109.

n366. Id.

n367. Id. at 112.


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98 Cornell L. Rev. 845, *

n368. Id.

n369. For example, the employee advised the company on how to handle chickens after delivery so as to reduce contamination. "He assisted
[the company] in tracking down and eliminating the source of discoloration of ducks received by producers ... ." Id. at 111.

n370. See id. at 110-11 (describing the voluntary nature of program).

n371. Id. at 113.

n372. Id. (quoting United States v. Carter, 217 U.S. 286, 305 (1910)).

n373. Id. (quoting Carter, 217 U.S. at 305).

n374. Id. (quoting Carter, 217 U.S. at 305).

n375. Some of the following objections are constitutional in nature. In answering them, I remain focused on the doctrine because the
relevant constitutional objections appear not to be overwhelming. In this type of discussion, one can always "go deeper," for example, by
interrogating competing constitutional values and policies that undergird the doctrine. However, exploring such arguments may mislead
readers into thinking that judges will rely on policy considerations untethered to doctrine when evaluating these constitutional objections,
which is unlikely to be the case. Moreover, exploring constitutional policy arguments in depth goes far beyond the scope (and strict space
constraints) of this already lengthy Article. Suffice it to say that, for purposes of this Part, if one were inclined to explore the underlying
constitutional policies, one must take into account the perspective that the Constitution may also contain strong anti-corruption principles.
For just such an argument, see Zephyr Teachout, The Anti-Corruption Principle, 94 Cornell L. Rev. 341 (2009). For a critique of that
argument, see Seth Barrett Tillman, Citizens United and the Scope of Professor Teachout's Anti-Corruption Principle, 107 Nw. U. L. Rev. 1
(2012).

n376. See A.C. Pritchard, United States v. O'Hagan: Agency Law and Justice Powell's Legacy for the Law of Insider Trading, 78 B.U. L.
Rev. 13, 22 (1998) (noting that "the common law of deceit provides scant support for [the position in Chiarella] that a corporate insider
defrauds a shareholder" when the insider simply trades on the open market); see also Goodwin v. Agassiz, 186 N.E. 659, 660 (Mass. 1933)
(holding that directors do not "occupy the position of trustee toward individual stockholders" and that there was "no fiduciary relation
between them and the plaintiff in the matter of the sale of his stock" (quoting Blabon v. Hay, 169 N.E. 268, 271 (Mass. 1929))).

n377. See Pritchard, supra note 376, at 23.

n378. To be sure, a minority of courts eventually came to adopt the "special facts" doctrine, in which special circumstances can render an
insider's silence in a face-to-face transaction unconscionable and thus warrant the imposition of a duty of full disclosure. That said, cases
adopting this doctrine are easily distinguishable from transactions over impersonal exchanges. See id. at 25 (distinguishing special facts
doctrine from other cases); see also Strong v. Repide, 213 U.S. 419, 434 (1909) (creating the special facts doctrine). While there were a few
states which required disclosure of nonpublic information to shareholders even in the absence of special circumstances, they did so only for
face-to-face transactions, which are thus distinguishable from stock market transactions. See Anabtawi, supra note 106, at 865 (citing Oliver
v. Oliver, 45 S.E. 232 (Ga. 1903)).
Page 151Page 151
98 Cornell L. Rev. 845, *

n379. See Alison Grey Anderson, Fraud, Fiduciaries, and Insider Trading, 10 Hofstra L. Rev. 341, 366-67 (1982) ("Silence by a fiduciary is
fraudulent primarily because the beneficiary is likely to interpret that silence in a face-to-face transaction as meaning that the fiduciary is
aware of no additional material information.").

n380. Langevoort, supra note 42, § 2:3, at 2-6 ("Given the essential independence of buyer and seller decisions, causation and injury
flowing from any nondisclosure are difficult to trace.").

n381. Painter, Krawiec & Williams, supra note 43, at 162 n.34 (citing Louis Loss, Securities Regulation 824 (1st ed. 1951)).

n382. Id. (emphasis added).

n383. Of course, even at the time, this majority rule was slowly giving way to the minority view that "corporate insiders are subject to a
fiduciary duty when dealing with shareholders of their corporation and thus must make full disclosure of all material facts." Id. Also,
according to Louis Loss, the majority rule had merged into the "special facts" doctrine. Id.

n384. See Pritchard, supra note 376, at 26.

n385. Chiarella v. United States, 445 U.S. 222, 227 n.8 (quoting Gratz v. Claughton, 187 F.2d 46, 49 (2d Cir. 1951)).

n386. As Adam Pritchard notes, "although this distinction may be 'sorry,' it is the common law rule." Pritchard, supra note 376, at 26.

n387. See, e.g., Irving Trust Co. v. Deutsch, 73 F.2d 121, 125 (2d Cir. 1934) ("A mere employee of a corporation does not ordinarily occupy
a position of trust or confidence toward his employer unless he is also an agent in respect to the matter under consideration."); Palmer v.
Cypress Hill Cemetery, 25 N.E. 983, 985 (N.Y. 1890) ("The plaintiff was not a trustee at the time the contract with him was made, and his
relation ... was not fiduciary, but was that of an employee ... .").

n388. See, e.g., Brophy v. Cities Serv. Co., 70 A.2d 5, 7 (Del. Ch. 1949) (holding that when an employee obtains secret information, the
employee assumes a position of trust within the company); Essex Trust Co. v. Enwright, 102 N.E. 441, 443 (Mass. 1913) (compelling
employee to assign a lease to detriment of his employer).

n389. See, e.g., ATC Distrib. Grp. v. Whatever It Takes Transmissions & Parts, Inc., 402 F.3d 700, 715 (6th Cir. 2004) ("Unlike 'mere'
employees, officers of a company may be presumed to have a fiduciary relationship to the company on that basis alone ... ."); TalentBurst,
Inc. v. Collabera, Inc., 567 F. Supp. 2d 261, 265-66 (D. Mass. 2008) (noting that in Massachusetts, an employee must occupy a position of
trust and confidence in order to warrant fiduciary duties); Atlanta Mkt. Ctr. Mgmt. Co. v. McLane, 503 S.E.2d 278, 281 (Ga. 1998) ("The
employee-employer relationship is not one from which the law will necessarily imply fiduciary obligations ... ."). Some states require that an
employee be a "key employee" in order to be fiduciary. See, e.g., Burbank Grease Servs. v. Sokolowski, 717 N.W.2d 781, 796 (Wis. 2005)
("If the employee is a 'key employee,' then a fiduciary duty of loyalty will exist.").

n390. See, e.g., United States v. Larrabee, 240 F.3d 18, 19 (1st Cir. 2001) (affirming liability of law firm's director of fiduciary services
under misappropriation theory); SEC v. Musella, 578 F. Supp. 425, 438-39 (S.D.N.Y. 1984) (finding law firm's office-services manager to be
a fiduciary for purposes of tipping liability).
Page 152Page 152
98 Cornell L. Rev. 845, *

n391. See SEC v. Falbo, 14 F. Supp. 2d 508, 522-23 (S.D.N.Y. 1998) (finding an executive's secretary to be a fiduciary under
misappropriation theory); Brophy, 70 A.2d at 7 (holding that a secretary occupies "a position of trust and confidence toward the corporation,
with respect to the information so acquired, and the purchase of its stock for his own account was a breach of the duty he owed to" the
corporation).

n392. SEC v. Materia, No. 82 Civ. 6225, 1983 WL 1396, at 2-3 (S.D.N.Y. 1983), aff'd, 745 F.2d 197 (2d Cir. 1984).

n393. SEC v. Trikilis, No. CV 92-1336-RSWL(EEX), 1992 WL 301398, at 3 (C.D. Cal. July 28, 1992), vacated, Civ. A. No. 92 1336-
RSWL(EEX), 1993 WL 43571 (C.D. Cal. Jan. 22, 1993).

n394. See Kim, Governmental Insider Trading, supra note 34, at 61.

n395. See supra note 36 and accompanying text.

n396. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975).

n397. George D. Brown, Should Federalism Shield Corruption? - Mail Fraud, State Law and Post-Lopez Analysis, 82 Cornell L. Rev. 225,
250 (1997) (discussing the United States v. Lopez Court's concern with protecting traditional state police power).

n398. See George D. Brown, New Federalism's Unanswered Question: Who Should Prosecute State and Local Officials for Political
Corruption?, 60 Wash. & Lee. L. Rev. 417, 421 (2003).

n399. See Adam H. Kurland, The Guarantee Clause as a Basis for Federal Prosecutions of State and Local Officials, 62 S. Cal. L. Rev. 367,
370 (1989) (stating that the constitutionality of statutes prosecuting state and local officials for corruption is well established).

n400. See id. (noting that Racketeer Influenced and Corrupt Organizations statute, the Travel Act, and the Hobbs Act were all grounded in
the Commerce Clause and survived constitutional challenge). Public officials are also prosecuted under the federal mail fraud statutes, which
are grounded in the postal power.

n401. See, e.g., United States v. Morrison, 529 U.S. 598 (2000) (civil damages provision of the Violence Against Women Act); United
States v. Lopez, 514 U.S. 549 (1995) (Gun-Free School Zones Act).

n402. See Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 Vand. L. Rev. 1573, 1585 n.29
(2005), for a discussion on the constitutionality of a hypothetical complete federal displacement of state corporate law. It goes without saying
that if Congress has the power to displace state corporate law in its entirety, Congress certainly has the power to regulate insider trading in its
entirety.

n403. Ryan K. Stumphauzer, Note, Electronic Impulses, Digital Signals, and Federal Jurisdiction: Congress's Commerce Clause Power in
the Twenty-First Century, 56 Vand. L. Rev. 277, 289 (2003). For a discussion of some lower courts' broad readings of the phrase
"instrumentality of interstate commerce," see id. at 312-13.
Page 153Page 153
98 Cornell L. Rev. 845, *

n404. Lopez, 514 U.S. at 558-59 ("Congress' commerce authority includes the power to regulate those activities having a substantial
relationship to interstate commerce ... .").

n405. Section 10(b)'s prohibitions apply when a defendant uses "any means or instrumentality of interstate commerce or of the mails, or of
any facility of any national securities exchange." 15 U.S.C. § 78j. Likewise, Rule 10b-5 provides that it is unlawful "for any person, directly
or indirectly, by the use of any means or instrumentality of interstate commerce ... ." 17 C.F.R. § 240.10b5.

n406. Cf. Lopez, 514 U.S. at 561 (striking down part of the statute because "it contains no jurisdictional element which would ensure" that
the prohibited activity affects interstate commerce).

n407. John C. Coffee, Jr., Modern Mail Fraud: The Restoration of the Public/Private Distinction, 35 Am. Crim. L. Rev. 427, 454-55 (1998)
(observing that federal anti-corruption legislation does not easily offend the anti-commandeering principle of New York v. United States).

n408. See id. at 455 (suggesting that Justice O'Connor created an exception to the federalism limits imposed in New York v. United States
for legislation that "subjected a state to the same legislation applicable to private parties").

n409. U.S. Const. art. I, § 6, cl. 1; see John E. Nowak & Ronald D. Rotunda, Treatise on Constitutional Law 305-12 (8th ed. 2010)
(explaining the history of the Speech or Debate Clause and the cases interpreting it). Of course, if a state constitution has a similar clause,
some of this analysis may cross-apply. Cf., e.g., Wilkins v. Gagliardi, 556 N.W.2d 171, 176-77 (Mich. App. 1996) ("The Speech or Debate
Clause of the Michigan Constitution is substantially similar to that of the United States Constitution ... .").

n410. Davis v. Passman, 442 U.S. 228, 235 n.11 (1979) (quoting Eastland v. United States Servicemen's Fund, 421 U.S. 491, 501 (1975))
(internal quotation marks omitted).

n411. Gravel v. United States, 408 U.S. 606, 624-25 (1972).

n412. See, e.g., United States v. Brewster, 408 U.S. 501, 508 (1972) (noting that the Founders designed the Clause to foster legislative
independence); Gravel, 408 U.S. at 616 ("The Speech or Debate Clause was designed to assure a co-equal branch of the government wide
freedom of speech, debate, and deliberation without intimidation or threats from the Executive Branch."); United States v. Johnson, 383 U.S.
169, 180-81 (1966) ("[The Clause] prevents intimidation by the executive ... .").

n413. Johnson, 383 U.S. at 178. For separate exploration of general separation of powers principles, see supra note 35.

n414. Brewster, 408 U.S. at 507.

n415. Gravel, 408 U.S. at 616.

n416. Id. at 625.

n417. Brewster, 408 U.S. at 516; see id. at 520 (rejecting "sweeping claims [that] would render Members of Congress virtually immune
from a wide range of crimes simply because the acts in question were peripherally related to their holding office").
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98 Cornell L. Rev. 845, *

n418. Gravel, 408 U.S. at 626.

n419. United States v. Johnson, 383 U.S. 169, 172 (1966) ("No argument is made, nor do we think that it could be successfully contended,
that the Speech or Debate Clause reaches conduct, such as was involved in the attempt to [illegally] influence the Department of Justice [and
thereby defraud the United States], that is in no wise related to the due functioning of the legislative process."). The Court did hold, however,
that with respect to a conspiracy charge that turned on dissecting both the text and motivation for a speech that Johnson made during the
legislative process, the Speech or Debate Clause would prevent prosecution. Id. at 173-77. The Court was careful to guard against
overreading. It explained, "our decision does not touch a prosecution which, though as here founded on a criminal statute of general
application, does not draw in question the legislative acts of the defendant member of Congress or his motives for performing them." Id. at
185.

n420. Brewster, 408 U.S. at 501 (prosecution under 18 U.S.C.§§201(c)(1), (g)); United States v. McDade, 28 F.3d 283, 283 (3d Cir. 1994).

n421. United States v. Renzi, 651 F.3d 1012, 1012 (9th Cir. 2011).

n422. Fed. Election Comm'n v. Wright, 777 F. Supp. 525, 527 (N.D. Tex. 1991).

n423. United States v. Rostenkowski, 59 F.3d 1291, 1302-04 (D.C. Cir. 1995).

n424. Cf. Brewster, 408 U.S. at 528 ("The Speech or Debate Clause does not prohibit inquiry into illegal conduct simply because it has
some nexus to legislative functions.")

n425. 408 U.S. 501 (1972).

n426. Cf. Bainbridge, Inside the Beltway, supra note 9, at 303 n.153 (comparing legislator insider trading to legislator bribery under
Brewster and stressing that both fall outside the scope of legislative activity).

n427. Brewster, 408 U.S. at 526 (internal quotation marks omitted); see id. at 512 ("A legislative act has consistently been defined as an act
generally done in Congress in relation to the business before it.").

n428. See id. at 524-25 ("But financial abuses by way of bribes, perhaps even more than Executive power, would gravely undermine
legislative integrity and defeat the right of the public to honest representation."); Bainbridge, Inside the Beltway, supra note 9, at 303 ("By
removing the perverse incentives such trading opportunities create, the legislative process would be enhanced.").

n429. United States v. Renzi, 651 F.3d 1012, 1031 (9th Cir. 2011) (holding that certain exhibits and emails that discussed status of actual
legislation should have been excluded from the grand jury based on these privileges). For the justification of this holding, see generally id. at
1020, 1035 n.27 (describing three distinct protections - liability immunity, testimonial privilege, and evidentiary privilege). Whether the
Clause creates also a nondisclosure privilege applicable against the Executive Branch is in dispute. Compare United States v. Rayburn
House, 497 F.3d 654, 663 (D.C. Cir. 2007) (finding the privilege), with Renzi, 651 F.3d at 1034 (rejecting the privilege).
Page 155Page 155
98 Cornell L. Rev. 845, *

n430. See Gravel v. United States, 408 U.S. 606, 616 (1972) (recognizing testimonial privilege).

n431. See United States v. Helstoski, 442 U.S. 477, 487-88 (1979) (holding that evidence that refers to a member's legislative act or
inquiries into the motivation behind a legislative act may not be introduced in a government prosecution). It is not entirely clear whether a
member can waive the Speech or Debate Clause. See id. at 490-91 (holding that if waiver is possible, it "can be found only after explicit and
unequivocal renunciation of the protection," but not deciding the question of its possibility).

n432. See United States. v. Renzi, 686 F. Supp. 2d 956, 971 (D. Ariz. 2010) (referring to the definition of "legislative act" as "an act
generally done in Congress in relation to the business before it ... or things said or done ... as a representative, in the exercise of the functions
of that office" (quoting Brewster, 408 U.S. at 512) (internal quotation marks omitted)).

n433. Although neither pure speech nor debate, a member's attendance at congressional hearings, briefings, or debates nonetheless is
necessary to performing all other legislative functions that are clearly protected by the Clause, such as voting or preparing committee reports.
Accordingly, the Supreme Court has acknowledged that "congressional efforts to inform itself through committee hearings are part of the
legislative function." Hutchinson v. Proxmire, 443 U.S. 111, 132-133 (1979).

n434. United States v. Swindall, 971 F.2d 1531, 1543 (11th Cir. 1992). The prosecution presented the evidence relating to the
Congressman's membership status in certain committees for the purpose of supporting an inference that the Congressman had "unique and
specific knowledge" of certain statutory provisions. The establishment of such knowledge was critical to the prosecution's case of perjury.
See id. at 1542. It should be noted, however, that the Court declined to dismiss the other indictments, where the prosecution established the
requisite evidence with reference to a legislative act. See id. (declining to dismiss Count Five).

n435. Brewster, 408 U.S. at 512. Also, in Gravel, the Court held that the lobbying of executive branch officials, though generally done, was
not protected by the Speech or Debate Clause because such activity was "beyond the legislative sphere." 408 U.S. at 625-26. In addition,
promises to perform a legislative act are not protected by the Clause. See Helstoski, 442 U.S. at 489.

n436. See Nowak & Rotunda, supra note 409, at 312-13.

n437. In addition, the Privilege from Arrest Clause, U.S. Const. art. I, § 6, is inapplicable because the privilege is limited to protection from
civil arrest, which is now an obsolete practice. See Nowak & Rotunda, supra note 409, at 312; Bainbridge, Inside the Beltway, supra note 9,
at 302.
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46 Cornell Int'l L.J. 219, *

58 of 430 DOCUMENTS

Copyright (c) 2013 Cornell University


Cornell International Law Journal

Spring, 2013

Cornell International Law Journal

46 Cornell Int'l L.J. 219

LENGTH: 30320 words

ARTICLE: The Word Commons and Foreign Laws

NAME: Thomas O. Main+

BIO: + William S. Boyd Professor of Law, William S. Boyd School of Law, University of Nevada, Las Vegas. The
author thanks Anupam Chander, Martha Minow, Scott Dodson, Elizabeth Burch, Tom Rowe, Dan Markel, Alexandra
Lahav, Kevin Stack, Greg Pingree, Jay Tidmarsh, Collin Wedel, Stephen Subrin, Matt Hall, Gregory Schneider, Emily
Navasca, and others who generously shared their expertise and offered their insights. This Article also benefited from
comments made by friends and colleagues at the University of Nevada-Las Vegas William S. Boyd School of Law and
the University of the Pacific McGeorge School of Law, and by colleagues during presentations at Temple University
Beasley School of Law, University of San Francisco Law School, St. Mary's University School of Law, and the
Northern California International Law Scholars Program.

LEXISNEXIS SUMMARY:
... The difficulty of ascertaining foreign law is somewhat peculiar since many legal systems throughout the world use
thousands of the same Latin, French, and English words in their codes and discourse. ... Like the farmers who bring
additional cattle to graze on the commons, national systems, acting independently and rationally, will introduce variant
meanings that progressively consume the common meaning of a word not only in the system that introduces the
variation, but everywhere else as well. ... Although some of these countries might precisely replicate the original
meaning, countries can - and should - tailor the device for their desired purpose. ... Accordingly, the discovery of
something new costs more, by way of measurement, than the confirmation of something familiar. ... The expense of
measuring foreign law is avoided when a case is dismissed on a forum non conveniens motion, but at what cost? ...
These efforts are qualitatively different from Incoterms, however, because effective harmonization requires two steps:
first, the laws must be harmonized; second, the meanings of the words in the shared text must be harmonized. ... Such a
resource could lead to the more frequent appointment of neutral experts and special masters.

HIGHLIGHT:
Dual trends are colliding in U.S. courts. The first trend is a tidal wave of cases requiring courts to engage the
domestic laws of foreign legal systems; globalization is the principal driver of this escalation. The second trend is a
profound and ever-increasing skepticism of our ability to understand foreign law; the literature of pluralism and
postmodernism has illuminated the uniquely local, language-dependent, and culturally embedded nature of law. Courts
cope with this dissonance by finding some way to avoid the application of foreign law. However, these outcomes are
problematic because parties are denied access to court or have their rights and responsibilities determined pursuant to
the incorrect law.
This Article offers an exposition of lexical meaning to explain the source of these oppositional trends and to
illuminate possible solutions. Legal words and ideas transcend geographic, social, and cultural boundaries. For this
reason, the words of another legal system look familiar and, thus, appear knowable to an outsider. Yet autonomous
national legal systems tend to tailor the meanings of these shared words for idiosyncratic purposes. Thus, ironically -
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46 Cornell Int'l L.J. 219, *

even paradoxically - the more commonly a word is used, the less predictable is its meaning. This differentiation of
meanings makes actual knowledge of the foreign law difficult to achieve.
As a framework for examining this phenomenon, this Article demonstrates that the common meaning of a word is a
limited resource. The common meaning of a word erodes when legal systems assign a new meaning to a shared word.
Idiosyncratic meanings are useful and generative, but they also introduce an important negative externality because the
common meaning of a word is essentially the starting point for measuring the meaning of that word in a foreign system.
The more robust the common meaning, the lower the measurement costs. The prototypical solutions to common-pool
problems - privatization and regulation - are infeasible here. Moreover, ubiquitous efforts to unify, approximate, or
harmonize laws tend to exacerbate the problem rather than help solve it.
We could drop the pretense that we are able to understand foreign law and eliminate the demand for it.
Alternatively, if the doctrines are going to presume familiarity with foreign law, we must address the supply side and
ensure that courts are, in fact, better able to understand the idiosyncracies of foreign law.

TEXT:
[*220]
Introduction

In the article that popularized the tragedy of the commons, Professor Garrett Hardin suggested that a common-pool
resource might remain usable for a substantial period before it ultimately collapses. n1 Providing an open pasture for
farmers to graze their cattle, for example, worked satisfactorily for a long time because wars, theft, and disease
prevented the population of farmers and cattle from rising significantly and, thus, limited pressures on the land. But
there arrives a moment in time when conditions demand that this approach be abandoned as unsustainable. The "day of
reckoning" inevitably comes, when the "inherent logic of the commons...generates tragedy." n2
Globalization is leading to a similar tipping point regarding the ascertainment of foreign law. There are an ever-
increasing number of disputes with multi-national contacts. These cases implicate constellations of doctrines and
statutes that, in turn, require courts to engage foreign laws. "As you read these words, there are half a dozen U.S. courts
that are assiduously citing foreign law ... ." n3 Courts confront matters involving Korean contract law, n4 Egyptian
corporate law, n5 Peruvian civil procedure, n6 Russian [*221] criminal process, n7 and so on. And this spectacle is just
getting underway. n8
Yet rather than actually applying the foreign law that they cite, courts usually avoid it. n9 The artful dodge comes in
many forms, and the consequences of evasion can be serious. Courts frequently dismiss cases that would otherwise
require them to apply foreign law. n10 In other instances, litigants may have their rights and responsibilities determined
pursuant to the wrong law. n11
The salient reason for the avoidance of foreign law is the mismatch between what the courts are able to do and what
the doctrines and statutes require. Ascertaining foreign law presents a formidable challenge. The inherent complexity of
a legal system poses a tremendous burden for someone not trained in that system to navigate and decipher. The legal
pluralism literature warns of nuance in layers of ordering: a mandate considered out of context can be incomplete or
misleading. n12 Furthermore, scholars of different orientations have sharply illuminated the vagaries of cultural and
language translations. n13
Moreover, the content of foreign law cannot be buried as a question of fact in the black box of jury decision-
making. Rather, it is a question of law. n14 Accordingly, this shines a spotlight on judicial resolution of the question for
both trial and appellate judges. Unfortunately, the adversarial system tends to magnify the problem. n15
The difficulty of ascertaining foreign law is somewhat peculiar since many legal systems throughout the world use
thousands of the same Latin, n16 French, n17 and English n18 words in their codes and discourse. The [*222] translation of
words between languages creates another large corpus of words that are shared between and among legal systems. For
example, purchase and sale in English resembles compra y venta in Spanish, compravendita in Italian, achat et vente in
French, einkauf und verkauf in German, and so on.
However, shared words do not necessarily have shared meaning. Legal systems tailor the meanings of words to
reflect the unique priorities, preferences, and goals of a judicial, political, or social system. n19 The meaning of the word
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46 Cornell Int'l L.J. 219, *

class action, for example, will vary among countries for good, but idiosyncratic, reasons. In one country, the word can
refer to a joinder device that only a government actor can initiate; in another, it can refer to a joinder device permissible
only for consumer cases. Difference in word meaning can range from subtle to dramatic.
Because words have more than one meaning, we can discern from those variant meanings what we might call a
common meaning - defined here as that which is common to all of the variant meanings. For example, if the term class
action has different meanings in the systems of the United States, Finland, and Norway, the common meaning of that
term is the common ground among the various extant meanings.
The most novel contribution of this Article is the characterization of a word's common meaning as a limited
resource. Common meaning is a limited resource because the introduction of variant meanings can diminish, [*223]
but will never enhance, the content or scope of a word's common meaning. By using the word class action, for example,
each system's variant meaning may progressively erode the common ground. The more disciplined and uniform the
meanings assigned to a word, the more robust its common meaning. At the other extreme, promiscuous use of the word
could deplete its common meaning rather quickly.
Characterizing the common meaning of a word as a limited resource invites consideration of this language
phenomenon as a common-pool problem. In the classic scenario, the tragedy of the commons is a product of the fact
that the farmers enjoy all the benefits of their actions yet bear only part of the expense of those actions. The part of the
expense borne by the others is a negative externality. n20 Here, a legal system that introduces an idiosyncratic meaning to
a shared word likewise enjoys all the benefits from that customization. Yet that system bears only a fraction of the
expense it creates. Idiosyncratic meanings create a negative externality because they diminish the content or scope of a
word's common meaning. Like the farmers who bring additional cattle to graze on the commons, national systems,
acting independently and rationally, will introduce variant meanings that progressively consume the common meaning
of a word not only in the system that introduces the variation, but everywhere else as well. n21
While it may be easy to see why a common grazing land is valuable to cattle farmers, the utility of a word's
common meaning is less obvious. To understand why the dilution of a word's common meaning is, in fact, a tragedy,
one must appreciate how often participants in a legal system ascertain or "measure" the meanings of words. Participants
measure the meaning of words in their own legal system; however, they also measure the meaning of words in other
legal systems. This measurement is undertaken to ascertain the tailored meaning of the word in the foreign system, not
the word's common meaning, but the common meaning of the word can play an important role in this exercise.
Specifically, the cost of measuring the tailored meaning rises as content in the common meaning falls. Common
meaning is like the starting point, and the closer that the starting point is to the finish line (that of understanding foreign
law), the shorter the distance traveled. Because idiosyncratic meanings erode common meaning, idiosyncrasy in one
system can increase the information processing costs of all other systems interacting with any other system. n22
The erosion of a word's common meaning helps explain why courts may be ill-equipped to reliably and confidently
measure the meaning of foreign words. For courts navigating these waters, a robust common meaning could operate as
something of an anchor of familiarity. The absence of that anchor leaves them adrift. Avoidance of foreign law is a
predictable [*224] consequence. Unfortunately, avoidance converts an information problem into a justice problem.
This Article brings into sharper relief a problem that is inchoately understood but poorly addressed. Ubiquitous
reform efforts to draft model legislation, to promote the harmonization of laws, or to advance multilateral protocols are
premised, explicitly or implicitly, on the notion that difference among national laws is expensive, problematic, archaic,
or unnecessary. n23 I refer to these reforms as demand-side efforts because they would reduce the demand for
customization (which, in turn, consumes common meaning). There is no foreign law to measure, the thinking goes,
when the foreign and forum laws are the same. But I argue that this is not a text problem, and, therefore, there is no
textual solution. Demand-side efforts cannot solve the problem because the common meaning of a word is a limited
resource that will inevitably (or "tragically") degrade. Harmonization efforts, in fact, exacerbate the information
problem. n24
To solve the problem, attention must turn to supply-side efforts: obtaining better information about the content of
foreign law. I survey several supply-side techniques that are already available to courts but are comparatively under-
utilized, such as appointing special masters and using court-appointed experts. n25 I also identify a role for new foreign
law institutes. n26 Yet, more important than these particular suggestions is the argument for supply-side reforms (and
against demand-side reforms) more generally.
I. Common Words
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46 Cornell Int'l L.J. 219, *

Countries can design their own legal systems with whatever components and words they desire. Although most national
systems have some distinctive and unique features, there is also commonality between and among many legal systems.
Some of this overlap is a product of countries' shared histories and common traditions. n27 Another primary source of
overlap is the transplantation of practices and concepts from one system into another. n28 Especially (although not
exclusively) in these many areas of overlap, legal systems throughout the world draw from a common well of [*225]
words. n29
Legal words and ideas move from one system into another for a variety of reasons. Such movement can be
characterized as diffusion, transplantation, approximation, harmonization, evolution, hegemony, reception, unification,
or something else. n30 These labels suggest subtly different levels of intent and intensity, but each conveys the notion of
the movement of laws and words across national borders. The importation of a word from another legal system may be
deliberate, voluntary, and wise - or it might be none of these. n31 This migration of words is not a new phenomenon -
quite the contrary. n32 However, technology and globalization can introduce network effects that create new incentives or
pressures to transplant, and these might affect the pace of a word's movement. n33
Shared words need not have shared meanings. Indeed, legal systems can ascribe whatever meaning(s) they desire to
the words that they borrow, inherit, or invent. n34 And of course, difference in meaning can range from subtle to obvious.
Common examples of faux amis (false friends) n35 include the following words: brief, contempt, demand, doctrine,
domicile, fact, jurisprudence, law, magistrate, notary, process, res judicata, and trial. n36 [*226] The French word contrat
includes agreements that Americans would instead regard as gifts, conveyances, or trusts, and excludes various
documents that Americans would label contracts. n37 Marriage is a contrat in France but it is not a contratto in Italy. n38
Administrative law means very different things in civil law and common law countries. n39 What the Japanese call
discovery does not resemble its supposed American forbearer. n40 And American corporate lawyers might not recognize
as directors of Japanese companies individuals who are also employees. n41
The complete list of shared words with different meanings may be almost as long as the list of shared words itself.
n42
In support of this basic proposition, anthropologists emphasize that legal language develops characteristics that
conform to the unique history and culture of the system in [*227] which it operates. n43 Put another way, there is "no
transportation [between systems] without transformation." n44 Philosophers reach a similar conclusion by focusing on the
fact that legal words have meaning and meaningfulness only within the context of a specific legal system and particular
rules of law. n45 Finally, linguists and semioticians emphasize that the legal language of any system is an autonomous
technical language. n46 These literatures confirm what experience and common sense suggest about geographic variance
and the differentiation of a word's meaning.
Part I demonstrates two basic facts: that legal systems share words and that the meanings of those words can differ.
Both of these observations should be obvious and uncontroversial. Yet, notice that a paradox is already taking shape. On
one hand, words are shared between and among legal systems. In this respect, legal language, like many other
professional [*228] languages, n47 transcends geographic, social, and cultural boundaries. But on the other hand, legal
systems are also autonomous and unique. Each national law constitutes an independent legal system with its own
vocabulary, structure, and methodology. n48 Thus, the shared words may have different uses, purposes, and meanings.
Accordingly, the more popular a word is internationally, the less predictable its meaning is.
II. Word Meanings

This Part focuses more deliberately on what I intend by reference to the meaning of a word. For the purposes of this
Article, meaning refers to a word's "purpose, or intent, or function or aim or effect ... ." n49 The goal here is not to provide
a philosophical theory of meaning; this Article does not focus on why or how a word has the meaning it does, nor even
what meaning it has. n50 Indeed, everything that follows in this Article can stand while remaining agnostic about a
particular conception of meaning, provided one accepts the premise that legal words have meaning.
Most importantly, this Part defines three terms: original meaning, local meaning, and common meaning. These
terms are defined so that we can use them in later parts to explore the overlap and interaction of meanings that result
when different legal systems use the same words.
A. The Meaning of Lay Words and Legal Words
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The meaning of a word, whether it be lay or legal, is not a function of that word itself (nor the letters that constitute that
word), but rather the use to which that word is put. n51 A word is a symbol for something else - often a [*229] thing,
idea, or concept. n52 The word cat, for example, is a symbol that means something. It may be useful to think of that word
written on the exterior of a box; inside that box is the meaning or meanings of the word (i.e., what the symbol
represents). When one sees or hears the word cat, the brain invokes a meaning or meanings akin to something within the
content of the box that corresponds to that word-symbol. Of course this is no ordinary "box": it must contain cats of
different breeds and sizes, both tame and wild, cartoon and real, young and old, metaphoric and literal, and so forth.
Exactly which of these various cats our brain invokes when the word is read or heard is a function of the word's use and
context. n53
Words also symbolize ideas and concepts, not just things (like cats) that one places inside a box. Still, a word like
catch or catatonic has an associated box of meaning(s), even if that box includes only metaphysical entities or abstract
propositions. n54 The words cat, catch, and catatonic are symbols that evoke something because of the association
between these words and certain things, ideas, and concepts. n55 There is an infinite loop because a word symbolizes
something that can be described with words that, in turn, symbolize more concepts and more words, and so on. n56 But
[*230] the essential learning here is very simple: it is our associations with a word-symbol that suggest the meanings of
words, not anything that is intrinsic to the words themselves. After all, these letters and words could just as easily
symbolize anything else.
The association between a word symbol and its meaning(s) is the product of dynamic inter-subjective social
construction. n57 The meanings of lay words like cat, catch, and catatonic are neither officially announced nor formally
policed. n58 Instead, the box that informs a word's meaning contains something contingent upon the social discourse
within the applicable community. n59 Words mean what we construct them to mean. n60 Of course, what one speaker
envisions as a word's meaning may or may not match what the listener assigns to that symbol. From the perspective of a
discourse community, then, the meaning of a word may be contained in a "black box" (or at least an opaque one), rather
than a transparent container. What some members think is inside the box, others may not, and neither group is
necessarily right or wrong. n61
Language is famously indeterminate. n62 Even within a single discourse community, one word can have multiple
meanings. n63 Multiple words can share one meaning. n64 The meaning of words can change over [*231] time. n65 New
ideas and concepts spawn new words. n66 And ambiguity, n67 vagueness, n68 and generality n69 are de rigueur. n70
Accordingly, the study of meaning can be the study of something ephemeral, elusive, and enigmatic.
Our discussion so far has focused on the meaning of words. Yet meaning is a function not only of words, but also of
sentences, punctuation, paragraphs, and more. Most of the contemporary philosophy and linguistics literature focuses on
the construction of meaning in the sentential context (sentence-level), rather than at the word-level. n71 Indeed, the
sentential context is critical because the words and punctuation marks of a sentence can be rearranged to convey very
different things. However, it is important to appreciate that "words are ... atomic in an account of meaning." n72 We can
break down the meaning of an essay into paragraphs, divide the meaning of a paragraph into sentences, and divide the
meaning of a sentence into words. Yet we must stop there because, as we have already seen, the meaning of a word does
not depend systematically on the letters that comprise that word. n73 To focus on the meaning of words, then, is to focus
on [*232] the building blocks of meaning. n74 One might analogize the study of word-meaning to playing chess, and the
study of sentential-meaning to playing three-dimensional chess. n75
Lexical meaning is a more focused - and less complicated and controversial - inquiry than studying sentence-
meaning. But more importantly, it is also the core of legal discourse. n76 Researchers of language distinguish between
nomothetic sciences (which focus on universal rules) and idiographic sciences (which describe the unique and non-
recurrent cases). n77 The nomothetic sciences, which include the law, formulate generalizations and thus have a greater
need for terminology than the idiographic sciences, which focus on individual phenomena. n78 This emphasis on
terminology in legal discourse suggests that words are important not only for their role as building blocks in the
constitution of sentences, but often as the focus of the legal inquiry itself. n79 Indeed, many judicial opinions announce
something along the lines of: "This case turns on the meaning of the word x." n80
Meaning is also far less abstract in legal discourse as compared with [*233] other discourse communities. n81 For
practical reasons, as opposed to epistemological considerations, legal words and legal sentences must have meaning and
authority in a way that the words in a poem need not. A judge or a statute, for example, can definitively resolve the
scope of a word's meaning in a particular context. n82 This is an unusual condition compared to other language discourse,
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which is more open-textured and unregulated, sometimes even anarchic. n83 The meaning of a word in a William Blake
poem, for example, may be discussed for centuries without definitive resolution. n84
In the legal context, legislators and judges actualize the semantic potential of words and utterances in particular
speech acts. n85 Social conventions recognize and accept judicial authority to declare the meaning of words, albeit for a
limited purpose and for a particular discourse community. n86 [*234] Thus, a statute or judicial opinion may definitively
resolve whether cat includes cougars, which of two baseball fans caught a foul ball, or whether an individual is in a
catatonic state. The performative nature of language is indispensable for a legal system to execute its mandate to define
the rights and responsibilities of its citizenry. n87
To be sure, linguistic indeterminacy is neither avoidable nor avoided in legal discourse. n88 Even when the meaning
of a word or concept is judicially determined to include or exclude a situation presented, other indeterminacies can
persist - polysemy, n89 synonymy, n90 evolution, n91 neologisms, n92 ambiguity, n93 vagueness, n94 and generality n95 are
endemic. However, unlike other discourse communities, as there is a judicial infrastructure with the recognized
authority to interpret or construct that meaning, we can confidently refer to legal words as having meaning within that
community. The interpretive infrastructure can determine the content of any box that contains the meaning of any legal
word. Thus, the meaning of a legal word unquestionably exists even if it is deliberately protean or hopelessly unclear
prior to (or even after) it is interpreted.
Because there is an arbiter of meaning, legal language is fundamentally different from ordinary discourse. When
analyzing the interaction of meanings in such legal language, the existence of a meaning or meanings is much more
important than either the content of any particular word's [*235] meaning or the philosophical methodology by which
a word's meaning is derived.
B. Original Meaning, Local Meaning, and Common Meaning

Legal words begin with what I call an original meaning. The first legal system to introduce a word determines the
original meaning of that word. n96 This Article uses the word class action as an example of a word-symbol. But, of
course, the word could just as easily be alimony, bond, consideration, or something else. When the word-symbol (or
word) class action was introduced, its original meaning embodied all that the legal discourse and the associated
conventions embedded in that word. The box of original meaning for that word-symbol included the text of the new rule
and all of its attendant features. n97 The original meaning of the word class action could include a trans-substantive
joinder device with four prerequisites, a provision for opt-outs, limits on compromising suits without court approval, a
protocol for the appointment of class counsel, and so forth. n98 For expository purposes, let us refer to this original
meaning of class action as M<1>, and its originator legal system as First Country.
The original meaning of a word, as defined here, is broad. Why isn't the original meaning of class action instead
defined as something narrow, such as "litigation by a representative on behalf of a group," and nothing more than that?
The answer is that we are trying to describe the meaning assigned to the word by the system that introduced it. If First
Country introduced the word class action with a rule that has prescribed objectives, prerequisites that must be satisfied,
and a number of accompanying technicalities that must be met, there is no basis for including some of these and
subordinating others in an original meaning. In the same way that a statute might introduce the word disability with a
definition that includes a detailed list of specific medical conditions, the original meaning of a word should include all,
not just some, of those enumerated conditions. If we are trying to ascertain the meaning that is in the original "box," the
best evidence of the original meaning of M<1> is what First Country has said (or would say) that it is. The inclination to
suggest a narrower characterization of original meaning would often lead to a meaning that would reflect hindsight bias
n99
- invoking more of the word's legacy or essence based [*236] upon the subsequent uses of the word. A word's legacy
or essence tells us something important about a word's meaning, but not about its original meaning.
Once one country introduces a word and its associated concept, we might expect some other countries to find the
new idea useful. And, of course, some of these countries may even wish to use the same word-symbol. n100 Although
some of these countries might precisely replicate the original meaning, n101 countries can - and should - tailor the device
for their desired purpose. n102 Because the meaning of a word in any legal system is a product of the legal discourse in
that system, each legal system can assign whatever meaning it desires to the words it uses. n103 Put another way, the
system can fill the box of meaning with any mixture of borrowed and unique content. n104
Thus we might imagine another legal system, called Second Country, that replicates the original meaning of class
action except for a new provision that limits the scope of the subject matter of class actions to certain substantive areas
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(e.g., available only in consumer cases). Because M<1> has a trans-substantive scope in this scenario, meaning no
restriction as to subject matter, Second Country has introduced a slightly unique meaning of the word class action,
which we shall label M<2>. Third Country might then replicate the original (M<1>), but change only the requirements
for appointment of class counsel, introducing M<3>. At this stage in the hypothetical we have three different countries -
each with a meaning of the word class action that is tailored to its respective system. This Article refers to these tailored
meanings of the word as local meanings. Thus, for example, the local meaning of the word class action in Third Country
happens to be the third iteration, M<3>.
A local meaning is not necessarily a unique meaning. Continuing with our hypothetical, Fourth Country might
replicate the original, M<1>, and Fifth Country might replicate M<2>. Finally, Sixth Country might replicate M<3>, but
also require members of the class to opt-in (as opposed to opting out of the class, as in the other five countries),
introducing the fourth variant meaning, M<4>. A tailored local meaning can replicate another system's [*237] meaning
or it can be subtly (or dramatically) distinctive. From a global perspective, each distinctive meaning adds another,
variant meaning to the word. In the hypothetical, we have six countries using the word and thus six local meanings; we
also have four variant meanings of the word, including the original meaning.
This Article is principally about the common meaning of a word. Common meaning is defined here as that which is
common among all of the local (or variant) meanings. n105 Drawing from the above example, the common meaning of the
word class action would be the content that M<1>, M<2>, M<3>, and M<4> have in common. The following Venn
diagram illustrates the common meaning (CM) of the word class action in light of the four variant local meanings:
Figure 1

Put another way, the common meaning of the word is the content of the original meaning, M<1>, less the provisions
regarding subject matter (removed by M<2>), less the provisions regarding class counsel (removed by M<3>), and less
the provisions regarding opt-in/opt-out procedures (removed [*238] by M<4>). The mathematical symbols and
suggested calculation provide more precision than is intended or necessary, but they can be conceptually useful. n106
Thus, within any particular legal system, a word has both a local meaning and, as a subset thereof, a common
meaning. The common meaning includes those components of the local meaning that are also manifest in all other legal
systems. In the class action example, the word's common meaning after M<1>, M<2>, M<3>, and M<4> might include
such components as adequate representatives, notice requirements, numerosity, and whatever else of the original
meaning is incorporated within and unaltered by M<2>, M<3>, and M<4>.
Common meaning has an empirical quality that might reveal the essence of the word. For the word class action, for
example, the common meaning, after forty or fifty variant meanings, could be reduced to "litigation by a representative
on behalf of a group," and nothing more than that. n107 The common meaning could also resemble - or even be - what
logicians would label as necessary and/or sufficient conditions to define the word. n108 But, as defined here, common
meaning could be more or less than these alternative characterizations. Instead, the term identifies an empirical core of
common meaning that includes a word's shared characteristics.
[*239]
C. Common Meaning as a Limited Resource

The common meaning of a word is a limited resource. In contrast to words and meanings generally - which are shared
but not limited resources n109 - common meaning is a global, shared, limited resource, much like water or a species of
fish. The common meaning of a word is a limited resource because it erodes progressively as legal systems assign new
meanings to the shared word. Viewing lexical meaning through a lens of analysis reserved for limited resources offers a
unique perspective. Importantly, it allows us to consider a word's common meaning as a common-pool problem. n110
The prototypical common-pool resource is a plot of public grazing land that all cattle farmers can use to graze
cattle. n111 The grass on the commons is a sustainable resource so long as it consumed no faster than its natural rate of
replenishment. As soon as consumption exceeds that rate, the resource will provide diminishing aggregate returns. The
optimal strategy for the society as a whole, then, is to consume the resource at a sustainable rate. n112
Unfortunately, individual farmers will usually harvest for themselves at a rate higher than their share of the
sustainable aggregate rate. Indeed, each farmer, acting independently and rationally, will bring more than their share of
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cattle to the commons. n113 The economic explanation is that each farmer receives all of the benefit of each additional
cow they graze on the commons (because their cattle are fed), but bears only part of the expense of each additional cow
(since the effects of overgrazing are shared [*240] by all the farmers). The part of the expense that the other farmers
bear is the externality. n114 Predictably, the grass is consumed faster than it grows, and the independent rational actors in a
community create losses for everyone. As a result, "freedom in a commons brings ruin to all" - even though it is clear
that it is not in anyone's long-term interest for this to happen. n115 Such is the tragedy of the commons.
The common meaning of a word is likewise a shared limited resource that is vulnerable to this tragedy. I emphasize
that this is dramatic tragedy - a tragedy not in the sense of unhappiness, but rather in the sense that it is something that
the actors bring upon themselves because of the "solemnity of the remorseless working of things." n116 I explore the
normative consequences of preserving or losing this particular common-pool resource separately later. n117 However,
before considering those issues, let us confirm the inevitability of the devolution of a word's common meaning.
The marginal benefit of introducing a new meaning to a shared word is largely internal. Legal systems have
different preferences, priorities, and goals, n118 and these legitimate differences are manifest in slightly (or dramatically)
unique versions of, say, the class action device. Second Country may have legitimate reasons to limit the scope of its
device to consumer cases, regardless of the approach of other countries. Yet, this customization has very little, or no,
positive externality; in other words, no other country directly benefits from Second Country's innovation. Rather, like
the farmer who alone benefits from maintaining a larger herd of cattle, any particular legal system will receive all of the
benefit of its idiosyncrasy. n119
[*241] However, a system bears only a fraction of the costs it creates when it introduces a new meaning to a
shared word. The common meaning of a word operates as a commons. Like the depletion of the commons by the
farmers, national legal systems, acting independently and rationally, will introduce variant meanings that progressively
erode the common meaning of a word. Differences in the variant meanings of a word may range from subtle to
dramatic, with the latter presenting the bigger threat to a thick common meaning.
While the social value of a commons for grazing cattle is surely obvious, the value of a word's common meaning is
probably less so. In other words, so what if a word's common meaning is thick or thin? The answer to this question must
be addressed in two stages. To appreciate the significance of losing this global, shared, limited resource we must first
comprehend why, and how often, understanding the local meaning of foreign words is important. Thereafter, we can
explore the relationship between common meaning and local meaning.
III. The Relevance of Foreign Laws

Knowing the local meaning of a word - whether in one's own or another system - may be necessary or useful for
myriad reasons. For example, individuals or institutions may want such information to ensure compliance with a law, so
as to avoid penalties for noncompliance. Alternatively, they may want information about some law in order to enjoy its
incentives or protections, or to avoid, win, or delay litigation. Further, if the matter comes before a court, judges will
review all of the available information to determine the meaning of a particular word or provision.
Participants routinely study the meaning of words in their own legal system, but they occasionally must also
ascertain the meaning of words in other legal systems. The need to have information on foreign law n120 can [*242] arise
in many contexts and affect almost anyone involved in the legal process. In the course of everyday business - in drafting
contracts or considering trade with foreign countries, in dealing with foreign nationals or companies, or merely in
buying or selling foreign goods at home - the need to consider the laws of a foreign nation arises. n121 "Even people's
personal lives are increasingly affected by contacts with foreign countries." n122 Vacationers, potential immigrants,
expatriates, retirees, investors, and persons contemplating marriage to or adoption of foreigners "all may wish at one
time or another to inform themselves as to the operation and effect of foreign laws on their activities." n123
When a transnational transaction or occurrence leads to litigation, courts often need to consider foreign laws. A
casual glance of very recent opinions from U.S. courts reveals dozens of such cases - implicating the laws of Argentina,
Australia, the Bahamas, Canada, the Cayman Islands, Costa Rica, the Dominican Republic, Ecuador, England, Finland,
French Polynesia, Germany, India, Indonesia, Iraq, Israel, Kuwait, Malaysia, Mexico, the Netherlands, Nigeria, Saudi
Arabia, Switzerland, Taiwan, and Venezuela, for example. n124 As seen in these cases, there is also a vast [*243]
geographic spread of courts that encounter questions of foreign law.
Foreign law is invoked for many reasons. The most frequently used conflict of laws doctrine requires the
application of foreign substantive law when a foreign jurisdiction has the "most significant relationship" with the
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underlying event. n125 In a tort action, the foreign country may have been the place of injury or wrongful conduct; in a
contract action, the foreign country may have been the place of contracting or of performance. n126
Choice of law clauses may also direct a court to apply foreign law. n127 Because respect for party autonomy is an
important norm in conflict of law theory surrounding contracts, n128 choice of law clauses are especially popular in
commercial and contract law. n129 Even matters without a transnational component may be subject to a determination of
foreign law if a robust "law market" emerges. n130
Policies such as the internal affairs doctrine in corporate law disputes [*244] may also compel the application of
foreign law. n131 Tax, n132 intellectual property, n133 and immigration n134 matters routinely implicate foreign laws. Domestic
laws such as the Foreign Corrupt Practices Act, n135 Title VII, n136 the Age Discrimination in Employment Act, n137 and
many other statutes n138 [*245] incorporate foreign law by reference. n139
In addition to those situations where courts are expected to apply foreign law, n140 many doctrines require courts to
consider or evaluate foreign law as part of the decisional calculus. On every motion to dismiss on grounds of forum non
conveniens, for example, the court must evaluate the adequacy of the alternative forum. n141 Similarly, every recognition
and enforcement of a foreign judgment is premised on the notion that the judgment is "final and conclusive and
enforceable where rendered," and is not the product of procedures incompatible with due process of law. n142 Further,
whenever there is concurrent parallel litigation in a foreign forum, the local court must assess the nature, content, and
significance of the foreign proceedings. n143
[*246] The list of situations in which foreign law can arise is as diverse as it is lengthy. In sentencing a criminal
defendant, prior foreign convictions can raise foreign law issues. n144 Criminal or tort defendants may raise a "cultural
defense." n145 In contract cases, foreign law may serve as a de facto excuse for nonperformance of a contract. n146 When a
witness invokes the privilege against self-incrimination, the issue can be the risk of prosecution under the law of a
foreign country. n147 A foreign forum selection clause may be unenforceable after review of the foreign jurisdiction's
substantive or procedural law. n148 A class action that includes foreign plaintiffs usually leads the court to consider, as part
of the certification process, whether a foreign court is likely to give res judicata effect to any dismissal, judgment, or
settlement. n149 Finally, foreign laws are also routinely implicated when there is service n150 or discovery n151 abroad.
[*247] Courts may also be obliged to consider foreign law when enforcing treaty obligations, applying uniform
laws, or advancing multinational harmonization efforts. n152 In these contexts, courts may need to consider foreign
interpretations of the shared mandate as part of the decisional calculus. n153 Litigation under the United Nations
Convention on Contracts for the International Sale of Goods (CISG) is one prominent example. n154 The CISG is
domestic law by virtue of a self-executing treaty, but the purpose of the multilateral treaty is to achieve uniformity in its
application. n155 Accordingly, courts must look to foreign case law for guidance in interpreting the relevant provisions of
the CISG. n156
A similar situation arises when domestic statutes or common law doctrines require knowledge of customary
international law or the law of nations. This is similar because international law is "foreign law" not only [*248] in the
sense that it is not state or federal law, but also because the substantive content of international law can require a review
of foreign domestic laws to determine whether there is a broad international consensus on a particular point of law. n157
Further, all federal laws are to be construed so as to avoid "violating the law of nations if any other possible
construction remains." n158
The foreign law inquiry can also require combinations of international and foreign domestic laws. The Foreign
Sovereign Immunities Act, for example, allows suits against foreign sovereigns when property is taken in violation of
international law. n159 Yet, whether international law has been violated will sometimes require a threshold determination
under foreign domestic law - e.g., who owned the property in question? n160
In a standard functionalist account of lawmaking, n161 the incorporation and consideration of foreign law in all of
these statutes and doctrines is neither casual nor accidental. The application, consideration, or evaluation of foreign law
may be central to a fair and just result in a particular case. The many situations where courts must apply or evaluate
foreign law constitute efforts to calibrate a balance among competing interests, to achieve the right levels of deterrence
and compensation, to ensure respect for the interests of foreign nations, or to encourage reciprocal treatment from such
foreign nations. n162
The above examples regarding the application of foreign law should not be confused with the controversy regarding
when and how foreign law should be used as persuasive or moral authority in interpreting the U.S. Constitution. n163 For
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example, the U.S. Supreme Court has cited foreign authority in deciding when the death penalty constitutes "cruel and
unusual [*249] punishment" under the Eighth Amendment n164 and in determining whether particular rights are
protected under a substantive due process analysis. n165 These opinions have generated several arguments against the use
of foreign legal authority in domestic constitutional interpretation. These include concerns that selective invocation of
foreign precedent gives judges too much discretion in their interpretive process, n166 that reliance on foreign law
undermines democratic accountability, n167 and that foreign law reflects local conditions and values incompatible with
unique aspects of American history, culture, and government. n168 This controversy raises a [*250] fundamentally
different issue, however, because in this narrow category of constitutional interpretation, the relevance of the foreign
law is often genuinely debatable. Indeed, even the advocates of using foreign law in the context of constitutional
adjudication acknowledge that, in the above examples, the foreign laws are merely useful rather than necessary. n169 By
contrast, this Article regards situations where foreign laws are unquestionably relevant and, in many circumstances,
even binding. n170 So let us put the contentious debate about constitutional interpretation aside and focus instead on those
matters of foreign law that are not, in this sense, controversial.
Whatever the total number of cases and situations where courts encounter, evaluate, or apply foreign law, it is
reasonable to speculate that that number will likely increase. n171 In a world where global travel is commonplace and
daily transactions routinely involve multiple countries, the number of disputes with transnational and international
components will surely grow. n172 Citizens of all countries will find themselves connected [*251] through the electronic
global information system. n173 Nations chasing prosperity will further integrate into a global development system. n174
Necessity - "practical commercial necessity" - will make issues of foreign law even more common and ever more
urgent. n175
IV. Measuring Foreign Meaning

When individuals, courts, or other institutions want or need information such as the tailored local meaning of a foreign
word, they face what economists call a measurement problem. n176 Humans can process and understand familiar things
relatively quickly: we "know what to look for, [*252] whom to ask, which issues to trouble over, and which to ignore
safely." n177 Conversely, to understand unfamiliar things, we must invest more time and resources - asking questions,
conducting research, and consulting experts, for example - until we can relate that which is unfamiliar to something that
is familiar and understandable. n178
Imagine, for example, that you are invited to join in a card game of "poker." You have played games of poker
before, but you are reluctant to part with your money without knowledge of this particular game, so you watch a couple
of hands before joining in. You will quickly process those parts of the game that are already familiar to you: you may
notice a deck of fifty-two cards; suits of clubs, diamonds, hearts, and spades; a hierarchy of winning hands involving
sets and runs; betting chips; and so forth. Although you measure these familiar parts through your observation, this
process of confirmation is swift and almost automatic because of the familiarity of what you observe.
Before, during, and/or after that process of confirmation, you will undertake something much more complicated:
discovering and measuring those parts of this game of poker that are unfamiliar. These differences - whether major or
minor - will occupy the bulk of your attention. Why didn't the bidding proceed in a clockwise fashion around the table?
Why didn't that straight flush beat a full house? Why do these players make such a point of articulating the amount of
each of their bids twice? The answers to each of these questions would likely lead you to ask follow-up questions,
leading to more answers, and perhaps still more questions. This process of discovery is a measurement expense.
These categories of confirmation of the familiar on one hand, and discovery of the unfamiliar on the other, differ in
degree rather than kind. Although the unfamiliar components of a word or concept will require discovery, the process of
discovery and measurement will involve relating unfamiliar components to something familiar and digestible. n179 The
difference between confirmation and discovery, then, is simply the number of steps taken before knowledge is achieved.
However, additional steps require additional investment, whether of time or money. Accordingly, the [*253] discovery
of something new costs more, by way of measurement, than the confirmation of something familiar.
A. The Unique Challenge of Ascertaining Foreign Law

Measuring foreign law is notoriously difficult. n180 As a threshold matter, simply accessing foreign law can be
challenging. n181 To be sure, enthusiasm for globalization has led to a proliferation of materials about foreigners, foreign
legal systems, and foreign laws. n182 However, this information is still difficult to digest, explain, adapt, and "make
usable" elsewhere. n183 Unfortunately, "databases do not furnish comprehensive access to foreign law; there are no
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convenient Restatements; [and] American legal education does not systematically equip judges or lawyers to carry out
research in a foreign legal system." n184 "Globalization not only renders legal information more readily available, but
often also considerably more [*254] opaque." n185 Information, however, is not the same thing as knowledge.
First of all, understanding foreign law is difficult because it incorporates all the challenges inherent in
understanding domestic law. For example, the inherently inconstant character of laws aggravates the interpretation of
the laws of a foreign system, as the effect of any law may differ from time to time. n186 The measurer must also consider
questions of constitutional validity and other threshold matters. n187 The law may vary depending upon whether one
adopts the interpretive lens of intentionalism, purposivism, textualism, or something else. n188 The foreign law may be
unsettled and controversial. n189 As the instruments of lawmaking are as malleable as words and laws themselves, one
may also encounter such phenomena as deliberately ambiguous laws. n190
Further, to apply or evaluate foreign law begs the jurisprudential question: What is law? Trawling the depths of that
question, legal pluralism literature explores the characteristics and consequences of the relationship between and among
the overlapping, semiautonomous layers of formal law and informal law. n191 The uninitiated often presume the
applicable foreign law to be some state code n192 but there may be other formal codifications [*255] that amplify or
qualify that code provision. n193 Some legal systems are formally pluralistic, recognizing various other family, religious,
business, or customary legal systems. n194 Further, various influential, if nonbinding, forms of "soft law" complicate the
foreign law inquiry. n195 A comprehensive application of foreign law requires the measurer to unpack the normative
heterogeneity discussed above and then to apply the relevant mandates faithfully.
For a number of overlapping reasons, knowledge of foreign law is especially and inherently difficult to achieve. n196
"There are very few [*256] points [of foreign law] which lend themselves to ... simple treatment." n197 "'Applying'
foreign law requires more than mere reference to that law; it demands that foreign law be considered on its own terms."
n198
But words are embedded within a legal system, and that system "employs a certain vocabulary, corresponding to
certain legal concepts; it uses certain methods to interpret them," and these methods, in turn, incorporate certain notions
of social order and the capacity and functions of law. n199
"One of the most problematic features of legal discourse is that it is 'invisible' ... 'the most serious obstacles to
comprehensibility are not the vocabulary and sentence structure employed in law, but the unstated conventions by which
language operates.'" n200 Part of this extraordinary challenge can be explained as a matter of cognitive science. "Speakers
produce the minimum linguistic information sufficient to achieve the speaker's communicational needs." n201 The
discourse community contemplated for a national law, for example, is a domestic audience. n202 Effective communication
with an outsider is not the purpose of such a text. Thus, the foreign law will not express all of the cues, assumptions,
presumptions, exceptions, canons, common sense, and peripheral knowledge essential to a comprehensive
understanding. n203 An apt analogy to the task of understanding foreign law is that of trying to learn the law on a
complex, unfamiliar, [*257] specialized subject solely from bar review outlines. n204
Inevitable cultural differences between the legal systems at issue may produce much of the difficulty in
understanding foreign law. n205 Legal words are immersed in a cultural context and are modulated by "systems," n206
"substructural forces," n207 "invisible patterns," n208 and "legal formants" n209 that inform and explain each word. n210 Laws do
not exist in the abstract; n211 they constitute a cultural understanding "which presupposes a cooperative community of
interpreters." n212 Legal language is a social practice, and the box of meaning for each legal word "necessarily bears the
imprint" of distinctive discursive practices. n213 "Law ... is local knowledge." n214
[*258] For all these reasons, to understand foreign law and all of these unique factors upon which it depends is a
remarkably ambitious undertaking. According to some, one can understand another legal system only through
immersion within that system and its values. n215 Absent intimate contact, the forum will examine unfamiliar laws as a
foreigner, interpreting a foreign law in light of its own values. n216 Proper examination "requires some degree of empathy
for the values peculiar to that system." n217 Yet this empathy extends to a long list of influences and factors, including the
foreign country's "political arrangements, social relations, interpersonal interactional practices, economic processes,
cultural categorizations, normative beliefs, psychological habits, philosophical perspectives, and ideological values." n218
It includes understanding a society's "religion, history, geography, morals, custom, philosophy, or ideology." n219 (It may
even include watching their movies! n220) To navigate such an inquiry meaningfully, one should have the "skills of a
scientist" and the "skills of an anthropologist." n221 Some insist that it is outright "impossible to avoid distortion in one's
analysis of another legal tradition: it is an inescapable fact of life, for the process of comparison can never become
sufficiently objective." n222 [*259] Although most of this literature about how legal rules are embedded in local
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dimensions of the law has emerged from postmodernists, this constituency has an unlikely ally in conservatives who
make a similar point when arguing against the use of foreign law to interpret the United States Constitution. n223
Translation of foreign laws from another language presents a related but additional obstacle. n224 Legal translation is
almost always difficult, and may in fact be impossible to accomplish. n225 Translations can be difficult to comprehend
because the laws are often merely translated into the target [*260] language, "rather than packaged in a manner that
made it useable by the judges and lawyers of the receiving system." n226 Effective packaging would locate the text within
the larger context of all those factors described above. n227 However, even if capturing that entire context were possible,
there are other dangers in "packaging," because when translating, "people tend to find what they seek." n228 Manipulation
can occur because translation necessarily requires a certain amount of creativity and interpretation; n229 there is no sense
of equivalence in the abstract that can guide the practice of translation. n230 Indeed, elementary hermeneutics teaches us
that every interpretation or translation, no matter how conscientious, will involve active participation by the translator.
n231
Even if fidelity to the original language were possible, n232 there are always interlinguistic gaps, as some words may
be untranslatable. n233
[*261]
B. The Significance of a Word's Common Meaning

Sensitivity to the vagaries of translation and the cultural dependence of the law increases the measurement expense.
When measuring a foreign word, the measurer must proceed with extra caution (i.e., more measurement) to avoid error.
As a practical matter, no foreign word may be so familiar that the measurer can confirm its meaning swiftly or
automatically. Still, some parts of the word's meaning will be more familiar than others. Again, we can crudely divide
this measurement process into the relatively familiar (which will require measurement resembling confirmation) and the
relatively unfamiliar (which will require measurement resembling discovery). n234
Building on the hypothetical introduced in Part II, imagine that a judge somewhere outside of Sixth Country is
measuring Sixth Country's class action (M<4>). This judge may be deciding a motion to dismiss on grounds of forum
non conveniens, for example, and upon consideration of the adequacy of Sixth Country as an alternative forum for the
suit, a critical issue may be whether or not the plaintiffs would be able to pursue a class action there. Hence, there is a
need for measurement.
The judge who is measuring the foreign device in Sixth Country, then, would be measuring M<4>, the content of
the circle with the solid boundary in the figure below. If the judge is familiar with one or more of the other five
countries that have a class action (including, perhaps, her own country), she will have a head start in measuring Sixth
Country's M<4>. Exactly how much of a head start depends upon which country or countries she is familiar with.
Figure 2
[*262] This figure demonstrates that the judge need only confirm the common meaning (CM) of the word and will
necessarily need to discover the unique meaning (UM) of the word. Whether the bands that appear in between CM and
UM require confirmation or discovery depends on with which device(s) she is already familiar.
Of course, this measurer is not the only measurer of M<4>. When one considers the aggregate of measurers, some
measurers may know only M<2>, requiring more discovery, and others will also be familiar with M[in'3,'] requiring
less. The more that the measurement process requires only confirmation, the lower the aggregate measurement expense.
As common meaning (CM) requires only confirmation, the more robust a word's common meaning, the lower that
aggregate expense.
Further, a sophisticated or experienced measurer of foreign laws could have familiarity with several different
variant meanings of a particular word, rather than just one. n235 For example, imagine that the judge who is measuring the
meaning of Sixth Country's M<4> was already familiar with M<1>, M<2>, and M<3>. In this situation, almost all of
M<4> would be familiar to her because of the slight difference between M<3> and M<4>. Yet, keenly aware of the
difficulty in interpreting foreign law generally, and conscious of the variations in the meaning of the word "class action"
in particular, one might expect her to "double-check" the meaning of those parts of M<4> that, although similar to
M<3>, are unlike M<1> and M<2>. This suggests a three-tiered measurement process: (i) confirmation of that which is
familiar to all meanings of the word; (ii) double-check of that which looks familiar (and, in fact, is familiar) but is
known to the measurer to vary elsewhere; and (iii) discovery of that which is unfamiliar.
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This three-tiered process, even if a rather crude model, resonates with our experience. If you were joining the game
of poker described earlier, n236 you would survey and confirm the familiar parts and focus your attention on the
unfamiliar parts. But if you had played different versions of poker in the past - say, occasionally with "wild" cards - you
would also double-check whether those particular variations were applicable even when they do not appear to be present
(and, in fact, are not). A similar situation is present when a driver considers making a U-turn while driving outside of
their home state: the other state might have the same rule, yet there is hesitation because of awareness of potential
variation on this point. There would be no hesitation, however, regarding the legality of entering an intersection on a
green light. In both instances the law could be familiar as a matter of fact - but the known variation elsewhere leads one
to double-check (or have second thoughts about) the familiar law regarding U-turns. In contrast, the common meaning
of a green light streamlines the measurement process.
[*263] The common meaning of a word, then, plays an important role in the measurement process. Specifically,
the more robust a word's common meaning, the lower the measurement cost. If the term class action had only one
meaning worldwide, the cost of measuring any particular class action device would be modest. If the measurer had (or
obtained) familiarity with any class action device, they would know the meaning of any other class action device.
Measurement would be a swift and virtually automatic process of confirmation.
If only sixty percent of a word's meaning were common worldwide, the measurer would need to canvass the
remaining forty percent. Only sixty percent of the measurement would necessarily be a swift and virtually automatic
process of confirmation. The other forty percent would be a process of confirmation, double-checking, or discovery,
depending upon circumstances unique to the measurer and the device being measured. This example demonstrates how
measurement costs rise as the content in a word's common meaning falls.
Introducing a variant meaning that consumes even part of a word's common meaning affects not only those who are
measuring that system's word meaning; the idiosyncrasy in just one system n237 can increase the information processing
costs of all other systems that are interacting with any other unfamiliar system. Another illustration may solidify this
point. Assume that all legal systems use the word day in the articulation of certain timing requirements and other
obligations - e.g., a response is due in ten days. Although we would expect slight variations of meaning in different legal
systems with respect to holidays, weekends, and such, the common meaning would surely include that a day is a
twenty-four-hour period. Then suppose that one rogue country redefines the word day for its own system to mean a
twelve-hour period. Naturally, this changes the measurement expense for outsiders who will be measuring the meaning
of the word in the rogue country, one dimension of the externality. However, awareness that a word has a different
meaning in any one system can also change the measurement expense for all persons interacting with any other foreign
system. This is true even if neither the measuring country nor the measured country is the rogue country. Knowledge of
the variation can convert a measurement from the category of mere confirmation to the category that requires a double-
check. Accordingly, there are other externalities in this rogue country's decision-making process - they enjoy all the
benefits of the decision to adopt this idiosyncratic meaning, but will not suffer all of the social costs that their conduct
precipitates. When terms such as class action or day lose common meaning, the loss of information increases the
measurement costs incurred by others.
[*264]
V. The Costs and Benefits of Measurement

An individual or institution will measure until the marginal costs of additional measurement equal the marginal benefits
- or until the marginal benefit in reduced error costs exceeds the marginal cost of measurement. n238 Because "our law is a
law of words," n239 the creation, modification, and vindication of all legal rights, responsibilities, and obligations
ultimately rely on the interpretation of words. n240 Accordingly, ascertaining the correct meaning of a word is important
for the planning, behavior, and success of individuals and institutions - and it may be essential for the integrity and
legitimacy of courts. The interpretation of a word in a foreign law can be as important as the situation or case in which
that issue arises. n241 Thus, the marginal benefit of obtaining additional information about the meaning of words is often
very high. n242
Although the marginal benefit of additional measurement can be significant, the cost of measuring is also
substantial. As already described, foreign law is complex, nuanced, and layered - and ascertaining meaning in any
particular context is fraught with perilous traps for the unwary and wary alike. n243 Ordinary cost-benefit analysis
recognizes some point at which a risk of error becomes preferable to the return on any additional measurement. n244
Accordingly, an individual who is contemplating action in another country may stop measuring laws in the target
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country as soon as she is willing to assume the risk of interpretive mistakes and overlooked laws. A corporation that is
contemplating investment in another country may make a similar decision - or, at the margins, might reject the foreign
investment opportunity because of the cost of measuring the applicable foreign laws. n245
[*265] Courts, however, are in a very different position than these individuals and corporations. Prevailing
doctrines and laws compel courts to engage with foreign laws, n246 and our judiciary typically has a very low tolerance
for error - especially with regard to questions of law. Errors in ascertaining foreign law can happen, of course, but the
legitimacy of courts depends upon the faithful execution of their responsibility to identify, interpret, and apply foreign
or domestic law, whatever the burden. n247
A. The Process of Measurement

Ascertaining foreign law suggests great expectations of the judiciary. n248 Importantly, judges must decide the content of
foreign law as a matter of law. n249 In 1966, Rule 44.1 of the Federal Rules of Civil Procedure was promulgated "to make
the process of determining alien law identical with the method of ascertaining domestic law to the extent possible to do
so." n250 In other words, the content of foreign law cannot be buried as a question of fact in the black box of jury
decision-making. n251 Judges must resolve these questions of law on the record, with an explanation of the ruling.
Moreover, the high expectation of and attention forced upon the judiciary resurfaces anew on appeal since the content of
foreign law must be decided by appellate judges de novo. n252
[*266] In determining the content of foreign law, courts "may consider any relevant material or source, including
testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence." n253 It behooves the
litigating parties to present expert testimony to assist the court on issues regarding the content of foreign law, and this is
the ordinary course. n254 Although the absence of a qualified expert witness can be a problem for courts, n255 the problem is
more commonly the opposite. In many cases, each party will have a foreign law expert who contradicts the other. n256
A battle-of-the-experts can become an "ignominious and unseemly spectacle." n257 The problems and dangers
generally associated with a system of party-controlled experts are likely quite familiar: the process can be expensive and
inefficient, n258 experts can become partisans, n259 and substance [*267] can be perverted. n260 Some of the most qualified
experts may refuse to testify due to the tainted nature of the process. n261 When the well-qualified are less willing to
serve, the pool of experts becomes less reliable. n262
Hosting a battle-of-the-experts can be a source of great embarrassment to the judge who has to determine between
the two adversaries. n263 Learned Hand's query is an abiding articulation of the problem facing judges: "[How should one
choose] between two statements each founded upon an experience confessedly foreign in kind to their own? It is just
because they are incompetent for such a task that the expert is necessary at all." n264
Unfortunately, the cross-examination of experts is not the best tool to obtain the truth on foreign law. n265 Judge
Pollack argued in this regard that the classic instruments of assuring veracity - the oath and cross-examination - are not
appropriate to the problems of determining foreign law. n266 It is less frequently a question of whether the expert is
credible or reliable. n267 Indeed, it is possible that legal experts arrive at different conclusions on the law of a foreign
legal system in the best of faith; such is certainly the case when reasonable minds disagree about the applicability or
meaning of some domestic law. n268 To resolve conflicting expert testimony, then, the court may "be forced either to turn
to the qualifications of the experts or to find an answer wholly independent of reliance on the experts." n269 Let us
consider each of those two options in turn.
[*268] The first option can be unattractive because "judging the messenger rather than the message is an
unsatisfactory mode of evaluating expert information." n270 Indeed, "credentials ... are an imperfect proxy for knowledge
under the best of circumstances, and far worse in court where they become yet another factor for lawyers to
manipulate." n271 Moreover, there is randomness and unpredictability since it is not clear exactly what qualifications are
preferred. Occasionally judges prefer an expert who practices in the foreign legal system; n272 others suggest that an
American lawyer who is learned in the law of a foreign country may be better situated to locate the foreign law within
the context of the pending litigation. n273 Even within this latter mind-set, questions abound. For example, which expert is
more qualified: the mid-career practitioner from a U.S. office of an international law firm who has considerable first-
hand experience in the foreign country or the senior comparative law professor from the University of Texas who has
studied that foreign system in depth? Experience and expertise can be difficult to compare; for the same reason, these
measures can be inadequate criteria for finding one foreign law expert more credible than another.
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The Federal Rule, which empowers the court to ascertain the foreign law itself, encourages the second option. n274 In
fact, Rule 44.1's invitation to consider "any relevant material" suggests that the court can (or perhaps even should) play
an active role in the process of ascertaining foreign law. n275 After all, the court has the ultimate responsibility for arriving
at a correct decision on the content of foreign law. n276 Yet an independent investigation into the content of foreign law -
and all of that law's attendant context n277 - is unappealing to "most judges [who] do not have the time, the knowledge, or
scholarly predilection to undertake their own research." n278 As one judge expressed: "We have quite a few things to do
besides decoding the Codigo Civil." n279 There is no mystery, then, as to why American "courts are not at all inclined to
engage in independent research of foreign law." n280
[*269] Judges thus find refuge in a third option: avoiding most applications of foreign law. n281 Data empirically
supports this perception. For example, Professor Jose Vargas surveyed American state court opinions that relied on
Mexican law during the years 2000 through 2007. n282 From 2003 to 2005, Californian courts cited Mexican law twice as
often as Canadian law, the next most frequently cited foreign law. n283 Yet Professor Vargas found only "two [cases] in
California, two [cases] in Texas, and five in other states" - over the course of eight years - where the court actually
based its decision on Mexican law. n284 The author's "disappointment" with the paucity of applications may have been
tempered, however, by the quality of those applications. n285 Delicately put, in those rare instances when foreign law is
applied, mistakes can be made. n286 Indeed, this is primarily why courts try to avoid foreign law in the first place. n287
[*270]
B. The Avoidance of Measurement

The artful dodge of foreign law comes in many forms. The most popular is the forum non conveniens dismissal. In
federal courts and in most state courts, judges have the authority to dismiss a case on grounds of forum non conveniens.
n288
In Professor Vargas's survey, over ninety percent of the hundreds of American state and federal court cases that cited
Mexican law were dismissed on forum non conveniens motions. n289 Several other recent studies demonstrate: (i) an
increasing number of filings of forum non conveniens motions, n290 (ii) high percentages of dismissals pursuant to such
motions, n291 and (iii) avoidance of foreign law as the most frequent explanation for those dismissals. n292
Although the large number of dismissals on this basis might surprise some, the difficulty in applying foreign law is
one of more than a dozen factors that courts are instructed to consider when deciding forum non conveniens [*271]
motions. n293 Ironically, however, a threshold determination that courts are instructed to address on forum non conveniens
motions is the adequacy of the foreign forum - an inquiry that requires some engagement with the foreign law and the
foreign legal system. n294
The expense of measuring foreign law is avoided when a case is dismissed on a forum non conveniens motion, but
at what cost? When a court dismisses such a case, the plaintiff is denied access to a court that had subject matter
jurisdiction over the case, personal jurisdiction over the defendant, proper venue, and the authority to vindicate the
plaintiff's rights and the defendant's liabilities. n295 Most plaintiffs "who suffer forum non conveniens dismissals" are
either unable or justifiably unwilling "to go forward in the hypothesized foreign forum." n296 Indeed, as an empirical
matter, only a disposition on the merits is more dispositive than a forum non conveniens dismissal. n297 Although there
undoubtedly are many instances where forum non conveniens dismissals are appropriate, this Article is concerned with
those dismissals that are occasioned solely or principally by the difficulty of applying foreign law. n298 In these cases, the
difficulty of applying foreign law leads to a denial of access to a United States court and, often as a practical matter, to a
denial of any legal redress at all. These unfortunate outcomes constitute error costs that are attributable to avoidance of
the foreign law question.
A second reason that courts cite but do not apply foreign law is that conflict of laws methodologies give a
tremendous amount of discretion to judges. When deciding what substantive law to apply, the Restatement (Second) of
Conflicts, for example, provides judges with a list of many factors [*272] to evaluate in deciding which jurisdiction
has the most significant relationship to the case. n299 Because none of these factors is essential and none is dispositive,
there is "total flexibility" in choosing the law that governs n300 - and courts usually find some way to apply forum law. n301
In fact, "ease in the determination and application of the law to be applied" is one of the many factors that courts must
consider. n302
Further, the escape devices of conflict-of-laws doctrine are legendary: characterization, renvoi, the distinction
between substance and procedure, and the public policy reservation can each facilitate the application of forum law
even when foreign law otherwise applies. n303 Further still, on [*273] occasions where judges purport to be applying
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foreign law, a host of implausible presumptions and remarkable fictions invade the judicial process. n304 A presumption of
similarity, for example, enables courts to conclude that, absent compelling evidence to the contrary, foreign law is the
same as forum law. n305 And, of course, the more difficult it is to ascertain foreign law, n306 the more difficult it is to
overcome this presumption. Hence, a court may presume that Mexico and Arizona have the same common property law,
n307
or that Illinois and Germany have the same commercial law. n308 For decades courts presumed that absent contrary
proof, all civilized countries had essentially the same laws. n309
The expense of measuring foreign law can be avoided by manipulating the conflict of laws inquiry to require the
application of forum law instead, [*274] but again: at what other cost? Naturally, a legally accurate outcome requires
invocation of the proper law. n310 Applying some other system's law is "inconsistent with our most fundamental intuition
about law - that its function is to regulate human action and its consequences. One would think that the applicable law
ought normally to have something to do with the real world events that gave rise to a dispute." n311 Although there
undoubtedly are many instances where forum law should be applied to cases with transnational contacts, this Article is
concerned only with those applications of forum law that are occasioned solely or principally by the difficulty of the
task of applying foreign law. n312 In these cases, the difficulty of applying foreign law leads to the application of forum
law to determine the rights and responsibilities of the parties, even though that is the incorrect law. Although this avoids
measurement costs, error costs are introduced.
A third technique for avoiding applications of foreign law is to assign a burden to prove foreign law. Most judges
"simply refuse to consider foreign law if the parties have not raised it or have not assisted the court in ascertaining its
content." n313 Prior to 1966, in federal court, the content of foreign law was a question of fact that the parties had to
prove. n314 Accordingly, if the issue of foreign law was not raised or if the content of foreign law was not proven to the
satisfaction of the judge, the party's failure of proof would lead either to the application of forum law or to dismissal of
the case. n315 Yet, with the application of foreign law now regarded as a question of law, it is less clear whether this
relieves the parties of the task [*275] of proving the law of a foreign country. On one hand, Rule 44.1 authorizes but
does not require the judge to do independent research. n316 On the other hand, because foreign law is a question of law, it
may be incumbent upon the court to find and apply foreign law once it becomes apparent that it governs. n317
Contemporary practice follows the former interpretation, n318 offering sufficient opportunity for courts to avoid the
question of foreign law by blaming the parties for failure of proof. n319 The more difficult it is to ascertain foreign law, n320
the more readily available this particular mode of avoidance.
Here again, the cost of measuring foreign law is avoided but an error cost is introduced. The concerns about
accuracy of legal outcomes already expressed are equally applicable here: the wrong law is used to determine the
parties' rights and responsibilities. n321 Yet there is also an interesting twist in this context - the party charged with the
burden of proving something about foreign law can be a plaintiff or a defendant. Consider, for example, an action
seeking to enforce a foreign judgment; the defendant may be resisting recognition and enforcement on the grounds that
the foreign judgment was procured by fraud. n322 Here, the inability of the defendant to satisfy the burden of proof with
regard to some aspect of foreign [*276] law might lead to enforcement of the foreign judgment (and, by extension, the
mandate of foreign law) rather than to rejection of it. n323 Interestingly then, the courts, while anti-measurement, are not
necessarily isolationist or provincial. Indeed, the United States is probably the most likely jurisdiction in the world to
recognize and enforce a foreign judgment. n324
Therefore, the consequences of avoiding foreign law can lead in several directions. First, pursuant to a forum non
conveniens dismissal, for example, a party can be denied access to a forum which it may be entitled, and is relegated to
a foreign forum (or left without a remedy). Second, pursuant to conflicts analysis, a party can be denied the rights or
protections of foreign law, to which, in some sense, it may be entitled, and is subject to forum law instead. Finally,
pursuant to the enforcement of a foreign judgment, a party can be denied the rights or protections of forum law, to
which, in some sense, it may be entitled, and is subject to foreign law instead.
The purpose of this Part was three-fold: to demonstrate that courts try to avoid applying foreign law; that they may
do so because of the difficulty of that task; and that avoidance is consequential.
VI. Solutions to the Common-Pool Problem

A common grazing pasture faces an impending crisis when the limited resource is consumed at an aggregate rate that
exceeds its rate of replenishment. The standard response to avert the tragedy of the commons is to reduce the demand on
the common-pool resource so that it does not exceed the available supply. For example, regulation or strict cooperation
reduces demand by restricting the number of cattle that farmers will graze on the commons. n325 Alternatively,
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privatization of the commons eliminates each [*277] farmer's incentive to introduce more cattle than the commons can
naturally sustain. n326 Solutions that address the supply of the resource are seldom considered or are presumed exhausted
- the premise of a common-pool resource, after all, is that it is limited. Yet supply-side solutions may be available: a
faster-growing grass or a different combination of vegetation in the commons could enhance the ability of the limited
resource to accommodate the existing demand.
Word commons face a crisis when idiosyncratic local meanings progressively consume the content of a word's
common meaning, another common-pool resource. The paradigmatic response is to minimize the demand for
idiosyncratic meanings. However, unlike a common grazing pasture, supranational regulation cannot effectively manage
the meaning of words. n327 Furthermore, because words cannot be converted from common goods into private property,
privatization is also not an option.
Reformers thus turn, perhaps instinctively, to another demand-side solution: harmonization. Harmonization reduces
the demand for idiosyncratic meanings because the local is universal, and vice versa. Further, harmonization taps into
the root of uniformity, which is so deeply embedded in our thought that many find it difficult or unnecessary even to
explain why uniformity is seen as good. n328 When there is fragmentation or lack of uniformity, scholars see this as "the
problematic issue of consistency." n329 Difference is often viewed as an unfortunate interim measure, and as a [*278]
target for reform. n330 Indeed, much of the entire discipline of comparative law has an implicit drive toward
harmonization. n331
Because all countries are measuring foreign laws, all could benefit directly from some sort of coordination. In fact,
because of standard network effects, we should expect a certain amount of standardization and uniformity. n332 Further,
most countries and legal systems want acceptance in the international community - or at least want foreign investment
and tourists. n333 One example of effective harmonization is the worldwide acceptance of the standard definitions of
eleven terms of trade (the Incoterms) promulgated by the International Chamber of Commerce. n334 A second example is
communications between and among airplane pilots and air traffic controllers; governments require communication in
one language, usually English. n335 In both of these examples, the desire to preserve the common meaning of shared
words reduces the demand for idiosyncrasy.
Additionally, efforts to harmonize or unify laws have found traction in [*279] particular spheres of interest, n336 and
other substantive areas are likely targets for future action. n337 These efforts are qualitatively different from Incoterms,
however, because effective harmonization requires two steps: first, the laws must be harmonized; second, the meanings
of the words in the shared text must be harmonized. The first step is ambitious; the second step may be naive.
"'The actual harmonization of divergent national laws and legal traditions seems to be meagre' and at times
'drastically overstated ...'" n338 While globalization intensifies the migration of words and concepts across national
boundaries, it does not lead inexorably to the harmonization of laws. n339 Even the concentrated effort to achieve
harmonization undertaken in Europe over the last half century has been slow and difficult. n340 [*280] Furthermore, that
context is unusually suited for harmonization since there is a supranational central authority that can issue binding
regulations, order uniformity, and trump national courts. n341
Yet, more fundamentally, even where there is harmonization of words, there is not necessarily harmonization of
word meanings. Indeed, absent disciplined and universal cooperation by all who share the word, common meaning will
inevitably erode. n342 Even substantial cooperation will not suffice, because similar to the few cattle farmers who can
overgraze the common ground while other farmers exercise restraint, the common meaning of a word can be consumed
by a few to the others' detriment.
Consider, for example, the United Nations Convention on Contracts for the International Sale of Goods ("CISG"),
which is generally recognized as the most successful multilateral harmonization effort. n343 Although obliged to consider
foreign case law when deciding cases under the CISG, n344 American courts tend to look exclusively at domestic cases
instead. n345 Because of limited access, language barriers, and cultural differences, "decisions handed down by foreign
courts are 'usually ignored' even when they concern uniform law." n346 Accordingly, "the unifying effect of the CISG
must thus be taken with a strong pinch of salt." n347 A comprehensive solution would require some sort of effective
regulatory enforcement mechanism.
Even if regulating the meaning of words were possible, frustration costs could outweigh the savings in
measurement costs. n348 Legitimate goals and objectives could be frustrated if the meaning of words could not be
customized for a particular jurisdiction's conditions and demands. The tailoring of a class action device, for example,
can be a useful and productive exercise. Idiosyncrasy can reflect the unique priorities, preferences [*281] and goals of
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46 Cornell Int'l L.J. 219, *

a judicial, political, or social system. n349 The dynamic nature of word meaning also permits adaptation to changed and
unforeseen circumstances. n350 Forced uniformity would thwart this progress and would squelch useful entrepreneurship.
n351

Harmonization is premised on the conviction that there exists a single answer to a particular problem, or a best
meaning for a particular word. Yet, in fact, there is much to suggest that while the world may be ontologically unitary, it
can only be "understood through epistemological diversity." n352 Further, the pursuit of uniformity can be an imperialistic
threat to the profound diversity of legal experience within and across jurisdictions. n353
Because of the inevitable differentiation in word meaning, harmonization of laws can exacerbate the problems
associated with ascertaining foreign law. When words are shared but the meanings are different, these faux amis become
terms that the measurer is most likely to overlook or, even if noticed, find the "most difficult to understand." n354 In the
former, [*282] the measurement expense is traded for an error cost; n355 in the latter, the measurement expense is not
avoided (and may even be increased). n356
The challenge presented is not a textual problem that requires a textual solution. Rather, it is a foreign law problem
that requires a foreign law solution. The problem is that judges must often consider, evaluate, and apply foreign law, but
are simply unwilling or unable to do so. Some of that reticence may be traceable to the work of a generation of scholars
who have described the task of understanding foreign law as "impossible" n357 - impossible because of "the
impenetrability of the otherness of the other." n358 This message deters courts from performing a task that doctrine and
statutes require n359 - and when courts avoid foreign law questions, litigants suffer. n360
If it is impossible for courts to adequately understand foreign law, we should revise all of the relevant statutes and
doctrines so that courts need not, or may not, n361 apply, consider, or evaluate foreign law. Of course, this [*283]
approach resembles the status quo somewhat, since the doctrines that require engagement with foreign law also tolerate
avoiding it, n362 and since courts rarely genuinely engage foreign law. n363 Although this solution would resolve the
measurement problem, the error costs associated with avoiding foreign law would then be entrenched: cases would still
be dismissed, and the "wrong" law would still be applied. Prohibiting the consideration or application of foreign law
would merely shift responsibility for these costs to those who are setting the new policy.
One benefit of such a reform, however, is that it would improve transparency. n364 Such reform would clarify that
courts do not, as a practical matter, engage with foreign law. Greater transparency could thus precipitate legal reforms to
account for the fact that foreign law is not applied. Doctrines and statutes that assume foreign law is being evaluated
may have different complementary provisions if they were (re)constructed under the assumption that foreign law would
not be applied. For example, because the forum non conveniens framework assumes that foreign law will be fully
evaluated to ensure the adequacy of the alternative forum prior to a dismissal, removing the assumption by prohibiting
consideration of foreign law may lead reformers to revisit that framework. Specifically, that framework might be
adjusted to make it harder for defendants to win a forum non conveniens motion. Yet, how or whether such reforms
would compensate for the loss of consideration of foreign law is, of course, speculative.
Yet instead of retrenchment, which is yet another demand-side solution, a better approach may exist on the supply-
side. In the same way that a faster-growing grass or a different combination of vegetation might increase the supply of
the common pasture to accommodate the extant demand, a complement to common meaning could enhance the supply
of information about foreign law.
For example, courts should take advantage of two devices that are already available to them, yet are hardly ever
used. First, judges could more frequently appoint a neutral expert to assist the court in ascertaining foreign law. n365
Court-appointed experts function essentially as third-party [*284] expert witnesses, but avoid the consequences of
partisan choice, compensation, and preparation - all of which can bias the evidence. n366 In some cases, court-appointed
experts might alleviate the need for party-controlled experts. n367 In other cases, the neutral expert might help the judge
resolve conflicting testimony presented by the parties' experts. n368 In any event, the court may split the expense of a
neutral expert between the parties or, as part of court costs, charge them to the losing party. n369
Second, judges could more frequently appoint a special master to manage the inquiry into the particulars of foreign
law. n370 The parties' experts would present their research before the master, and would be subject to cross-examination.
n371
The master could invest more time in the endeavor than a judge, and could draw upon his or her expertise in
comparative methodology, if not also the laws of the specific country in question. The master would then prepare a
report analyzing the foreign law issues, n372 which the court could allow the parties to object to; the court would also
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46 Cornell Int'l L.J. 219, *

review the master's conclusions de novo. n373 Again, the court could split the expense between the parties or, as part of
court costs, charge them to the losing party. n374
Yet courts very rarely use these useful and economical resources. n375 [*285] Although focusing on the issue of
expert testimony generally rather than expert testimony about foreign law in particular, Professor Samuel Gross
laments:

Judges simply do not [appoint neutral experts] ... . Attempts to change that fact have been uniformly ineffective.
Demonstrating the logic of the procedure has not worked. Enacting rules that codify the courts' authority ... has changed
nothing. Exhorting judges to do so has had no effect. n376

Indeed, while several surveys of federal and state judges have confirmed that these devices would be helpful in certain
types of cases - including those involving foreign law - the majority of these judges have never actually used any of
them. n377
There are two principal reasons that judges may be reluctant to use these devices. One reason is a general hostility
to any deviation from the adversarial system. n378 To be sure, neutral experts and special masters are a deviation from the
traditional model of party control. Accordingly, there is a risk, real or perceived, that an expert or master may have too
much power [*286] or may lack the incentive to do a good job. n379 A second reason that judges may not use their
authority to appoint a neutral expert or a special master is that judges may be unaware of an appropriate individual for
the task. n380 How many judges could readily find an appropriate expert on the finer points of Slovakian contract law?
Yet each of these hurdles is surmountable. Regarding the innate resistance to inquisitorial techniques, it is critical to
appreciate how foreign law differs both legally and practically from other matters that call for expert testimony. The
content of foreign law is a question of law for the judge, not a question of fact. n381 Because there is no question for a
jury, nor even any rules of evidence to apply, n382 the usual resistance should find less traction in this context. Moreover,
testimony on foreign law does not usually lend itself to the usual alignments; unlike experts on, say, medical testimony,
there are not separate camps of experts on foreign law that are sympathetic to plaintiffs or defendants. n383
Although it is undoubtedly true that litigators prefer control over every aspect of their case (including the
appointment of experts), this is a generalized preference; there is no specific constituency of the bar for whom party-
control of witnesses is critical. n384 To the extent that expert testimony about foreign law is different from other types of
expert testimony, philosophical opposition may not explain judicial behavior as much as inertia; the parties are unlikely
to suggest the appointment of a neutral expert or special master. n385 Yet judges could do so on their own initiative - and
to their benefit - with or without the parties' blessing. n386
Second, a judge may be more likely to appoint a neutral expert or special master if an appropriate specialist were
readily available. To address this concern, some have suggested creating and maintaining a roster of experts. n387
However, because quality control is a problem with such [*287] lists, these efforts have consistently failed. n388
Accordingly, there is need for a resource upon which judges could confidently rely for assistance on matters of foreign
law. Ideally, the resource would provide assistance no matter the country or subject matter in question. Such a resource
could lead to the more frequent appointment of neutral experts and special masters.
Consider, then, an academic institute that aims to provide assistance to courts on inquiries regarding foreign law.
Although the United States has no tradition of foreign law institutes, n389 there are many European foundations and
academic institutes that could provide inspiration. n390 Some European courts in particular have benefited from research
conducted by comparative law centers. n391 In some countries, the burden of researching foreign law is placed entirely on
the court, resulting in considerable use of such institutes. n392 In fact, "the availability of this form of research assistance
has relieved the burden to a considerable extent, obviating in most cases the need, for example, for expert witnesses."
n393

Quite fittingly, the issue presented here is the transplantability and tailoring of the foreign law institute. As
Professor Merryman recognized long ago, in the United States, with its much greater emphasis on party autonomy and
adversary proceedings, an expert from a research institute enters into an entirely different litigation context. Whereas
Germans are likely to accept such an opinion, American lawyers may be inclined to sabotage any efficiency gains and to
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46 Cornell Int'l L.J. 219, *

undermine the expert's authority. n394 Yet if the problem is the lack of a reliable unbiased source of information on
matters of foreign law, an institute associated with a law school could be part of a viable solution.
Any number of law schools could establish institutes scaled to a size commensurate with the group of comparative
law experts qualified and willing to engage in such activity. The venture could leverage a source of talent that leading
educators have recognized as a largely untapped [*288] resource: a school's foreign LL.M. students. n395 As fellows (or
with some other designation), these graduate students could share their interests, foreign contacts, and expertise with the
institute.
Such a foreign law institute situated within a law school could be the resource to which judges would confidently
turn for assistance on matters of foreign law. The institute would develop and maintain contacts in foreign countries
who could provide assistance in solving difficult questions of the law of these nations. n396 Although an institute would
not always have in-house expertise on the particular foreign law at issue, the institute could always provide the court
with expertise to ascertain any particular foreign law at issue. The institute could also provide the court with an
individual who would serve as a neutral expert or as a special master.
Institutes could offer unbiased, authoritative, and credible expertise. Academic institutions are also generally held
in high esteem. n397 Concern for the reputation of both the law school and the institute would create incentive to perform
this service for the judiciary proficiently and efficiently. The tradition of academic freedom also offers a stark contrast to
the partisan expert, who is a hired gun. n398 Finally, the ascertainment of foreign law on a particular subject requires the
sort of rigorous scholarly inquiry that is familiar to academics.
The establishment of an organization to perform any public function raises concerns about capture by industry or
special interests. n399 Yet that phenomenon is unlikely here. First, courts retain ultimate responsibility for declaring the
content of foreign law; neutral experts merely offer testimony, and special masters make recommendations. The judge
would always have the benefit of the parties' input. Second, it is difficult to imagine what industry or group would
commandeer the institute to benefit themselves. There is no view of foreign law that is systematically pro-plaintiff,
[*289] pro-business, or anti-big-government, for example. Finally, no single foreign law institute would have a
monopoly on this outsourcing opportunity. Any number of law schools could provide this service - especially since the
institutes should be largely self-funding. n400
These are but some examples of ways that the supply of information regarding foreign law could compensate for
lack of common meaning. More important than these specific suggestions, however, is the argument for supply-side
reforms more generally. The urgent need is a practical approach to foreign law that could better meet the needs of a
judiciary that confronts a docket transformed by globalization.
Conclusion

The costs of measuring foreign law are inversely related to the amount of content in a word's common meaning. Yet
common meaning is a limited resource that is inevitably consumed by national legal systems acting independently and
rationally. The loss of common meaning, in turn, is a loss of information that leads courts to avoid the applications of
foreign law due to the difficulty of applying it. The information deficit thus becomes a justice deficit because the
avoidance of foreign law leads unnecessarily to, depending upon the specific circumstances, a denial of access to court
or the application of the wrong law. Efforts to harmonize laws are an instinctive response to this phenomenon - but these
efforts are misdirected. The solution to the tragedy is instead an improved supply of information about foreign law.

Legal Topics:

For related research and practice materials, see the following legal topics:
Civil ProcedureVenueForum Non ConveniensEvidenceTestimonyExpertsCourt-Appointed
ExpertsCompensationTortsStrict LiabilityHarm Caused by AnimalsGeneral Overview

FOOTNOTES:

n1. Garrett Hardin, The Tragedy of the Commons, 162 Sci. 1243, 1244 (1968).
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46 Cornell Int'l L.J. 219, *

n2. Id.

n3. Stephen Yeazell, When and How U.S. Courts Should Cite Foreign Law, 26 Const. Comment. 59, 61 (2009).

n4. See, e.g., LG Elecs., Inc. v. ASKO Appliances, Inc., No. 08-828- RGA, 2012 WL 2365901 (D. Del. June 21, 2012).

n5. See, e.g., Bigio v. Coca-Cola Co., 675 F.3d 163 (2d Cir. 2012).

n6. See, e.g., In re Consorcio Minero, S.A. v. Renco Grp., Inc., No. 11 Mc. 354., 2012 WL 1059916 (S.D.N.Y. Mar. 29, 2012).

n7. See, e.g., Starski v. Kirzhnev, 682 F.3d 51 (1st Cir. 2012).

n8. See infra notes 171-75, and accompanying text.

n9. See infra notes 281-87 and accompanying text.

n10. See infra notes 288-92 and accompanying text.

n11. See infra notes 310-24 and accompanying text.

n12. See infra notes 191-95 and accompanying text.

n13. See infra notes 196-223 and accompanying text.

n14. See Fed. R. Civ. P. 44.1.

n15. See infra notes 254-80 and accompanying text.

n16. Popular Latin words include: certiorari, coram nobis, ex parte, in rem, mandamus, pro rata, quantum meruit, res ipsa loquitur, and
respondeat superior. For a longer list, see David Mellinkoff, The Language of the Law 14-15 (1963). Latin has a well-documented place in
the history of the development of the law. Id. All major sources of our knowledge of Roman law are written in Latin, including the Corpus
Iuris Civilis, arguably "the most influential [set of] law books ever written." Justinian, Justinian's Institutes 9, 18 (Peter Birks & Grant
McLeod trans., Cornell Univ. Press 1987) (c. 535 B.C.E.). Legal Latin is especially durable as a technical language for the legal profession.
See 3 William Blackstone, Commentaries 319-21 ("Law-latin is ... a mere technical language, calculated for eternal duration, and easy to be
apprehended both in present and future times; and on those accounts best suited to preserve those memorials which are intended for
perpetual rules of action.").
Page 178Page 178
46 Cornell Int'l L.J. 219, *

n17. Popular French words include: cestui que, cy pres, demurrer, mortgage, and voir dire. See L. Susan Carter, Oyez, Oyez, "O Yes":
American Legal Language and the Influence of the French, Mich. B.J., Oct. 2004, at 39. "It would be hardly too much to say that at the
present day almost all our words that have a definite legal import are in a certain sense French words." 1 Frederick Pollock & Frederic
William Maitland, The History of English Law 80 (2d ed. Cambridge 1968) (1895). Other examples include:

Contract, agreement, covenant, obligation, debt, condition, bill, note, master, servant, partner, guarantee, tort, trespass, assault, battery,
slander, damage, crime, treason, felony, misdemeanor, arson, robbery, burglary, larceny, property, possession, pledge, lien, payment, money,
grant, purchase, devise, descent, heir, easement, marriage, guardian, infant, ward ... . We enter a court of justice: court, justices, judges,
jurors, counsel, attorneys, clerks, parties, plaintiff, defendant, action, suit, claim, demand, indictment, count, declaration, pleading, evidence,
verdict, conviction, judgment, sentence, appeal, reprieve, pardon, execution, every one and every thing, save the witnesses, writs and oaths,
have French names.

Id. at 81; see also Peter M. Tiersma, Legal Language 28-33 (1999).

n18. Popular English words include: class action, due diligence, franchise, lease, and whistleblower, for example. Eversheds, Legal Drafting
in English: The Big Picture on Small Print 10 (2011), available at http://www.eversheds.de/files/en/Legaldraftingin English
%28updatedSept2011%29.pdf. For more on the increasing use of legal English worldwide, see Heikki E.S. Mattila, Comparative Legal
Linguistics 240-41 (2006); Celia Wasserstein Fassberg, Language and Style in a Mixed System, 78 Tul. L. Rev. 151, 164 (2004) (discussing
Hebrew as a modern legal language and the incorporation of English loanwords therein).

n19. See, e.g., William P. Alford, On the Limits of "Grand Theory" in Comparative Law, 61 Wash. L. Rev. 945, 954-56 (1986) (discussing
the Chinese criminal justice system); George P. Fletcher, Constitutional Identity, 14 Cardozo L. Rev. 737 passim (1993) (comparing U.S. and
European legal cultures); Frederick Schauer, Free Speech and the Cultural Contingency of Constitutional Categories, 14 Cardozo L. Rev.
865, 868-72 (1993) (exploring different countries' treatment of speech and expression rights); Arthur Taylor von Mehren, Special Substantive
Rules for Multistate Problems: Their Role and Significance in Contemporary Choice of Law Methodology, 88 Harv. L. Rev. 347, 350-56
(1975) (explaining that differing expectations complicate multistate litigation).

n20. See Hardin, supra note 1, at 1244; see also Richard Cornes & Todd Sandler, The Theory of Externalities, Public Goods, and Club
Goods 39-43 (2d ed. 1996) (expanding on different types of externalities).

n21. See infra notes 105-08 and accompanying text.

n22. See infra notes 234-37 and accompanying text.

n23. See infra notes 328-53 and accompanying text.

n24. See infra notes 354-56 and accompanying text.

n25. See infra notes 365-77 and accompanying text.

n26. See infra notes 395-400, and accompanying text.


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46 Cornell Int'l L.J. 219, *

n27. See H. Patrick Glenn, Comparative Legal Families and Comparative Legal Traditions, in The Oxford Handbook of Comparative Law
421, 432-34 (Mathias Reimann & Reinhard Zimmerman eds., 2006). See generally Konrad Zweigert & Hein Kotz, An Introduction to
Comparative Law (Tony Weir trans., 3d ed. 1998).

n28. See Alan Watson, Legal Transplants: An Approach to Comparative Law 95 (2d ed. 1993) ("Most changes in most systems are the result
of borrowing."). For arguments suggesting that Watson's thesis should be limited to the spread of Roman private law in Western Europe, see
William Ewald, Comparative Jurisprudence (II): The Logic of Legal Transplants, 43 Am. J. Comp. L. 489, 500-04 (1995); Eric Stein, Uses,
Misuses - And Nonuses of Comparative Law, 72 Nw. U. L. Rev. 198, 203-04 (1978).

n29. See, e.g., Paolo G. Carozza, "My Friend is a Stranger": The Death Penalty and the Global Ius Commune of Human Rights, 81 Tex. L.
Rev. 1031, 1045 (2003) (describing how, in virtually all foreign nations, courts "borrow[] from, respond[] to, or otherwise interact[]
substantially with external sources of law, including foreign sources").

n30. See Nuno Garoupa & Anthony Ogus, A Strategic Interpretation of Legal Transplants, 35 J. Legal Stud. 339, 343 (2006); Pierre
Legrand, On the Unbearable Localness of the Law: Academic Fallacies and Unseasonable Observations, 10 Eur. Rev. Private L. 61, 68
(2002); David Nelken, Towards a Sociology of Legal Adaptation, in Adapting Legal Cultures 7, 15-20 (David Nelken & Johannes Feest eds.,
2001); William Twining, Diffusion and Globalization Discourse, 47 Harv. Int'l L.J. 507, 510-12 (2006).

n31. This Part explores normative implications of the diffusion of laws and language only peripherally. For a full discussion, see infra notes
328-356 and accompanying text.

n32. See Watson, supra note 28, at 22.

n33. For a discussion of network effects, see infra note 332 and accompanying text.

n34. See Basil Markesinis & Jorg Fedtke, Engaging with Foreign Law 337 (2009); see also James Gordley, When Is the Use of Foreign Law
Possible? A Hard Case: The Protection of Privacy in Europe and the United States, 67 La. L. Rev. 1073, 1075 (2007) (discussing, in general,
the inherent uniqueness and idiosyncrasy of each country's legal system).

n35. See W.E. Weisflog, Problems of Legal Translation, in Swiss Reports Presented at the XIIth International Congress of Comparative Law
179, 213-15 (1987).

n36. For more examples, see Gregory S. Alexander, The Application and Avoidance of Foreign Law in the Law of Conflicts, 70 Nw. U. L.
Rev. 602, 629 n.121 (1976) ("The French contrat, domicile, tribunal administratif, notaire, prescription and juge de paix, are not the English
'contract', 'domicile', 'administrative tribunal', 'notary public', 'prescription' and 'justice of the peace.'" (quoting Alan Watson, Legal
Transplants: An Approach to Comparative Law 11 (1974)); H.C. Gutteridge, The Comparative Aspects of Legal Terminology, 12 Tul. L.
Rev. 401, 402 (1938) (discussing, among other examples, the difficulty of translating the American concept of a "trust" into foreign
languages); Rodolfo Sacco, Legal Formants: A Dynamic Approach to Comparative Law (Installment I of II), 39 Am. J. Comp. L. 1, 20
(1991) (discussing different meanings of trespass); Gloria M. Sanchez, A Paradigm Shift in Legal Education: Preparing Law Students for the
Twenty-First Century: Teaching Foreign Law, Culture, and Legal Language of the Major U.S. American Trading Partners, 34 San Diego L.
Rev. 635, 662 (1997) (considering the word investment which, in Spanish, is inversion; in English the term means "long-term benefits,"
while in Mexico it means "short-term profit"); id. at 663 (discussing how different meanings of the word chicken led to litigation). The
phenomenon is not limited to translations across languages. See Deborah Cao, Translating Law 68-69 (2007) (discussing the changing
meaning of words even within one language, using the term warranty in England and the United States as an example). "The word 'law' in
Western languages has four different interpretations in Chinese as in li [order], li [rites, rules of propriety], fa [human-made laws] and zhi
[control]." Id. at 1. Cao also distinguishes demand in English from demands in French; domicile in English, from domicile in French and
domizil in German; la doctrine in French, which means legal writing or legal scholarship, from the English notion of doctrine; notaire in
French and notary in English; common law in English and droit commun in French; the Haute Cour de justice of French and the English
notion of the High Court of Justice. Id. at 58-59.
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46 Cornell Int'l L.J. 219, *

n37. See Sacco, supra note 36, at 12-15; see also Lawrence Lessig, Fidelity in Translation, 71 Tex. L. Rev. 1165, 1200-07 (1993).

n38. " In France, for example, these contracts are called contrat de marriage." Peter M. Walzer, A World of Agreements Enforcing and
Attacking Foreign Prenups in the United States, Fam. Advoc., Winter 2011, at 30.

n39. See, e.g., Susan Rose-Ackerman, American Administrative Law Under Siege: Is Germany a Model?, 107 Harv. L. Rev. 1279, 1289-96
(1994); see also John H. Langbein, The German Advantage in Civil Procedure, 52 U. Chi. L. Rev. 823, 851 (1985). See generally
Comparative Administrative Law (Susan Rose-Ackerman & Peter L. Lindseth eds., 2010).

n40. See Richard Marcus, Exceptionalism and Convergence: Form Versus Content and Categorical Views of Procedure, in Common Law,
Civil Law and the Future of Categories 521, 538 (Janet Walker & Oscar G. Chase eds., 2010) ("Discovery in Japan or Germany ... [is] so
different in content from the American version that [it is] insignificant as evidence of meaningful convergence.").

n41. See generally Kenichi Osugi, What is Converging? Rules on Hostile Takeovers in Japan and the Convergence Debate, 9 Asian-Pac. L.
& Pol'y J. 143, 154 (2007).

n42. For contours of the debate regarding the transplantability vel non of words, compare Otto Kahn-Freund, On Uses and Misuses of
Comparative Law, 37 Mod. L. Rev. 1, 5-6 (1974) (suggesting translatability is generally possible, though dependent on the content of the
legal concept or provision at issue), with Pierre Legrand, On the Singularity of Law, 47 Harv. Int'l L.J. 517, 527 (2006) ("Each manifestation
of law is an event, that is, it occurs or deploys itself as 'something' that is never the repetition of anything else and that will never be repeated
either - it occurs as something operating within a specific historical situation ... which, because time is what it is, is inevitably specific."). For
more background on the transferability debate, see Nicholas Foster, Transmigration and Transferability of Commercial Law in a Globalized
World, in 4 Comparative Law in the 21st Century 55, 58-60 (Andrew Harding & Esin Orucu eds., 2002).

n43. See Peter Goodrich, Legal Discourse: Studies in Linguistics, Rhetoric and Legal Analysis 2 (1987); Susan [#x8A]arçevic, Translation
of Culture-Bound Terms in Laws, in 4 Multilingua 127, 127 (1985); see also infra notes 200-23 and accompanying text.

n44. William Twining, General Jurisprudence: Understanding Law from a Global Perspective 284 (2009). Twining elaborates on this point:

No serious student of diffusion can assume that what is borrowed, imposed or imported remains the same. This is not just a matter of the
interpretation and application of received law, but also of its use or neglect, impact, and local political, economic and social significance... .
How and to what extent any particular 'import' retains its identity or is accepted, ignored, used, assimilated, adapted, rooted, resisted,
rejected, interpreted, enforced selectively, and so on depends largely on local conditions.

Id.; see also Richard L. Abel, Law as Lag: Inertia as a Social Theory of Law, 80 Mich. L. Rev. 785 (1982) (reviewing Alan Watson, Society
and Legal Change (1977)); Anna Lise Kjaer, A Common Legal Language in Europe?, in Epistemology and Methodology of Comparative
Law 377, 377-79 (Mark Van Hoecke ed., 2004); Ugo Mattei, A Theory of Imperial Law: A Study on U.S. Hegemony and the Latin
Resistance, 10 Ind. J. Global Legal Stud. 383, 408 (2003) ("Legal reception is a highly creative activity.").
For examples of how transplanted law often operates quite differently in the target country than in the source country, see Daniel
Berkowitz, Katharina Pistor & Jean-Francois Richard, Economic Development, Legality, and the Transplant Effect, 47 Eur. Econ. Rev. 165,
165-68 (2003); Daniel Berkowitz, Katharina Pistor & Jean-Francois Richard, The Transplant Effect, 51 Am. J. Comp. L. 163, 163-65 (2003);
Bernard Black, Reinier Kraakman & Anna Tarassova, Russian Privatization and Corporate Governance: What Went Wrong?, 52 Stan. L.
Rev. 1731, 1754-57 (2000); Mark D. West, The Puzzling Divergence of Corporate Law: Evidence and Explanations from Japan and the
United States, 150 U. Pa. L. Rev. 527 (2001).
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46 Cornell Int'l L.J. 219, *

n45. H. L. A. Hart, The Concept of Law 167-84 (2d ed. 1994); see also Mary Jane Morrison, Excursions into the Nature of Legal Language,
37 Clev. St. L. Rev. 271, 271-72 (1989). "Legal language ... describes a metaphysical phenomenon. Law does not exist in the physical world.
Since it is entirely created by humans, law is always linked to the culture of any particular society: it therefore constitutes a social
phenomenon." Mattila, supra note 18, at 105.

n46. See Cao supra note 36, at 24 ("Law is culturally and jurisdictionally specific."); Bernard S. Jackson, Semiotics and Legal Theory 46-50
(1985); Ferdinand de Saussure, Course in General Linguistics 114-15 (Charles Bally, Albert Sechehaye, & Albert Riedlinger eds., Wade
Baskin trans., 1966) ("Language is a system of interdependent terms in which the value of each term results solely from the simultaneous
presence of the others ... . All values are apparently governed by the same paradoxical principle.").

n47. See, e.g., Gutteridge, supra note 36, at 401 ("The physician, the theologian, the mathematician, the chemist and the economist employ
technical terms which are well understood throughout the scientific world ... .").

n48. See Frederick Charles von Savigny, Of the Vocation of Our Age for Legislation and Jurisprudence 27 (Legal Classics Library 1986)
(1831) (noting the "organic connection of law with the being and character of the people," and analogizing a people's law to their language);
Sarah K. Harding, Comparative Reasoning and Judicial Review, 28 Yale J. Int'l L. 409, 411 (2003) ("Legal systems reflect the cultures
within which they are situated and thus have unique and highly contingent identities... . Given this close connection between law and local
culture, foreign law seems to have very little place in judicial reasoning."); Susan [#x8A]arçevic, Legal Translation and Translation Theory:
A Receiver-Oriented Approach, in Legal Translation: History, Theory/ies and Practice 329, 336-37 (2000); see also infra notes 196-204 and
accompanying text.

n49. Lessig, supra note 37, at 1177 n.46.

n50. C.K. Ogden and I.A. Richards collected sixteen definitions of meaning - the "arch-ambiguity." C.K. Ogden & I.A. Richards, The
Meaning of Meaning 186-87, 104 n.1 (8th ed. 1946); see also Lessig, supra note 37, at 1181; infra note 71.

n51. The notion that words are not intrinsically meaningful is built largely upon the assumption of modern analytic thought that the function
of language is to communicate. See, e.g., Richard Larson & Gabriel Segal, Knowledge of Meaning: An Introduction to Semantic Theory 45-
47 (1995) (noting that, for example, the difference between a "bank" of a river and a financial "bank" indicates that words lack inherent
meaning; meaning must be supplied by the larger context of the communication). For a general introduction to Locke's theory of language,
see E. J. Lowe, Locke on Human Understanding 143-65 (Tim Crane & Jonathan Wolff eds., 1995) (dealing with Locke's account of
language); E.J. Ashworth, Locke on Language, 14 Can. J. Phil. 45, 46-52 (1984). See generally H. P. Grice, Meaning, 66 Phil. Rev. 377
(1957) (investigating the meaning of the word "meaning").

n52. See Ogden & Richards, supra note 50, at 186-89.

n53. Wittgenstein is credited for emphasizing the connection between a word's use and its meaning in the "language-game." See generally
Ludwig Wittgenstein, Philosophical Investigations 4 (G.E.M. Anscombe trans., 3d ed. 2001).
When a word is read or heard without any corresponding context, prototype theorists suggest that our brains are inclined to evoke
prototypes for the word. Upon seeing or hearing the word cat, for example, we are more inclined to consider a specific prototype of cat (from
the box of meaning) rather than to survey all of the different cats in the "box." The locus classicus for prototype theory is Eleanor H. Rosch,
Natural Categories, 4 Cognitive Psychol. 328, 328-30 (1973).

n54. Words that push the box metaphor toward its breaking point are words like behalf or is. But the simplicity of the box metaphor will
suffice here.
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46 Cornell Int'l L.J. 219, *

n55. See Gerald Graff, "Keep off the Grass," "Drop Dead," and Other Indeterminacies: A Response to Sanford Levinson, 60 Tex. L. Rev.
405, 408 (1982). Graff stated:

Meaning is not a substance but an activity and has the determinacy of an activity rather than of a physical object... . The question of what any
text means, then, is neither more nor less open to "determinate" inference than the question of ... whether a historical event occurred or didn't
occur. Just as we have reason to believe that we know a lot about some historical occurrences [and] less about others, ... so it is with texts:
the degree to which we can be confident about our inferences depends on the amount of evidence available, evidence which itself is open to
criticism and may well be fallible.

Id. This is deconstruction at work. See generally Christopher Norris, Deconstruction: Theory and Practice 31 (1982) ("Deconstruction is ...
an activity of reading which remains closely tied to the texts it interrogates."); Christopher Norris, The Deconstructive Turn: Essays in the
Rhetoric of Philosophy 6 (1983) ("Deconstruction is first and last a textual activity ... .").

n56. For a discussion of this infinite regress, see F. H. Bradley, Appearance and Reality: A Metaphysical Essay 17-18 (Clarendon Press,
1930) (1893). The same sort of regress occurs when one considers looking at the dictionary for the meaning of a word, because dictionaries
use words to define words. See Cliff Goddard, Can Linguists Help Judges Know What They Mean? Linguistic Semantics in the Court-
Room, 3 Forensic Linguistics 250, 252-53 (1996).

n57. See William G. Lycan, Philosophy of Language 66-68 (Paul K. Moser ed., 2000) (describing a thought experiment to demonstrate the
impact of social interaction with the environment on the construction of a word-symbol and its meaning).

n58. Dictionaries are private, non-binding, and, in any event, descriptive rather than prescriptive. "A dictionary definition is, after all, just a
meaning postulate." Brian G. Slocum, Linguistics and "Ordinary Meaning" Determinations, 33 Statute L. Rev. 39, 41 (2012). But see
Academie Francaise, http://www.academie-francaise.fr (last visited May 26, 2013) (acting as an official authority on the French language).

n59. See Lawrence Venuti, The Translator's Invisibility: A History of Translation 18 (Susan Bassnett & Andre Lefevere eds., 1995); Dennis
M. Patterson, Realist Semantics and Legal Theory, 2 Can. J. L. & Jurisprudence 175, 177 (1989).
A "discourse community" refers to the social context in which speaking or writing takes place. See Stanley Fish, Doing What Comes
Naturally 87-140, 372-98 (Stanley Fish & Frederic Jameson eds., 1989). Individuals may be members of various discourse communities
simultaneously - at one's church, workplace, home, gym, and so forth. Linguists also use the term register when referring to a discourse
community's use of the language and instruments of communication. Register incorporates the lexicon or specialized terms created by the
community. See John M. Swales, Genre Analysis: English in Academic and Research Settings 40 (1990).

n60. Lycan, supra note 57, at 67 ("Meaning 'ain't in the head.'").

n61. See Glanville L. Williams, Language and the Law-IV, 61 Law Q. Rev. 384 (1946), reprinted in Law and Language 97, 141-42
(Frederick Schauer ed., 1993).

n62. Contemporary discussion of the "indeterminacy of meaning" is rooted in Willard Van Orman Quine's Word and Object and challenges
to his thesis. See generally William Van Orman Quine, Word and Object 113-37 (2d ed. 2013). Notwithstanding decades of criticism, an
irreducible indeterminacy persists. See Jan G. Kooij, Ambiguity in Natural Language: An Investigation of Certain Problems in its Linguistic
Description 3 (S. C. Dik & J. G. Kooij eds., 1971) (suggesting that ambiguity is an unavoidable part of any natural language) (citing Otto
Jespersen, Language: Its Nature, Development, and Origin (1964)).

n63. See Geoffrey Nunberg, The Non-Uniqueness of Semantic Solutions: Polysemy, 3 Linguistics & Phil. 143, 144-45 (1979).
Page 183Page 183
46 Cornell Int'l L.J. 219, *

n64. Larson & Segal, supra note 51, at 45-47. See generally Klaas Willems, Logical Polysemy and Variable Verb Valency, 28 Language Sci.
580 (2006).

n65. See Andreas Blank, Why Do New Meanings Occur? A Cognitive Typology of the Motivations for Lexical Semantic Change, in
Historical Semantics and Cognition 61 (Andreas Blank & Peter Koch eds., 1999).

n66. See Fifty Years Among the New Words: A Dictionary of Neologisms, 1941-1991 1-17 (John Algeo ed., 1991).

n67. See D. A. Cruse, Lexical Semantics 49 (B. Comrie et al. eds., 1986); Arnold M. Zwicky & Jerrold M. Sadock, Ambiguity Tests and
How to Fail Them, in 4 Syntax and Semantics 1 (John P. Kimball ed., 1975).

n68. See Paul Grice, Studies in the Way of Words 177-78 (1989); Rosanna Keefe, Theories of Vagueness 6 (2000).

n69. See, e.g., Noam Chomsky, Language and Mind 91 (3d ed. 2006).

n70. I do not intend to suggest that this indeterminacy is necessarily pathologic. It may even be virtuous. Contrary to what some authors
have suggested, indeterminacy is not "'the common cold of the pathology of language.'" Kooij, supra note 62, at 1 (quoting Abraham Kaplan,
An Experimental Study of Ambiguity and Context 1 (1950)).

n71. For the traditional theories of meaning, see generally Ogden & Richards, supra note 50. For a discussion of the more contemporary use
theories, psychology theories, verificationism, and truth-condition theories, see Lycan, supra note 57, at 88, 100, 115, 129.
The distinction between lexical meaning and sentential meaning is somewhat artificial since the meaning of words is fundamentally
constitutive: words are involved in the constitution of sentences, and the meaning of words is constituted through sentences. See Gottlob
Frege, On Sense and Meaning, in Collected Papers on Mathematics, Logic, and Philosophy 157 (Brian McGuinness ed., Max Black et al.
trans. 1984) (suggesting that individual words make sense only in the context of sentences); Cruse, supra note 67, at 51 ("The meaning of
any word form is in some sense different in every distinct context in which it occurs.").

n72. Michael Morris, An Introduction to the Philosophy of Language 15 (2007).

n73. Id. Onomatopoeia may be something of an exception that proves this rule. These are words that imitate the sound they convey - e.g.,
moo, meow, pow, hiccup, sizzle. See Hugh Bredin, Onomatopoeia as a Figure and a Linguistic Principle, 27 New Literary Hist. 555, 557
(1996). Even these words are somewhat culture-bound, however. See W. G. Aston, Japanese Onomatopes and the Origin of Language, 23 J.
Anthropological Inst. Gr. Brit. & Ir. 332, 353 (1894) (noting how the Japanese use "nya" to describe the mewing of a cat). In any event, these
are exceptional words with a relatively insignificant role in legal discourse.

n74. Morris, supra note 72, at 15. "The principle of compositionality states that the meaning of a complex linguistic expression is built up
from the meanings of its composite parts in a rule-governed fashion." M. Lynne Murphy & Anu Koskela, Key Terms in Semantics 36 (2010)
(emphasis omitted).

n75. Analogizing language to a game is one of the major contributions of Ludwig Wittgenstein. See generally Wittgenstein, supra note 53.

n76. Note that a reference to a single discourse of law is a shorthand. In fact, legal discourse is not homogenous, but is rather "a set of
related legal discourses." See Yon Maley, The Language of the Law, in Language and the Law 11, 13 (John Gibbons ed., 1994).
Page 184Page 184
46 Cornell Int'l L.J. 219, *

n77. See generally James T. Lamiell, 'Nomothetic' and 'Idiographic': Contrasting Windelband's Understanding with Contemporary Usage, 8
Theory & Psychol. 23 (1998); Wilhelm Windelband, Address on Occasion of the Assumption of the Rectorship of Kaiser-Wilhelm
University of Strasburg (1894), in 8 Theory & Psychol. 6 (1998).

n78. See Stefan Ziemski, Two Types of Scientific Research, 10 J. for Gen. Phil. Sci. 338, 338-39 (1979).

n79. See Weisflog, supra note 35, at 207.

n80. See, e.g., Astrue v. Capato ex rel. B.N.C., 132 S. Ct. 2021, 2027 (2012) ("To resolve this case, we must decide whether the Capato
twins rank as 'children' under the Act's definitional provisions." (alteration in original)); Hall v. United States, 132 S. Ct. 1882, 1886 (2012)
("Our resolution of this case turns on the meaning of a phrase in § 503(b) of the Bankruptcy Code: 'incurred by the estate.'"); Mohamad v.
Palestinian Auth., 132 S. Ct. 1702, 1706 (2012) ("The ordinary meaning of the word ["individual"], fortified by its statutory context,
persuades us that the Act authorizes suit against natural persons alone."); Argonaut Great Cent. Ins. Co. v. Mitchell, No. 11-12063, 2012 WL
2947757, at 1 (11th Cir. July 20, 2012) ("The instant case which turns on the meaning of 'getting on' and 'getting off' the insured vehicle.");
Hall v. United States, 677 F.3d 1340, 1344 (Fed. Cir. 2012) ("This case centers on the proper meaning of the word 'summoned' in 5 U.S.C. §
6322(a)."); St. Paul Fire & Marine Ins. Co. v. Schilli Transp. Servs. Inc., 672 F.3d 451, 457 (7th Cir. 2012) ("At the center of the dispute in
this case is the meaning of the word 'you' in this [contract]."); Foothills Texas, Inc. v. MTGLQ Investors, L.P., No. 09-10452, 2012 WL
2974907, at 5 (Bankr. D. Del. July 20, 2012) ("The dispute turns on the meaning of the term 'executory contract' under the Code."); Egan v.
Planning Bd. of Stamford, No. 32371, 2012 WL 2546806, at 6 n.17 (Conn. App. July 10, 2012) ("Our analysis turns on the meaning of the
term 'front lot line.'"). For a classic example that Professor Brian Landsberg brought to my attention, see Gibbons v. Ogden, 22 U.S. 1 (1824)
(tracing the meaning of "regulate," "commerce," and "among").
Remember also Kenneth Starr's account of President Clinton's testimony in his report to Congress: "It depends on what the meaning of
the word 'is' is." Office of the Indep. Counsel, Referral to the United States House of Representatives Pursuant to Title 28, United States
Code, § 595(c) n.1091 (1998), reprinted in The Starr Report: The Findings of Independent Counsel Kenneth W. Starr on President Clinton
and the Lewinsky Affair 325 n.1091 (1998).

n81. To be sure, when a philosopher or semiotician examines laws as a patterned system of meanings, the insubstantiality of legal language
becomes evident, and the inquiry presses on both jurisprudence and epistemology. See Mary Douglas, The Future of Semiotics, 38 Semiotica
197, 199 (1982). Yet in legal practice, laws are treated as though they are substantial - with boundaries and consequences. This Article
focuses on these practical outcomes.

n82. This is not necessarily because they always get the meanings "right"; instead, they get the meanings "right" only in the sense that they
are the final arbiters. And the discourse community recognizes that authority. See id.

n83. For an early discussion of the phrase "open texture," see Friedrich Waismann, Verifiability, in Logic and Language 117, 119 (Antony
Flew ed., 1968). Hart later used the same phrase in the legal context. See Hart, supra note 45, at 123, 272-76 (discussing the indeterminacy
of language in the context of his theory on the proper scope of judicial discretion).

n84. Blake scholars have debated, among other things, the meaning of the titular flowers in The Lily from William Blake, Songs of
Innocence & Experience (1794). Traditional readings cast it as a symbol of purity, innocence, modesty, and humility. See S. Foster Damon, A
Blake Dictionary: The Ideas and Symbols of William Blake 240 (1965); E.D. Hirsch Jr., Innocence and Experience: An Introduction to Blake
256-57 (1964). In contrast, D. G. Gillham offers an ironic interpretation of the lily, as the flower appears white and virginal because it
"knows (or senses) that it is enticing to appear to be so." D. G. Gillham, Blake's Contrary States: The Songs of Innocence and of Experience
as Dramatic Poems 174 (1966). John Grant directly refutes Gillham's "theory of radical irony," championing the more traditional reading of
the flower. See John E. Grant, Two Flowers in the Garden of Experience, in William Blake: Essays for S. Foster Damon 333, 341-45 (Alvin
H. Rosenfeld ed., 1969).
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46 Cornell Int'l L.J. 219, *

n85. According to the theory of speech acts, originally developed by John L. Austin and John Searle, human language is used to not only
transmit messages or influence people's behavior, but acts are also realized through this language. See J. L. Austin, How to Do Things With
Words 6 (J. O. Urmson & Marina Sbisa eds., 2d ed. 1975); John R. Searle, Speech Acts: An Essay in the Philosophy of Language 16 (1969).
Building on this framework, Brenda Danet classified legal language use into different types of speech acts. See Brenda Danet, Language in
the Legal Process, 14 Law & Soc'y Rev. 445, 457-60 (1980).

n86. " There is a famous passage in Alice Through the Looking-Glass (Chapter VI) where, to Humpty Dumpty's claim to use words in
unusual senses, Alice made what may seem to the ordinary person to be an unanswerable objection. 'The question is,' said Alice, 'whether
you can make words mean different things.' 'The question is,' replied Humpty Dumpty, 'which is to be master - that's all.'" Williams, supra
note 61, at 141.

n87. See Mattila, supra note 18, at 31 ("Speech acts are of fundamental importance from the standpoint of the legal order. Given that the law
is a metaphysical phenomenon that is only 'alive' in language, it is only by language means that it is possible to change legal relationships.
The language of the law is thus an instrument of speech acts: it has a performative function.").

n88. " Few would now deny the indeterminacy side of H.L.A. Hart's repeated claim that language and the rules based on it contain both a
core of settled meaning and a penumbra of uncertainty. The disputes are over whether the core is as comparatively large as Hart and others
maintain, whether the core is as settled as it is supposed, and whether the notion of core (or plain or literal) meaning is coherent at all." Law
and Language, supra note 61, at xiv. See generally Brian Bix, Law, Language, and Legal Determinacy (1993); Timothy A. O. Endicott,
Vagueness in Law 190 (2000); Vagueness in Normative Texts (Vijay K. Bhatia et al. eds., 2005).

n89. See Mattila, supra note 18, at 109-11; Tiersma, supra note 17, at 111-12.

n90. See Tiersma, supra note 17, at 113-14.

n91. See Kooij, supra note 62, at 3; Ferenc Kovacs, Linguistic Structures and Linguistic Laws 354 (B. R. Gruner & Akademiai Kiado eds.,
Sandor Simon trans., 1971).

n92. See Tiersma, supra note 17, at 97-100.

n93. See Ralf Poscher, Ambiguity and Vagueness in Legal Interpretation, in The Oxford Handbook of Language and Law 128, 129 (Peter
M. Tiersma & Lawrence M. Solan eds., 2012).

n94. See generally Endicott, supra note 88; Olafur Pall Jonsson, Vagueness, Interpretation, and the Law, 15 Legal Theory 193 (2009);
Lawrence M. Solan, Vagueness and Ambiguity in Legal Interpretation, in Vagueness in Normative Texts, supra note 88, at 73; Jeremy
Waldron, Vagueness in Law and Language: Some Philosophical Issues, 82 Calif. L. Rev. 509 (1994).

n95. See Poscher, supra note 93, at 128.

n96. For a theoretical discussion of whether meanings are created or discovered, see Patterson, supra note 59, at 177.
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46 Cornell Int'l L.J. 219, *

n97. Cf. Steven G. Calabresi, Introduction to Originalism: A Quarter-Century of Debate 1-40 (Steven G. Calabresi ed., 2007) (discussing
various meanings of original meaning); Randy E. Barnett, An Originalism for Nonoriginalists, 45 Loy. L. Rev. 611, 613 (1999); John O.
McGinnis & Michael B. Rappaport, A Pragmatic Defense of Originalism, 31 Harv. J.L. & Pub. Pol'y 917, 917-19 (2008).

n98. This history is suggested only for expository purposes. For an historical account of the class action, see generally Stephen C. Yeazell,
From Medieval Group Litigation to the Modern Class Action (1987).

n99. See Christine Jolls & Cass R. Sunstein, Debiasing Through Law, 35 J. Legal Stud. 199, 204, 236 (2006); Jeffrey J. Rachlinski, A
Positive Psychological Theory of Judging in Hindsight, 65 U. Chi. L. Rev. 571, 574 (1998) (describing steps courts take to correct for the
human propensity to view past events with a hindsight bias).

n100. For a discussion of the phenomenon of transplants, see supra notes 27-33 and accompanying text.

n101. In some instances, the enthusiastic nature of the borrowing creates unique problems. See Holger Spamann, Contemporary Legal
Transplants: Legal Families and the Diffusion of (Corporate) Law, 2009 BYU L. Rev. 1813, 1858 (2009) ("Singapore decided to adopt the
new English company law outright before the English had even finished drafting it, and they did not even adjust the numbering in cross-
references of their securities law copied from Australia.").

n102. See Markesinis & Fedtke, supra note 34, at 336-37 ("Borrowing a particular legal idea does not ... mean that the system on the
receiving end needs to follow the model in each and every detail.").

n103. See Patterson, supra note 59, at 177.

n104. See generally Jackson, supra note 46, at 46 (noting that, once constituted as a system, "the language of law represents an entire
universe of legal meanings, the choice of any one of which ... reflects the exclusion or absence of the other available legal meanings").

n105. This defined term is not a synonym of "plain meaning," nor of "ordinary meaning." Unfortunately, the Supreme Court has used the
term as such a synonym. See, e.g., Perrin v. United States, 444 U.S. 37, 42 (1979) (referring to the "ordinary, contemporary, common
meaning" of statutory text). Quite fittingly given the thesis of this Article, however, the Court has also used the term "common meaning" in
essentially the sense that I use it here. See, e.g., United States v. Santos, 553 U.S. 507, 511 (2008) (noting that the term "proceeds" "has not
acquired a common meaning in the provisions of the Federal Criminal Code").
For a general discussion of plain meaning and original meaning, see Ellen P. Aprill, The Law of the Word: Dictionary Shopping in the
Supreme Court, 30 Ariz. St. L.J. 275, 280 (1998); Alani Golanski, Linguistics in Law, 66 Alb. L. Rev. 61, 63 (2003); Lawrence M. Solan,
The New Textualists' New Text, 38 Loy. L.A. L. Rev. 2027, 2036-38 (2005).

n106. Whether mercifully or unfortunately, the Venn diagram does not reflect the infinitely regressive nature of word meaning. See Bradley,
supra note 56, at 17-18. Each of the circles above theoretically circumscribes an infinite number of circles since a word symbolizes
something that can be described with words that, in turn, symbolize more concepts and more words, and so on. The meaning of each word is
theoretically its own circle. For example, if a circle represents the meaning of the word "class action" in First Country, then that includes the
"trans-substantive joinder device with four prerequisites, [and] a provision for opt-outs ... ." Supra text accompanying note 98. But each of
these words ("trans-substantive," for example), in turn, has a meaning, and that meaning is describable by words that have meanings.
The Venn diagram also suggests that the meaning of a word is static, when of course it is dynamic. See James Boyd White, Justice as
Translation: An Essay in Cultural and Legal Criticism 239-41 (1990); Arthur Schopenhauer, On Language and Words, in Theories of
Translation 32-35 (Rainer Schulte & John Biguenet eds., 1992); James Boyd White, Judicial Criticism, in Interpreting Law and Literature: A
Hermeneutic Reader 393 (Sanford Levinson & Steven Mailloux eds., 1988). Because meaning is dynamic, M<1>, M<2>, M<3>, and M<4>
could be the evolution of the meaning of the word within one system.
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46 Cornell Int'l L.J. 219, *

n107. The Global Class Actions Exchange website, maintained by Deborah Hensler of Stanford Law School, contains reports on
contemporary variations on the class action device. Global Class Actions Exchange, Stan. Univ., http://globalclassactions.stanford. edu/ (last
visited May 26, 2013). The variations among countries include, for example, restricting the subject matter (non-trans-substantive), see Klaus
Viitanen, Finland, 622 Annals Am. Acad. Pol. & Soc. Sci. 209, 213 (2009) (consumer cases only); requiring that the action address a shared
public concern, see Camilla Bernt, Norway, 622 Annals Am. Acad. Pol. & Soc. Sci. 220, 223 (2009); emphasizing the role of a government
official in the initiation of actions, see Viitanen, supra, at 213-14; and requiring class members to opt in, see Elisabetta Silvestri, Italy, 622
Annals Am. Acad. Pol. & Soc. Sci. 138, 146 (2009).

n108. See generally Roger Wertheimer, Conditions, 65 J. Phil. 355 (1968).

n109. Words and meanings are shared resources because multiple users can enjoy the same word. Words and meanings generally are not
limited resources because one person's use of the word does not compromise another's use of that word. Cf. N. Stephan Kinsella, Against
Intellectual Property Rights, 15 J. Libertarian Stud. 1, 22-23 (2001).

n110. The origin of the common-pool line of inquiry is usually traced to Garrett Hardin. See Hardin, supra note 1, at 1244; see also Elinor
Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action 2 (James E. Alt & Douglass C. North eds., 1990)
(deducing that Aristotle was the first person known to identify the tragedy of the commons). For more contemporary analyses of Hardin's
theory, see generally Ronen Avraham & K. A. D. Camara, The Tragedy of the Human Commons, 29 Cardozo L. Rev. 479 (2008) (applying
the theory of the commons to health insurance); Jerry Brito, The Spectrum Commons in Theory and Practice, 2007 Stan. Tech. L. Rev. 1
(2007) (applying the theory of the commons to radio frequencies); Gary D. Libecap, Open-Access Losses and Delay in the Assignment of
Property Rights, 50 Ariz. L. Rev. 379 (2008) (applying the theory of the commons to fishing, gas and oil extraction, and air pollution). For
the articulation of a new generation of commons phenomena, see generally Michael J. Madison, Brett M. Frischmann & Katherine J.
Strandburg, Constructing Commons in the Cultural Environment, 95 Cornell L. Rev. 657 (2010).

n111. Hardin, supra note 1, at 1244.

n112. " Examples of typical common-pool resource systems include lakes, rivers, irrigation systems, groundwater basins, forests, fishery
stocks, and grazing areas. Common-pool resources may also be facilities that are constructed for joint use, such as mainframe computers and
the Internet." Charlotte Hess & Elinor Ostrom, Ideas, Artifacts, and Facilities: Information as a Common-Pool Resource, 66 Law &
Contemp. Probs. 111, 121 (2003).

n113. See Ward Farnsworth, The Legal Analyst: A Toolkit for Thinking About the Law 106-107, 109-16 (2007); Hardin, supra note 1, at
1244.

n114. See Cornes & Sandler, supra note 20, at 39-43 (discussing externalities); see also James E. Meade, The Theory of Economic
Externalities: The Control of Environmental Pollution and Similar Social Costs 15 (1973).

n115. Hardin, supra note 1, at 1244.

n116. Alfred North Whitehead, Science and the Modern World 11 (Pelican Mentor Books 1948) (1925).

n117. See infra notes 332-56 and accompanying text.

n118. See supra note 19 and accompanying text.


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46 Cornell Int'l L.J. 219, *

n119. To be sure, there could be a positive externality if innovation in one legal system were so enlightened (or so problematic) that other
legal systems adopted it (or avoided it, as the case may be) and would not have done so but for the experience of the former. In this sense,
idiosyncrasy might add to the interpretive stock of a word, and this could be independently useful. The analogue is Justice Brandeis' famous
"laboratories" metaphor about federalism. See New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting) ("It is one
of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel
social and economic experiments without risk to the rest of the country.").
But this is surely a modest externality; although some idiosyncrasies could be transplanted widely, see supra notes 27-33 and
accompanying text, the purpose of customization is to tailor the device to local conditions, which are, almost by definition then, unique, see
supra note 19. Even were the positive externality of a particular innovation substantial and compelling, understand that it would not forestall
or directly offset the loss of the word's common meaning. If, for example, five additional countries introduced a class action device and
followed Sixth Country's lead (codifying the opt-in component), the idiosyncrasy in Sixth Country provided something useful elsewhere (to-
wit, a positive externality), but the word's common meaning is still compromised as a result of Sixth Country's customization. The values of
common meaning, on one hand, and entrepreneurship, on the other, are not equivalents in the sense that one can directly offset the other.
To emphasize this point, consider the following analogue: if the cattle farmers sharing the common grazing land had to purchase more
horses to shepherd their ever-burgeoning cattle herds to and from the commons, the stimulus to the market for horses would be a positive
externality - the more cattle brought to the commons, the more horses and horse equipment purchased by each farmer. But this positive
externality would not forestall or directly offset the consumption of the common-pool resource. Theoretically, the positive externality might
outweigh the negative externality - if, say, the marginal stimulus to the horse market spurred other economic growth worth far more than the
commons - but it would not save the commons. I address the normative consequences of preserving common meaning at infra notes 332-356
and accompanying text.
There is a possibility that if an innovation introduced in one system was adopted by all other systems, the innovation would become
part of the word's common meaning. If, for example, the five countries that followed Sixth Country's lead were instead First, Second, Third,
Fourth, and Fifth Country, the common meaning may ultimately even reset to include Sixth Country's opt-in. But see infra Part IV.B.

n120. In this Article, unless otherwise noted, "foreign law" refers to the national law of foreign countries and to international law. The
challenge of applying unfamiliar law can even be manifest in the application of sister-state law. Alexander, supra note 36, at 620-21. But
these challenges are "usually not as acute as that of applying the rule of another nation. While some material differences do exist among the
laws of the several states, they are not nearly as frequently encountered as differences with foreign national laws. In a similar vein," some
applications of foreign law are more difficult than others. Id. at 603 n.3. "The foreign law 'problem' is not monolithic." Id.; see also Catherine
Valcke, Global Law Teaching, 54 J. Legal Educ. 160, 161 (2004) ("Foreign law typically refers to the internal law of states other than our
own." (emphasis omitted)).

n121. Roger J. Miner, The Reception of Foreign Law in the U.S. Federal Courts, 43 Am. J. Comp. L. 581, 581 (1995) ("Aside from foreign
law issues arising in cases relating to foreign trade, federal courts throughout this nation are faced daily with immigration matters, tort
claims, public law disputes, arbitration enforcement proceedings, domestic relation suits and even criminal cases that call for the
determination and application of foreign law.").

n122. Douglas R. Tueller, Reaching and Applying Foreign Law in West Germany: A Systemic Study, 19 Stan. J. Int'l L. 99, 101 (1983).
International treaties have also extended the domain of international law to include private acts and transactions, such as wills, trusts,
decedents' estates, "the adoption of children, the abduction of children, the commercial sale of goods, electronic funds transfers, bills of
exchange, and promissory notes." Phillip R. Trimble, International Law, World Order, and Critical Legal Studies, 42 Stan. L. Rev. 811, 812
(1990).

n123. Tueller, supra note 122, at 101-02.

n124. The following list provides a number of examples: Argentina (Ubiquiti Networks, Inc. v. Kozumi USA Corp., No. C 12-2582 CW,
2012 WL 2343670 (N.D. Cal. June 20, 2012)); Australia ( Seed Servs., Inc. v. Winsor Grain, Inc., 868 F. Supp. 2d 998 (E.D. Cal. 2012));
Bahamas (Matthews v. Whitewater West Indus., Ltd., No. 11-24424- CIV, 2012 WL 1605184 (S.D. Fla. May 8, 2012)); Canada ( Sonoco
Products Co. v. ACE INA Ins., 877 F. Supp. 2d. 398 (D.S.C. 2012)); Cayman Islands ( Loukianoff v. Galitsky, No. C 12-00296 CRB, 2012
WL 1144289 (N.D. Cal. Apr. 4, 2012)); Costa Rica ( Lucas v. Hertz Corp., 875 F. Supp. 2d 991 (N.D. Cal. 2012)); Dominican Republic
(Font Paulus ex rel. P.F.V. v. Vittini Cordero, No. 3:12-cv-986, 2012 WL 2524772 (M.D. Pa. June 29, 2012)); Ecuador (Tobar v. United
States, No. 07cv817 WQH (WMc), 2012 WL 2190766 (S.D. Cal. June 13, 2012)); England ( Howden N. Am. Inc. v. Ace Property & Cas.
Ins. Co., 875 F. Supp. 2d 478 (W.D. Pa. 2012)); Finland ( Frederiksson v. HR Textron, Inc., 484 F. App'x 610 (2d Cir. 2012)); French
Polynesia ( Putz v. Golden, No. C10-0741JLR, 2012 WL 2565017 (W.D. Wash. July 2, 2012)); Germany (Mageba Textilmaschinen GmbH
Page 189Page 189
46 Cornell Int'l L.J. 219, *

& Co. KG v. Archibald, No. 3:12- CV-00126-FDW, 2012 WL 2568075 (W.D.N.C. July 2, 2012)); India (Shire Dev. LLC v. Cadila
Healthcare Ltd., No. 1:10- CV-00581-KAJ, 2012 WL 2564134 (D. Del. June 28, 2012)); Indonesia ( JPMorgan Chase Bank, N.A. v. PT
Indah Kiat Pulp & Paper Corp. Tbk, 854 F. Supp. 2d 528 (N.D. Ill. 2012)); Iraq ( Al Shimari v. CACI Int'l, Inc., 679 F.3d 205 (4th Cir.
2012)); Israel ( Estate of Botvin v. Islamic Rep. Iran, 873 F. Supp. 2d 232 (D.D.C. 2012)); Kuwait (Shah v. Kuwait Airways Corp., No. 08
Civ. 7371(LAP)(JCF), 2012 WL 1631624 (S.D.N.Y. May 7, 2012)); Malaysia (Nestle Waters N. Am., Inc. v. Malaysian Assur. Alliance
Berhad, No. 8:12-cv-180- T-30AEP, 2012 WL 2305940 (M.D. Fla. June 18, 2012)); Mexico ( Gen. Motors Corp. v. Albert Weber GmbH,
No. 08-12671, 2012 WL 2184564 (E.D. Mich. June 14, 2012)); Netherlands ( United States v. Omar, No. 09-242 (MJD/FLN), 2012 WL
2277821 (D. Minn. June 18, 2012)); Nigeria ( Aeons Centro de Administracao de Empresas, Ltd. v. Cent. Bank of Nigeria, No. BEL-11-
3447, 2012 WL 2675259 (D. Md. July 3, 2012)); Saudia Arabia ( Douglas v. Smith Int'l, Inc., 481 F. App'x 917 (5th Cir. 2012)); Switzerland
(Nuvo Research Inc. v. McGrath, No. C 11-4006 SBA, 2012 WL 1965870 (N.D. Cal. May 31, 2012)); Taiwan ( SignalQuest, Inc. v. Tien-
Ming Chou, 284 F.R.D. 45 (D.N.H. 2012)); Venezuela ( Skanga Energy & Marine Ltd v. Arevenca S.A., 875 F. Supp. 2d 264 (S.D.N.Y.
2012)).
Of course, reported cases reveal only part of the picture. See John R. Schmertz, Jr., The Establishment of Foreign and International
Law in American Courts: A Procedural Overview, 18 Va. J. Int'l L. 697, 697 (1978) ("Foreign law, and to a lesser extent international law,
play an ever-increasing role in U.S. federal and state adjudications. In addition to the reported cases, there are many more unreported cases,"
including those where the parties and the court overlooked the foreign law issues.).

n125. Restatement (Second) of Conflict of Laws § 6.2 cmt. (1971). The most significant relationship test of the Restatement (Second) of
Conflicts is the most popular, but is not the only extant conflicts methodology. See generally Symeon C. Symeonides, Choice of Law in the
American Courts in 2010: Twenty-Fourth Annual Survey, 59 Am. J. Comp. L. 303 (2011).

n126. See Restatement (Second) of Conflict of Laws §§145, 188 (1971).

n127. For a discussion of the increasing use of choice of law clauses, see Erin Ann O'Hara, Opting Out of Regulation: A Public Choice
Analysis of Contractual Choice of Law, 53 Vand. L. Rev. 1551, 1556 (2000); see also Jan M. Smits, The Complexity of Transnational Law:
Coherence and Fragmentation of Private Law, 14 Elec. J. Comp. L. (2010), available at http://www.ejcl.org/143/art143-14.pdf.

n128. See Paul R. Dubinsky, Human Rights Law Meets Private Law Harmonization: The Coming Conflict, 30 Yale J. Int'l L. 211, 229
(2005) ("In recent decades, national courts have shown increasing respect for party autonomy ... .").

n129. See Restatement (Second) of Conflict of Laws § 187 (1971).

n130. See generally Erin A. O'Hara & Larry E. Ribstein, The Law Market (2009) (arguing states must, when developing domestic laws,
account for individuals' potential desire to evade that law by, for example, contracting under the law of another state).

n131. See Franklin A. Gevurtz, Global Issues in Corporate Law 6-11 (2006) (discussing McDermott Inc. v. Lewis, 531 A.2d 206 (Del.
1987)).

n132. See Paul N. Iannone, The Critical Role of Foreign Law and Tax Court Rule 146: Determination of Foreign Law by the United States
Tax Court in I.R.C. Section 482 Cases, 16 Q.L.R. 445, 453 (1997) ("Foreign law plays a vital role for corporations that must determine an
allocation of income and expenses among domestic and foreign affiliated businesses for tax purposes."); see also I.R.C. § 901 (concerning
foreign tax credits).

n133. See Graeme W. Austin, Does the Copyright Clause Mandate Isolationism?, 26 Colum. J.L. & Arts 17, 59 (2003); Stephen Breyer,
Assoc. Justice of the Supreme Court of the United States, Keynote Address Before the Ninety-Seventh Annual Meeting of the American
Society of International Law (Apr. 4, 2003), in 97 Am. Soc'y Int'l L. Proc. 265, 265-66 (2003); Edward Lee, The New Canon: Using or
Misusing Foreign Law to Decide Domestic Intellectual Property Claims, 46 Harv. Int'l L.J. 1, 5, 13 (2005). See generally David E. Miller,
Finding a Conflicts Issue in International Copyright Litigation: Did the Second Circuit Misinterpret the Berne Convention in Itar-Tass?, 8
Cardozo J. Int'l & Comp. L. 239 (2000) (describing how the Itar-Tass decision is implicating foreign law issues).
Page 190Page 190
46 Cornell Int'l L.J. 219, *

n134. See, e.g., Pazcoguin v. Radcliffe, 292 F.3d 1209, 1216 (9th Cir. 2002) (applying Phillipine law to determine if immigrant was
excludable). Foreign law may also determine the validity of a marriage, see Colbert v. Colbert, 169 P.2d 633, 635 (Cal. 1946), the
effectiveness of an adoption, see In re Adoption of Doe, 923 N.E.2d 1129, 1134 (N.Y. 2010), or the legitimacy of a child, see Perez v.
Gardner, 277 F. Supp. 985, 992 (E.D. Wis. 1967). Amnesty cases may require inquiry into both international and local laws. See generally
Ronald C. Slye, The Legitimacy of Amnesties Under International Law and General Principles of Anglo-American Law: Is a Legitimate
Amnesty Possible?, 43 Va. J. Int'l L. 173 (2002).

n135. See 15 U.S.C.§§78dd-1(c), 78dd-2(a)(1)(A), 78dd-2(c) (2006). See generally Elizabeth Spahn, Discovering Secrets: Act of State
Defenses to Bribery Cases, 38 Hofstra L. Rev. 163, 181-82 (2010).

n136. See 42 U.S.C. § 2000e-1(b) (2006).

n137. See 29 U.S.C. § 623(f)(1) (2006). See generally Andrew P. Walsh, Employment Discrimination - Mahoney v. RFE/RL, Inc.: The
"Foreign Laws" Exception to the ADEA - When a Collective Bargaining Agreement Equals a Law, 19 W. New Eng. L. Rev. 455, 455 (1997).

n138. See, e.g., Registration and Regulation of Brokers and Dealers, 15 U.S.C. § 78o(b)(4)(B), 78c(a)(39)(B), (D) (2006) (granting the SEC
and self-regulatory organizations authority to bar, suspend, or limit securities professionals based upon the findings of a foreign court or
foreign securities authority that such persons committed specified types of violations of foreign law); Tariff Act of 1930, 19 U.S.C. § 1527(a)
(2006) (prohibiting the importation of any wild mammal or bird "if the laws or regulations of any country" forbid it); Marine Mammal
Protection Act of 1972, 16 U.S.C. § 1372(c) (2006) (prohibiting importation of marine mammals taken or possessed in violation of foreign
law); The Lacey Act of 1990, 16 U.S.C. § 3372(a)(2)(A) (2006) (making it unlawful to possess or sell fish or wildlife taken "in violation of
any foreign law"); Death on the High Seas Act, 46 U.S.C. § 30306 (2006) (allowing foreign cause of action for wrongful death on the high
seas to be brought in U.S. courts); National Stolen Property Act, 18 U.S.C. § 2315 (2006) (prohibiting the importation or transportation of
"stolen" goods); United States v. Schultz, 333 F.3d 393, 404 (2d Cir. 2003) (interpreting "stolen" under U.S.C. § 2315 to mean "taken in
violation of a patrimony law.").
Some other statutes include reciprocity rules that allow recovery by citizens or subjects of a foreign state only if that foreign state
would allow an American citizen to recover were the situation reversed. See, e.g., 28 U.S.C. § 2502(a) (2006) ("Citizens or subjects of any
foreign government which accords to citizens of the United States the right to prosecute claims against their government in its courts may
sue the United States in the United States Court of Federal Claims if the subject matter of the suit is otherwise within such court's
jurisdiction."); 46 U.S.C. § 31111 (2006) (applying a similar reciprocity rule in cases in which an alien sues the United States for damages
caused by a public vessel, or for compensation for towage or salvage services).

n139. Similarly, some domestic statutes refer to citizens or subjects of a foreign state. In these instances, foreign law may determine a
party's status thereunder. See, e.g., JPMorgan Chase Bank v. Traffic Stream (BVI) Infrastructure Ltd., 536 U.S. 88, 91 (2002) (testing the
meaning of a "corporation of a foreign state" in the context of diversity subject matter jurisdiction); see also Antonin Scalia, Assoc. Justice of
the Supreme Court of the United States, Keynote Address: Foreign Legal Authority in the Federal Courts (Apr. 3, 2004), in 98 Am. Soc'y
Int'l L. Proc. 305, 305 (2004) ("Much of our [JP Morgan Chase Bank] opinion was devoted to consideration of English law, since whether
the corporation was a citizen or subject of a foreign state depended on its legal status under foreign law.").

n140. To be clear, it is the domestic law that binds, not the foreign mandate. The foreign law is binding in the sense that it is recognized by
or incorporated by reference into the domestic law. See 1 Joseph H. Beale, A Treatise on the Conflict of Laws 53 (1935) ("Since the only law
that can be applicable in a state is the law of that state, no law of a foreign state can have there the force of law."); Joseph Story,
Commentaries on the Conflict of Laws § 7, at 10 (5th ed. 1857).

n141. See Usha (India), Ltd. v. Honeywell Int'l, Inc., 421 F.3d 129, 135 (2d Cir. 2005) (assigning burden to moving party); Piper Aircraft
Co. v. Reyno, 454 U.S. 235, 254 n.22 (1981) (identifying adequacy as a threshold issue).
Page 191Page 191
46 Cornell Int'l L.J. 219, *

n142. Uniform Foreign Money-Judgments Recognition Act § 2 (1962), available at http://www.uniformlaws.org/shared/docs/foreign


%20money%20judgments%20recognition/ufmjra%20final%20act.pdf; Restatement (Third) of Foreign Relations Law of the United States §
482 (1987). See generally Walter W. Heiser, The Hague Convention on Choice of Court Agreements: The Impact on Forum Non
Conveniens, Transfer of Venue, Removal, and Recognition of Judgments in United States Courts, 31 U. Pa. J. Int'l L. 1013 (2010)
(discussing the requirements of finality and due process for the enforcement of foreign judgments under the Uniform Foreign Money
Judgments Act and under the Restatement).

n143. See, e.g., Kimberly Hicks, Parallel Litigation in Foreign and Federal Courts: Is Forum Non Conveniens the Answer?, 28 Rev. Litig.
659, 685 (2009) (explaining that international comity, Colorado River abstention, and inherent power theories require the U.S. courts to
examine details of the foreign proceeding); Austen L. Parrish, Duplicative Foreign Litigation, 78 Geo. Wash. L. Rev. 237, 247-51 (2010).
See generally Cortelyou Kenney, Disaster in the Amazon: Dodging "Boomerang Suits" in Transnational Human Rights Litigation, 97 Calif.
L. Rev. 857 (2009); Louise Ellen Teitz, Both Sides of the Coin: A Decade of Parallel Proceedings and Enforcement of Foreign Judgments in
Transnational Litigation, 10 Roger Williams U. L. Rev. 1 (2005).

n144. See Alex Glashausser, The Treatment of Foreign Country Convictions as Predicates for Sentence Enhancement Under Recidivist
Statutes, 44 Duke L.J. 134, 142 (1995) (discussing courts' consideration of foreign convictions in criminal sentencing); A. Kenneth Pye, The
Effect of Foreign Criminal Judgments in the United States, 32 U. Mo. Kan. City L. Rev. 114, 128 (1964) ("A number of states specifically
give effect to foreign criminal convictions by providing that a conviction in any other ... country[] of a crime which ... would be a 'felony' ...
may be used as a basis for imposing increased punishment on the offender.").

n145. See generally Leti Volpp, (Mis)Identifying Culture: Asian Women and the "Cultural Defense," 17 Harv. Women's L.J. 57 (1994).

n146. See, e.g., U.C.C. § 2-615 (1987); see also Perutz v. Bohemian Disc. Bank in Liquidation, 110 N.E.2d 6, 7 (N.Y. 1953) ("A contract
made in a foreign country by citizens thereof and intended by them to be there performed is governed by the law of that country.").

n147. See generally Diane Marie Amann, A Whipsaw Cuts Both Ways: The Privilege Against Self-Incrimination in an International Context,
45 UCLA L. Rev. 1201 (1998) (examining the privilege against self-incrimination where there is a possibility of being prosecuted abroad for
a foreign crime).

n148. See, e.g., McDonnell Douglas Corp. v. Islamic Rep. of Iran, 758 F.2d 341, 345-46 (8th Cir. 1985).

n149. See Hannah L. Buxbaum, Multinational Class Actions Under Federal Securities Law: Managing Jurisdictional Conflict, 46 Colum. J.
Transnat'l L. 14, 33-34 (2007); Stephen J. Choi & Linda J. Silberman, Transnational Litigation and Global Securities Class-Action Lawsuits,
2009 Wis. L. Rev. 465, 480-86 (2009) (discussing the impact of possible non-recognition on class certification).

n150. The forum's procedural rules govern the mechanics for serving process upon foreign defendants. However, some of these rules
incorporate by reference the foreign practice rules. See, e.g., Fed. R. Civ. P. 4(f)(2)(A) ("If there is no internationally agreed means ...
[service can be done] as prescribed by the foreign country's law ... ."). The rules also contemplate use of an international treaty that, in turn,
incorporates by reference foreign practice rules. See Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in
Civil or Commercial Matters, Nov. 15, 1965, 20 U.S.T. 361, 658 U.N.T.S. 163.

n151. See, e.g., Fed. R. Civ. P. 28(b)(1)(C) ("A deposition may be taken in a foreign country ... on notice, before a person authorized to
administer oaths either by federal law or by the law in the place of examination ... ."). Moreover, all of the forum's rules are to be
administered with "special vigilance to protect foreign litigants" from discovery abuse. Societe Nationale Industrielle Aerospatiale v. U.S.
Dist. Court S.D. Iowa, 482 U.S. 522, 546 (1987). Specifically, this includes "due respect ... for any sovereign interest expressed by a foreign
state." Id. Demonstrating such respect may involve evaluating foreign discovery practices - and the history behind and justifications for those
rules. See, e.g., In re Anschuetz & Co., GmbH, 838 F.2d 1362, 1364 (5th Cir. 1988) ("The courts of this circuit, when considering discovery
requests ... will be sensitive to interests expressed in the Hague Convention.").
Page 192Page 192
46 Cornell Int'l L.J. 219, *

n152. See Scalia, supra note 139, at 305. The United States is a bilateral, regional, or international party to more than 10,000 treaties and
international agreements. See U.S. Dep't of State, Treaties in Force: A List of Treaties and Other International Agreements of the United
States in Force on January 1, 2011 (2011), available at http://www.state.gov/documents/organization/169274.pdf.
For a discussion of the relevance of foreign law with regard to extradition treaties in Brazil, see Jacob Dolinger, Application, Proof, and
Interpretation of Foreign Law: A Comparative Study in Private International Law, 12 Ariz. J. Int'l & Comp. L. 225, 241-42 (1995).
With regard to the role of foreign law in harmonization efforts, see generally Graeme B. Dinwoodie, The Development and
Incorporation of International Norms in the Formation of Copyright Law, 62 Ohio St. L.J. 733 (2001) (suggesting that domestic courts
should use foreign law as a way to develop international copyright norms in transnational disputes). With regard to harmonization, consider
also the borrowed-statute doctrine in the context of canons of statutory interpretation: "when a legislator copies a statute from a foreign
legislator, it can be presumed that she was aware of the way in which the statute had been construed by the foreign courts." Carlos F.
Rosenkrantz, Against Borrowings and Other Nonauthoritative Uses of Foreign Law, 1 Int'l J. Const. L. 269, 275 (2003); see also infra notes
343-347.

n153. When interpreting the text of a treaty, for example, foreign precedents should not simply be considered but be given "considerable
weight." Olympic Airways v. Husain, 540 U.S. 644, 658 (2004) (Scalia, J., dissenting) (citing Air France v. Saks, 470 U.S. 392, 404 (1985)).

n154. United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, 1489 U.N.T.S. 3 (codified at 15 U.S.C.A.
app. at 52 (West Supp. 1997)).

n155. See Fritz Enderlein & Dietrich Maskow, International Sales Law: United Nations Convention for the International Sale of Goods,
Convention on the Limitation Period in the International Sale of Goods 8-9 (1992); see also International Sale of Goods: Hearing on Treaty
Doc. No. 98-99 Before the S. Comm. on Foreign Relations, 98th Cong. 1, 13 (1984) (statement of Sen. Christopher J. Dodd) (commenting
that Congress intended the CISG to create a "uniform international legal system to which each party to an international sales contract could
refer").

n156. See United Nations Convention on Contracts for the International Sale of Goods, supra note 154, art. 7(1) ("In the interpretation of
this Convention, regard is to be had to its international character and to the need to promote uniformity in its application."). Further, Article
7(2) implicitly provides that courts should not rely exclusively on domestic law. See id. art. 7(2); John Linarelli, Analytical Jurisprudence
and the Concept of Commercial Law, 114 Penn St. L. Rev. 119, 154 (2010); see also Franco Ferrari, The Relationship Between the UCC and
the CISG and the Construction of Uniform Law, 29 Loy. L.A. L. Rev. 1021, 1024-26 (1996).

n157. See, e.g., Alien Tort Claims Act, 28 U.S.C. § 1350 (2006); Foreign Sovereign Immunities Act, 28 U.S.C. § 1605 (2006); see also
Yeazell, supra note 3, at 62-63. See generally supra note 120.

n158. Murray v. The Schooner Charming Betsy, 6 U.S. (2 Cranch) 64, 118 (1804) (Marshall, C.J.); see also Lea Brilmayer, International
Law in American Courts: A Modest Proposal, 100 Yale L.J. 2277, 2279-80 (1991) (discussing U.S. courts' tendency to view questions of
foreign law as political questions, thus finding them "unsuited for domestic adjudication").

n159. 28 U.S.C. § 1605(a)(3) (2006).

n160. See Scalia, supra note 139, at 305.

n161. See Lynn M. LoPucki, The Systems Approach to Law, 82 Cornell L. Rev. 479, 484-86 (1997).
Page 193Page 193
46 Cornell Int'l L.J. 219, *

n162. See generally Harold Hongju Koh, Internalization Through Socialization, 54 Duke L.J. 975 (2005) (discussing the socialization and
internalization of international law as a vehicle for the coordination of and unity within the international community).

n163. See Daniel A. Farber, The Supreme Court, the Law of Nations, and Citations of Foreign Law: The Lessons of History, 95 Calif. L.
Rev. 1335, 1337 (2007). See generally Steven G. Calabresi & Stephanie Dotson Zimdahl, The Supreme Court and Foreign Sources of Law:
Two Hundred Years of Practice and the Juvenile Death Penalty Decision, 47 Wm. & Mary L. Rev. 743 (2006); M.H. Hoeflich, Translation &
the Reception of Foreign Law in the Antebellum United States, 50 Am. J. Comp. L. 753 (2002); Vicki C. Jackson, Constitutional
Comparisons: Convergence, Resistance, Engagement, 119 Harv. L. Rev. 109 (2006); John O. McGinnis, Foreign to Our Constitution, 100
Nw. U. L. Rev. 303 (2006); Austen L. Parrish, Storm in a Teacup: The U.S. Supreme Court's Use of Foreign Law, 2007 U. Ill. L. Rev. 637
(2007); Rosenkrantz, supra note 152.

n164. See Roper v. Simmons, 543 U.S. 551, 575-78 (2005) (noting that the fact that no other country permits the juvenile death penalty is
not controlling, but confirming the conclusion that the death penalty is disproportionate for killers younger than eighteen); Atkins v. Virginia,
536 U.S. 304, 317 (2002) ("Within the world community, the imposition of the death penalty for crimes committed by mentally retarded
offenders is overwhelmingly disapproved."); Trop v. Dulles, 356 U.S. 86, 102-03 (1958) (plurality opinion) (citing the virtual unaninimity of
"civilized nations" to support the conclusion that the Eighth Amendment bars the imposition of statelessness as a punishment for crime).

n165. See, e.g., Lawrence v. Texas, 539 U.S. 558, 560, 576-77 (2003) (noting that other nations have protected the "right of homosexual
adults to engage in intimate, consensual conduct" and finding "no showing that in this country the governmental interest in circumscribing
personal choice is somehow more legitimate or urgent"); Washington v. Glucksberg, 521 U.S. 702, 734-35 (1997) (finding that the
experience with physician-assisted suicide in the Netherlands supported state claims of potential for abuse).

n166. See, e.g., Scalia, supra note 139, at 309 ("Adding foreign law to the box of available legal tools is enormously attractive to judges
because it vastly increases the scope of their discretion. In that regard it is much like legislative history, which ordinarily contains something
for everybody and can be used or not used, used in one part or in another, deemed controlling or pronounced inconclusive, depending upon
the result the court wishes to reach."); Melissa A. Waters, Treaty Dialogue in Sanchez-Llamas: Is Chief Justice Roberts a Transnationalist,
After All?, 11 Lewis & Clark L. Rev. 89, 91 n.8 (2007) ("Relying on foreign precedent doesn't confine judges. It doesn't limit their discretion
the way relying on domestic precedent does. Domestic precedent can confine and shape the discretion of the judges. Foreign law, you can
find anything you want ... and that actually expands the discretion of the judge." (quoting Confirmation Hearing on the Nomination of John
G. Roberts, Jr. to Be Chief Justice of the United States Before the S. Comm. on the Judiciary, 109th Cong. 200-01 (2005) [hereinafter
Roberts Confirmation Hearing]) (alteration in original)).

n167. See, e.g., Waters, supra note 166, at 91 n.8 ("If we're relying on a decision from a German judge about what our Constitution means,
no president accountable to the people appointed that judge, and no Senate accountable to the people confirmed that judge, and yet he's
playing a role in shaping the law that binds the people in this country. I think that's a concern that has to be addressed." (quoting Roberts
Confirmation Hearing, supra note 166, 200-201 (2005))); J. Harvie Wilkinson III, The Use of International Law in Judicial Decisions, 27
Harv. J.L. & Pub. Pol'y 423, 426 (2004) ("When judges rely on foreign sources, especially for difficult constitutional questions concerning
domestic social issues, they move the bases for judicial decision-making even farther from the realm of both democratic accountability and
popular acceptance.").

n168. See, e.g., Steven G. Calabresi, "A Shining City on a Hill": American Exceptionalism and the Supreme Court's Practice of Relying on
Foreign Law, 86 B.U. L. Rev. 1335, 1337 (2006) ("Americans are more individualistic, more religious, more patriotic, more egalitarian, and
more hostile to unions and Marxism than are the people of any other advanced democracy. This positive account of the ways in which the
United States truly is exceptional will call into question the practicality and wisdom of our Supreme Court imposing foreign ideas about law
on us."); Diarmuid F. O'Scannlain, U.S. Circuit Judge, U.S. Court of Appeals for the Ninth Circuit, What Role Should Foreign Practice and
Precedent Play in the Interpretation of Domestic Law?, Address Before the Institute of Advanced Legal Studies of the University of London
(Oct. 11, 2004), in 80 Notre Dame L. Rev. 1893, 1907 (2005) (noting unique aspects of the United States that may make reliance on foreign
law inappropriate).

n169. See, e.g., Jackson, supra note 163, at 111-12. Likewise, commentators who are suspicious of foreign law in the context of
constitutional adjudication concede its applicability in the sort of contexts examined in this Article. See, e.g., Scalia, supra note 139, at 305-
06 (recognizing "appropriate" uses of foreign laws).
Page 194Page 194
46 Cornell Int'l L.J. 219, *

n170. See supra notes 125-48 and accompanying text.

n171. The steady increase in the number of cases implicating foreign law has been acknowledged in each of the last five decades. See, e.g.,
Andrew N. Adler, Translating & Interpreting Foreign Statutes, 19 Mich. J. Int'l L. 37, 38 (1998) ("U.S. courts increasingly must decide
issues involving the laws of foreign nations."); Paul R. Dubinsky, Is Transnational Litigation a Distinct Field? The Persistence of
Exceptionalism in American Procedural Law, 44 Stan. J. Int'l L. 301, 302 (2008) (noting "steady growth in the volume of litigation with an
international dimension"); Arthur R. Miller, Federal Rule 44.1 and the "Fact" Approach to Determining Foreign Law: Death Knell for a Die-
Hard Doctrine, 65 Mich. L. Rev. 613, 615 (1967) (recognizing a "steady increment in the number of lawsuits with international aspects");
Rudolf B. Schlesinger, A Recurrent Problem in Trans-National Litigation: The Effect of Failure to Invoke or Prove the Applicable Foreign
Law, 59 Cornell L. Rev. 1, 1 (1973) (observing that foreign law questions are presented "with considerable frequency"); John G. Sprankling
& George R. Lanyi, Pleading and Proof of Foreign Law in American Courts, 19 Stan. J. Int'l L. 3, 4, 9 (1983) (noting foreign law issues
come before American courts "quite often" and "no doubt will appear more frequently"); see also Harold Hongju Koh, Transnational
Litigation in United States Courts v (2008) (noting "the last thirty years have seen a growing torrent of cases" filed in the United States with
foreign and international issues); Marcus S. Quintanilla & Christopher A. Whytock, The New Multipolarity in Transnational Litigation:
Foreign Courts, Foreign Judgments, and Foreign Law, 18 Sw. J. Int'l L. 31, 48 (2011) ("Our overarching conjecture is that, as we move
toward 2021, transnational litigation will be increasingly multipolar.").

n172. See generally Thomas O. Main, Global Issues in Civil Procedure 1 (2005); Ronan E. Degnan & Mary Kay Kane, The Exercise of
Jurisdiction Over and Enforcement of Judgments Against Alien Defendants, 39 Hastings L.J. 799, 799 (1988) ("It is trite but true to observe
that disputes between United States nationals and people from other lands have been increasing steadily and doubtless will continue to do
so.").
For a discussion of the pressures on territorial boundaries generally, see Jack Goldsmith & Tim Wu, Who Controls the Internet?
Illusions of a Borderless World 179-83 (2006) (describing and responding to the perception that notions of sovereignty are eroding in a
borderless world); Parrish, supra note 143, at 238 n.4.

n173. See Andrew S. Bell, Forum Shopping and Venue in Transnational Litigation 3 (James Fawcett ed., 2003) (describing how the growth
of transnational litigation is fueled by "great technological advances, particularly in the fields of transportation and telecommunications and,
more generally, through the internet's facilitation of international commerce"); Sanchez, supra note 36, at 636 ("The U.S. American
practitioner, now more than ever before, operates in a world society and economy constituted not only of an international society and
economy but also of interdependent nations' societies and economies. The globalization process has given rise to the development of
transnational law practice." (footnotes omitted)); Tueller, supra note 122, at 101-02 ("The need to have information on foreign law can arise
in many contexts and affect almost anyone involved in the legal process. Thus, in the course of everyday business - in drafting contracts or
considering trade with foreign countries, in dealing with foreign nationals or companies, or merely in buying or selling foreign goods at
home - the need to consider the laws of a foreign nation arises with increasing frequency.").

n174. See Harold J. Berman, World Law, 18 Fordham Int'l L.J. 1617, 1617 (1995); Martti Koskenniemi & Paivi Leino, Fragmentation of
International Law? Postmodern Anxieties, 15 Leiden J. Int'l L. 553, 557-58 (2002) ("Without attempting yet another sociology of
globalisation, it may be accepted that political communities have become more heterogeneous, their boundaries much more porous, than
assumed by the received images of sovereignty and the international order, and that the norms they express are fragmentary, discontinuous,
often ad hoc and without definite hierarchical relationship - that we now live in a 'global Bukowina.'" (citing B. de Sousa Santos, Toward a
New Common Sense: Law, Science and Politics in the Paradigmatic Transition (1995))); Gunther Teubner, "Global Bukowina": Legal
Pluralism in the World Society, in Global Law Without a State 3 (Gunther Teubner ed., 1997). The world has "shrunk." See Robert A.
Jefferies, Jr., Recognition of Foreign Law by American Courts, 35 U. Cin. L. Rev. 578, 578 (1966) ("This 'shrinkage' has produced a
manyfold increase in the personal and commercial relations between nationals of different countries. As a result, today's attorney is likely to
be faced with claims and disputes that are dependent upon foreign law for their solution."); Basil Markesinis, Ways and Means of Teaching
Foreign Law: A Review of James Gordley & Arthur Taylor von Mehren's An Introduction to the Comparative Study of Private Law:
Readings, Cases, Materials, 23 Tul. Eur. & Civ. L.F. 175, 205 (2008) (referring to "a shrinking world which is getting closer and closer
together through economic, political, scientific, and environmental concerns which are shared by nations"). For a popular narrative of these
events, see generally Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-First Century (2005).

n175. Markesinis & Fedtke, supra note 34, at 75.

n176. Measurement costs are the costs required to obtain necessary information. Measurement costs and information costs are usually
interchangeable concepts. See Yoram Barzel, Measurement Cost and the Organization of Markets, 25 J.L. & Econ. 27, 28 n.3 (1982);
Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110 Yale L.J. 1, 26
(2001).
Page 195Page 195
46 Cornell Int'l L.J. 219, *

n177. Jason Scott Johnston, Communication and Courtship: Cheap Talk Economics and the Law of Contract Formation, 85 Va. L. Rev. 385,
428 (1999). See generally Michael P. Van Alstine, The Costs of Legal Change, 49 UCLA L. Rev. 789 (2002).

n178. I draw upon the constructivist viewpoint on learning theory. This literature emphasizes the active role of the learner in building
understanding and making sense of new information. See generally Jean Piaget, Biology and Knowledge (1971); Jean Piaget, Studies in
Reflecting Abstraction (Robert L. Campbell ed., trans., 2001). People construct new knowledge by using their perceptions (prior conceptual
knowledge) to determine the initial path or foundation from which to build. See Piaget, Biology and Knowledge, supra, at 147-85. "People
adapt their thinking to include new ideas, as new experiences provide additional information. This adaptation occurs in two ways, through
assimilation and accommodation. In the former process, new information is simply added to the cognitive organization already there. In the
latter, the intellectual organization has to change somewhat to adjust to the new idea." Kathleen S. Berger, The Developing Person: Through
Childhood and Adolescence 55 (1978).

n179. See supra note 178.

n180. Applying foreign law is "exceedingly difficult." Alexander, supra note 36, at 637; see also Schmertz, supra note 124, at 699
(describing why applying foreign law poses "a major intellectual challenge").

n181. Justice Breyer, for example, has admitted (and lamented) that neither he nor his clerks can easily find relevant foreign material
(despite their close physical proximity to one of the world's top legal libraries). See Breyer, supra note 133, at 267-68 (suggesting inability to
find foreign material); see also Adler, supra note 171, at 63 n.110 ("Commentators typically worry that judges 'may do a half-baked job of
research in totally unfamiliar materials and come to a conclusion without basis in foreign or domestic law." (quoting Thomas F. Bridgman,
Proof of Foreign Law & Facts, 45 J. Air L. & Com. 845, 854 n.38 (1980))); Iannone, supra note 132, at 445-46 ("Merely identifying the law
of a foreign country may be a difficult and perplexing problem ... .").

n182. See Shirley S. Abrahamson & Michael J. Fischer, All the World's a Courtroom: Judging in the New Millennium, 26 Hofstra L. Rev.
273, 291 (1998) (describing how advances in technology have led to the growing internationalization of the judiciary); Ruth Bader Ginsburg,
Assoc. Justice of