Volume 108

A Modern Poor Debtor’s Oath

Bankruptcy offers a fresh start that frees individuals from crushing debt burdens. Many insolvent Americans are, however, simply too poor to afford bankruptcy. Filing for even the simplest type of bankruptcy costs around $1,800, with most of this money paid to attorneys who help complete more than twenty required forms and schedules. These forms verify that the debtor qualifies for relief and help divide the debtor’s estate among creditors, but for the large majority of debtors, this paperwork is unnecessary because the debtor easily qualifies for relief and has no assets to distribute.

History offers a better model. Two centuries ago, the law granted release from debtor’s prison through the simple execution of a “poor debtor’s oath”—a short declaration that the debtor lacked substantial assets. For most debtors, modern bankruptcy law should require no more than an updated version of a poor debtor’s oath that provides relief unless creditors or their trustees are willing to pay some cost to challenge the oath’s validity. To discourage the wealthy from taking false oaths, Congress could sharply limit the exemptions available in the simplified procedure. Even dramatically smaller exemptions would protect all of the assets of the overwhelming majority of bankrupt debtors. By avoiding costly processes for debtors who obviously qualify for bankruptcy relief, a modern poor debtor’s oath could save hundreds of millions of dollars in transaction costs each year and greatly expand access to bankruptcy.

Introduction

“The principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor.”1 1.See Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (internal quotation marks and citations omitted).Show More The fresh start offers insurance against adverse events, such as unemployment or illness, that debtors either cannot purchase in the marketplace or will not purchase due to volitional or cognitive failures.2 2.Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 Harv. L. Rev. 1393, 1405–18 (1985).Show More The fresh start also protects a debtor’s friends, family, and acquaintances from the consequences of the debtor’s financial distress. It may even protect the broader economy.3 3.Id. at 1418–24.Show More Insolvent debtors may have little reason to work hard if creditors can seize their earnings.4 4.Id. at 1420–24. For qualifications to this argument, see Richard M. Hynes, Non-Procrustean Bankruptcy, 2004 Univ. Ill. L. Rev. 301, 321–26.Show More

Bankruptcy cannot provide these benefits to debtors who cannot afford to file. Even the simplest form of bankruptcy, Chapter 7, requires more than twenty complex forms and schedules,5 5.For example, in the Central District of California Bankruptcy Courts, at least twenty-seven forms are required to be submitted to the court by Chapter 7 debtors. U.S. Bankr. Ct. for the Cent. Dist. of Cal., Chapter 7 Petition Package (Individual Debtors), 3–6 (Dec. 2020), https://www.cacb.uscourts.gov/sites/cacb/files/documents/forms/Ch7%20IndividualPetitionPackage.pdf [https://perma.cc/JHR2-HMMG].Show More so nearly all debtors hire a lawyer.6 6.Just 6.5% of Chapter 7 debtors file pro se. See infra note 158 and accompanying text.Show More On average, debtors spend more than $1,800 on filing and attorney’s fees.7 7.See Lois R. Lupica, The Consumer Bankruptcy Fee Study: Final Report, Am. Bankr. Inst. 130, tbl.A-6 (Dec. 2011) (listing total direct access costs (attorney’s fees plus filing fees) for no-asset Chapter 7 cases of $1,304 in 2005 dollars). The Bureau of Labor Statistics Inflation calculator converts $1,304 in May of 2005 into $1,806 in May of 2021. CPI Inflation Calculator, U.S. Bureau of Lab. Stat., https://www.bls.gov/data/inflation_calculator.htm [https://perma.cc/33FK-GRDN] (last visited Apr. 3, 2022).Show More These debtors must also pay their attorneys up front because, if the payment were financed, that debt too would be cancelled in bankruptcy. Debtors thus need to “sav[e] up for bankruptcy,”8 8.See, e.g., Ronald J. Mann & Katherine Porter, Saving Up for Bankruptcy, 98 Geo. L.J. 289, 292 (2010). Then-Professor Porter has since been elected to the U.S. House of Representatives.Show More and yet the debtors most in need of bankruptcy are often those who live paycheck-to-paycheck and cannot afford to save up for anything.

Some of the cost of the modern bankruptcy petition is due to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”),9 9.Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (codified in scattered sections of 11 U.S.C.).Show More legislation supported by then-Senator Joe Biden.10 10.151 Cong. Rec. 3, 4351 (2005) (statement of then-Senator Joe Biden) (arguing in favor of the bill’s adoption during debate, concluding that “[a] vote for this bill is a vote to protect family support payments in bankruptcy. That is why I support this bill”).Show More Arguing that some debtors were filing for bankruptcy when they could afford to pay some or all of their debts, creditors successfully lobbied Congress to increase the evidence that debtors must produce when filing.11 11.SeeRobert H. Scott, III, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: How the Credit Card Industry’s Perseverance Paid Off, 41 J. Econ. Issues 943, 945 (2007).Show More Many consumer advocates, including then-Professor Elizabeth Warren, strongly opposed BAPCPA, arguing that the reforms would unduly raise the cost of filing for the vast majority of debtors who truly deserved relief.12 12.See, e.g., Robert M. Lawless et al., Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, 82 Am. Bankr. L.J. 349, 362 n.53 (2008).Show More

Now-President Joe Biden has endorsed bankruptcy legislation sponsored by now-Senator Elizabeth Warren.13 13.Katie Glueck & Thomas Kaplan, Biden, Looking to Attract Progressives, Endorses Warren Bankruptcy Plan, N.Y. Times (May 22, 2020), https://www.nytimes.com/2020/03/14​/us/politics/biden-warren-bankruptcy.html [https://perma.cc/Y3V9-YN9Y].Show More With respect to making bankruptcy more accessible,14 14.We express no judgment on other aspects of the reforms, such as making it easier to discharge student debt. Consumer Bankruptcy Reform Act of 2020, S. 4991, 116th Cong. § 101(b)(8) (2020).Show More these reforms do not go far enough. By repealing some of BAPCPA’s requirements, Senator Warren’s reforms may reduce the current cost of filing,15 15.Elizabeth Warren, Fixing Our Bankruptcy System to Give People a Second Chance, Warren Democrats (Jan. 7, 2020), https://elizabethwarren.com/plans/bankruptcy-reform [https://perma.cc/Q529-HMSB].Show More but even before 2005, filing under Chapter 7 still cost consumers around $1,200 (in 2020 dollars).16 16.See Lupica, supra note 7, at 130 tbl.A-6 (reporting total direct costs of $866 in 2005 dollars). Adjusting for inflation, this is roughly $1,199 in 2020 dollars. CPI Inflation Calculator, supra note 7.Show More Warren’s reforms would also allow more debtors to finance their attorney’s fees.17 17.Consumer Bankruptcy Reform Act of 2020, S. 4991, 116th Cong. § 101(b)(4) (2020); Warren, supra note 15.Show More Yet that reform still leaves debtors spending significant sums just to prove an inability to pay their creditors and impedes bankruptcy’s fresh start by immediately saddling individuals emerging from bankruptcy with debt.

The complex forms and schedules required of debtors filing for bankruptcy stand in sharp contrast to the simple notice-filing standards available to creditors, who can file debt collection suits with just “a short and plain statement of the claim.”18 18.See, e.g., Fed. R. Civ. P. 8. Even a plausibility standard requires only that the complaint allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).Show More Of the “eight million debt claims . . . filed [every year,] . . . six million . . . turn into default judgments,”19 19.See, e.g., Yonathan A. Arbel, Adminization: Gatekeeping Consumer Contracts, 71 Vand. L. Rev. 121, 123 (2018).Show More meaning that the plaintiff will never have to produce any evidence.

By going all the way back to the Founding era, one can find an insolvent debtor’s action that matched the simplicity of modern notice filing—the poor debtor’s oath. “Debt was an inescapable fact of life in early America . . . [that] cut across regional, class, and occupational lines. Whether one was an Atlantic merchant or a rural shopkeeper, a tidewater planter or a backwoods farmer, debt was an integral part of daily life.”20 20.Bruce H. Mann, Republic of Debtors: Bankruptcy in the Age of American Independence 3 (2002).Show More The United States lacked a lasting federal bankruptcy law until the end of the nineteenth century,21 21.Prior to 1898, Congress enacted three bankruptcy acts that together lasted less than twenty years. Congress repealed the Bankruptcy Act of 1800 in 1803, Act of Dec. 19, 1803, ch. 6, 2 Stat. 248, the Bankruptcy Act of 1841 in 1843, Act of Mar. 3, 1843, ch. 82, 5 Stat. 614, and the Bankruptcy Act of 1867 in 1878, Act of June 7, 1878, ch. 160, 20 Stat. 99. For a history of bankruptcy in the United States, see generally David A. Skeel, Jr., Debt’s Dominion: A History of Bankruptcy Law in America (2001) and Charles Jordan Tabb, The History of Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5 (1995).Show More and many Founding-era Americans found themselves in debtor’s prison.22 22.See infra notes 52–55 and accompanying text.Show More The poor debtor’s oath was an early reform that freed many debtors from this prison. In contrast to the numerous documents that a modern bankrupt debtor must submit, a federal version of this oath fit into just a few lines: “You solemnly swear (or affirm) that you have not estate, real or personal, nor is any to your knowledge holden in trust for you to the amount or value of twenty dollars, nor sufficient to pay the debt for which you are imprisoned.”23 23.Act of May 5, 1792, ch. 29, § 2, 1 Stat. 265, 266. For other versions of the poor debtor’s oath, see infra note 64 and accompanying text.Show More

Legal historian Bruce Mann suggests that the fact that the poor debtor’s oath was not part of a bankruptcy system explains the oath’s simplicity.

Insolvency and bankruptcy process create procedures for determining creditors’ claims against a debtor and for distributing the debtor’s property among his or her creditors in proportion to their claims. Poor debtor’s oaths offered neither, nor could they when they applied only to debtors with too little property to be worth distributing.24 24.Mann, supra note 20, at 51.Show More

Although modern bankruptcy law has procedures for determining creditors’ claims and distributing the debtor’s property, these procedures are not used in around 95% of consumer Chapter 7 cases because there are no assets to distribute.25 25.See infra Table 1.Show More Well less than 2% of these cases distribute more than $5,000 to unsecured creditors.26 26.See infra notes 129–33 and accompanying text.Show More The Supreme Court of the United States understated matters when it said that the fresh start is bankruptcy’s “principal purpose.”27 27.See Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007).Show More In the overwhelming majority of consumer bankruptcies, the fresh start is bankruptcy’s sole purpose.28 28.Tom Jackson recognized this point when he noted that “[t]he fresh-start policy is thus substantively unrelated to the creditor-oriented distributional rules that give bankruptcy law its general shape and complexity.” Jackson, supra note 2, at 1396.Show More

Bankruptcy’s numerous schedules and other required documents could still play a useful role if they are needed to determine whether a debtor deserves a fresh start. However, because nearly all consumers who file under Chapter 7 receive the same relief—a discharge of debt without forfeiting any assets—a court does not need full disclosure of the specifics of a debtor’s financial condition. The court only needs to know that the debtor’s financial condition is bad enough to qualify for a Chapter 7 discharge without any distribution to unsecured creditors. For many debtors, this purpose can be achieved with a modern version of the poor debtor’s oath. One possible version of this oath based on the current law’s substantive rules would read, “After any exempt property is excluded and administrative expenses are paid, no funds will be available to distribute to unsecured creditors, and my household income is below [median income].”29 29.For a longer discussion of the possible text of this oath, see infra Section III.D.Show More Little more is actually needed from most debtors beyond their identifying information; creditors could learn of the debtor’s filing from the credit bureaus such as Equifax, Experian, and TransUnion.30 30.See infra Section IV.A. Our proposal is similar to Tom Jackson’s suggestion that the fresh start could be tied to a public declaration of insolvency. See Jackson, supra note 2, at 1396 n.8. (“For example, the law might grant discharge through a system of public notice whereby certain assets (such as future wages) would be freed from the claims of existing creditors. The mechanism of public notice would inform creditors of the debtor’s election.”).Show More

Although we call for a modern version of the poor debtor’s oath, we do not envision restricting the oath to the truly destitute. During her tenure as a law professor, Senator Warren and her colleagues persuasively argued that most bankrupt debtors are drawn from the “middle class,”31 31.See, e.g., Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, The Fragile Middle Class: Americans in Debt 2–3 (2000).Show More and in this paper, we demonstrate that the overwhelming majority of bankrupt debtors could rightfully take the above oath. As a result, we will primarily use the less common label for a poor debtor’s oath—an insolvent debtor’s oath.32 32.For others using this phrase, see, for example, Robert A. Feer, Imprisonment for Debt in Massachusetts before 1800, 48 Miss. Valley Hist. Rev. 252, 259 (1961) and Walter H. Moses, Enforcement of Judgments Against Hidden Assets, 1951 U. Ill. L.F. 73, 79.Show More

That so many debtors can rightfully take the oath is partly due to bankruptcy’s current substantive rules. By definition, half of all households earn less than the median income, which makes them automatically pass bankruptcy’s income-based means test,33 33.See infra note 125 and accompanying text.Show More and many states provide exemptions that allow debtors to protect substantial wealth in bankruptcy. For example, twenty states allow debtors to exempt at least $100,000 in home equity,34 34.See infra note 104 and accompanying text.Show More and seven states (and the District of Columbia) have homestead exemptions with no dollar limit.35 35.See infra notes 101–03 and accompanying text.Show More We do not try to justify or reform these substantive rules. Rather, we argue that, given these substantive rules, bankruptcy should use very different procedures.

During the Founding era, an insolvent debtor’s oath shifted the burden of proof to the creditor to show that the debtor actually had assets.36 36.See Feer, supra note 32, at 255 (“The creditors were to be notified of the oath, and if they did not prove within fifty days that it was false, the prisoner was to be freed unless his creditors agreed to pay his weekly board charges.”).Show More However, a modern version could instead serve the same role that notice pleading serves in consumer debt collection—delaying the time when moving parties must present evidence and excusing presentation when their opponents concede or do nothing. Although the plaintiff retains the burden of proof in consumer debt collection, notice pleading shifts some burden to the defendant, who must challenge the complaint and force the plaintiff to provide evidence. If the defendant does nothing, the plaintiff will win a judgment by default. Similarly, creditors or their trustees could challenge an insolvent debtor’s oath and thereby force the debtor to complete the extensive schedules required by existing law. If such challenges are sufficiently costly, creditors will not challenge an oath unless there is a reasonably high probability that the oath was falsely taken. If an oath goes unchallenged, the debtor will receive a discharge by default.37 37.As is true under current law, courts could revoke a discharge if it is found to have been obtained by fraud or if a subsequent audit by the U.S. Trustee suggests revocation is appropriate. See 11 U.S.C. § 727(d); infra notes 165–69 and accompanying text.Show More

Lawsuits and other efforts to pursue a defaulting debtor cost money. Therefore, creditors and debt collectors have developed tools to predict whether debtors are likely to have sufficient assets or income to satisfy their judgments.38 38.See infra Section III.B.Show More We show that these same tools could be used to identify false oaths with a high degree of accuracy.39 39.See infra Section III.BShow More

By discouraging high-asset debtors from falsely taking an insolvent debtor’s oath, the law could reduce the incentive for creditors and trustees to challenge oaths and thereby lessen the administrative burden on those debtors who truly qualify for relief. In the Founding era, this was done by threatening severe punishment for perjury. This threat remains today in the form of bankruptcy fraud. Over time, however, consumers may learn that such a threat is largely empty. In our current system, debtors who make a material misstatement on their bankruptcy petition face more risk of being struck by lightning than being convicted of bankruptcy fraud.40 40.See infra notes 202–06 and accompanying text.Show More

Sharply limiting asset exemptions would more effectively deter wealthy debtors from falsely taking an insolvent debtor’s oath. Such a punishment is unlikely to harm debtors who rightfully take an oath because most debtors have assets that are far below currently available exemptions.41 41.See infra Table 2 and accompanying text.Show More Homestead exemptions can be quite generous. However, over the last decade, roughly 80% of Chapter 7 debtors reported no home equity at all,42 42.See Nathaniel Pattison & Richard M. Hynes, Asset Exemptions and Consumer Bankruptcies: Evidence from Individual Filings, 63 J.L. & Econ. 557, 569 tbl.2 (2020).Show More making the size of the homestead exemption available to them irrelevant.

Part I explores the debtor-creditor law of the Founding era. Although this law was much less generous than modern law, it did provide a very simple way for debtors to declare their inability to pay—the insolvent debtor’s oath. Part II describes a modern bankruptcy law that offers consumers very generous relief but requires complex paperwork and is unaffordable for many in financial distress. Part III proposes a new and greatly simplified bankruptcy procedure that would allow some debtors to take an updated version of the insolvent debtor’s oath in lieu of completing the complicated forms and schedules required by current law. The potential benefits are enormous. Because so many consumers file, the population of bankrupt consumers spends more than one billion each year on Chapter 7 filing costs alone,43 43.See infra notes 128–30 and accompanying text.Show More and the indirect costs of the paperwork may be even larger. Some insolvent debtors are too broke to file; they either forego bankruptcy protection altogether or file under a different chapter that allows them to pay their attorneys over time but rarely discharges their debts.44 44.See infra Section II.B.Show More Our proposal offers something for supporters of means testing as well. Procedures that require the production of costly information are easier to justify if they are restricted to the small number of debtors who are likely to have significant assets or income. Part IV addresses likely criticisms of our proposal, and Part V concludes.

  1. See Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (internal quotation marks and citations omitted). ↑
  2. Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 Harv. L. Rev. 1393, 1405–18 (1985). ↑
  3. Id. at 1418–24. ↑
  4.  Id. at 1420–24. For qualifications to this argument, see Richard M. Hynes, Non-Procrustean Bankruptcy, 2004 Univ. Ill. L. Rev. 301, 321–26. ↑
  5. For example, in the Central District of California Bankruptcy Courts, at least twenty-seven forms are required to be submitted to the court by Chapter 7 debtors. U.S. Bankr. Ct. for the Cent. Dist. of Cal., Chapter 7 Petition Package (Individual Debtors), 3–6 (Dec. 2020), https://www.cacb.uscourts.gov/sites/cacb/files/documents/forms/Ch7%20IndividualPetitionPackage.pdf [https://perma.cc/JHR2-HMMG]. ↑
  6. Just 6.5% of Chapter 7 debtors file pro se. See infra note 158 and accompanying text. ↑
  7. See Lois R. Lupica, The Consumer Bankruptcy Fee Study: Final Report, Am. Bankr. Inst. 130, tbl.A-6 (Dec. 2011) (listing total direct access costs (attorney’s fees plus filing fees) for no-asset Chapter 7 cases of $1,304 in 2005 dollars). The Bureau of Labor Statistics Inflation calculator converts $1,304 in May of 2005 into $1,806 in May of 2021. CPI Inflation Calculator, U.S. Bureau of Lab. Stat., https://www.bls.gov/data/inflation_calculator.htm [https://perma.cc/33FK-GRDN] (last visited Apr. 3, 2022). ↑
  8. See, e.g., Ronald J. Mann & Katherine Porter, Saving Up for Bankruptcy, 98 Geo. L.J. 289, 292 (2010). Then-Professor Porter has since been elected to the U.S. House of Representatives. ↑
  9. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (codified in scattered sections of 11 U.S.C.). ↑
  10. 151 Cong. Rec. 3, 4351 (2005) (statement of then-Senator Joe Biden) (arguing in favor of the bill’s adoption during debate, concluding that “[a] vote for this bill is a vote to protect family support payments in bankruptcy. That is why I support this bill”). ↑
  11. See Robert H. Scott, III, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: How the Credit Card Industry’s Perseverance Paid Off, 41 J. Econ. Issues 943, 945 (2007). ↑
  12. See, e.g., Robert M. Lawless et al., Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, 82 Am. Bankr. L.J. 349, 362 n.53 (2008). ↑
  13. Katie Glueck & Thomas Kaplan, Biden, Looking to Attract Progressives, Endorses Warren Bankruptcy Plan, N.Y. Times (May 22, 2020), https://www.nytimes.com/2020/03/14​/us/politics/biden-warren-bankruptcy.html [https://perma.cc/Y3V9-YN9Y]. ↑
  14. We express no judgment on other aspects of the reforms, such as making it easier to discharge student debt. Consumer Bankruptcy Reform Act of 2020, S. 4991, 116th Cong. § 101(b)(8) (2020). ↑
  15. Elizabeth Warren, Fixing Our Bankruptcy System to Give People a Second Chance, Warren Democrats (Jan. 7, 2020), https://elizabethwarren.com/plans/bankruptcy-reform [https://perma.cc/Q529-HMSB]. ↑
  16. See Lupica, supra note 7, at 130 tbl.A-6 (reporting total direct costs of $866 in 2005 dollars). Adjusting for inflation, this is roughly $1,199 in 2020 dollars. CPI Inflation Calculator, supra note 7. ↑
  17. Consumer Bankruptcy Reform Act of 2020, S. 4991, 116th Cong. § 101(b)(4) (2020); Warren, supra note 15. ↑
  18. See, e.g., Fed. R. Civ. P. 8. Even a plausibility standard requires only that the complaint allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). ↑
  19. See, e.g., Yonathan A. Arbel, Adminization: Gatekeeping Consumer Contracts, 71 Vand. L. Rev. 121, 123 (2018). ↑
  20. Bruce H. Mann, Republic of Debtors: Bankruptcy in the Age of American Independence 3 (2002). ↑
  21. Prior to 1898, Congress enacted three bankruptcy acts that together lasted less than twenty years. Congress repealed the Bankruptcy Act of 1800 in 1803, Act of Dec. 19, 1803, ch. 6, 2 Stat. 248, the Bankruptcy Act of 1841 in 1843, Act of Mar. 3, 1843, ch. 82, 5 Stat. 614, and the Bankruptcy Act of 1867 in 1878, Act of June 7, 1878, ch. 160, 20 Stat. 99. For a history of bankruptcy in the United States, see generally David A. Skeel, Jr., Debt’s Dominion: A History of Bankruptcy Law in America (2001) and Charles Jordan Tabb, The History of Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5 (1995). ↑
  22. See infra notes 52–55 and accompanying text. ↑
  23. Act of May 5, 1792, ch. 29, § 2, 1 Stat. 265, 266. For other versions of the poor debtor’s oath, see infra note 64 and accompanying text. ↑
  24. Mann, supra note 20, at 51. ↑
  25. See infra Table 1. ↑
  26. See infra notes 129–33 and accompanying text. ↑
  27. See Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007). ↑
  28. Tom Jackson recognized this point when he noted that “[t]he fresh-start policy is thus substantively unrelated to the creditor-oriented distributional rules that give bankruptcy law its general shape and complexity.” Jackson, supra note 2, at 1396. ↑
  29. For a longer discussion of the possible text of this oath, see infra Section III.D. ↑
  30. See infra Section IV.A. Our proposal is similar to Tom Jackson’s suggestion that the fresh start could be tied to a public declaration of insolvency. See Jackson, supra note 2, at 1396 n.8. (“For example, the law might grant discharge through a system of public notice whereby certain assets (such as future wages) would be freed from the claims of existing creditors. The mechanism of public notice would inform creditors of the debtor’s election.”). ↑
  31. See, e.g., Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, The Fragile Middle Class: Americans in Debt 2–3 (2000). ↑
  32. For others using this phrase, see, for example, Robert A. Feer, Imprisonment for Debt in Massachusetts before 1800, 48 Miss. Valley Hist. Rev. 252, 259 (1961) and Walter H. Moses, Enforcement of Judgments Against Hidden Assets, 1951 U. Ill. L.F. 73, 79. ↑
  33. See infra note 125 and accompanying text. ↑
  34. See infra note 104 and accompanying text. ↑
  35. See infra notes 101–03 and accompanying text. ↑
  36. See Feer, supra note 32, at 255 (“The creditors were to be notified of the oath, and if they did not prove within fifty days that it was false, the prisoner was to be freed unless his creditors agreed to pay his weekly board charges.”). ↑
  37. As is true under current law, courts could revoke a discharge if it is found to have been obtained by fraud or if a subsequent audit by the U.S. Trustee suggests revocation is appropriate. See 11 U.S.C. § 727(d); infra notes 165–69 and accompanying text. ↑
  38. See infra Section III.B. ↑
  39. See infra Section III.B ↑
  40. See infra notes 202–06 and accompanying text. ↑
  41. See infra Table 2 and accompanying text. ↑
  42.  See Nathaniel Pattison & Richard M. Hynes, Asset Exemptions and Consumer Bankruptcies: Evidence from Individual Filings, 63 J.L. & Econ. 557, 569 tbl.2 (2020). ↑
  43. See infra notes 128–30 and accompanying text. ↑

  44. See infra Section II.B. ↑

Permission to Destroy: How a Historical Understanding of Property Rights can Reign in Consent Searches

Consent searches are by far the most common tool to circumvent the Fourth Amendment’s warrant requirement. Though police officers have the property owner’s permission, the searches they conduct are not always harmless. Without probable cause or reasonable suspicion, consent searches have justified officers’ destruction of car parts, electronics, and shoes. Are officers allowed to damage property after receiving consent to search a person’s belongings? In some jurisdictions, a consent search becomes unreasonable when officers destroy property, entitling the owner to money damages in civil litigation or the exclusion of evidence in criminal prosecutions. In other jurisdictions, an owner’s consent means she has forfeited the right to have her property stay intact. This Note’s first contribution is identifying and examining this consequential circuit split.

To resolve Fourth Amendment ambiguities, the Supreme Court has increasingly turned to the common law in place at the Founding. The mishandling and destruction of colonists’ personal property by British soldiers acting pursuant to general warrants and writs of assistance helped to spur the Revolutionary War. This Note’s second contribution applies Founding-era evidence to consent search doctrine. By drawing on colonial records, this Note offers an originalist argument for restraining consent searches.

Introduction

Just before daybreak on March 31, 2011, ten law enforcement officials arrived at the Chicago apartment where Jai Crutcher and Christopher Colbert, brothers by adoption, lived with their families.1 1.Colbert v. City of Chicago, 851 F.3d 649, 652 (7th Cir. 2017); id. at 661 (Hamilton, J., concurring in part and dissenting in part).Show More The officers told Crutcher they were there to conduct a parole check, and Crutcher consented to the search.2 2.Id. at 652 & n.1 (majority opinion) (“The terms of Crutcher’s release required him to ‘refrain from possessing a firearm or other dangerous weapon,’ ‘consent to a search of [his] person, property, or residence under [his] control,’ and ‘comply with any additional conditions the Prisoner Review Board has or may set as a condition of [his] parole or mandatory supervised release including, but not limited to: ELECTRONIC MONITORING FOR DURATION.’” (alterations in original)).Show More As the police moved through the house, their search quickly turned destructive. In testimony that Judge David Hamilton of the U.S. Court of Appeals for the Seventh Circuit called “disturbing,” the brothers described “the fright of their children as officers broke holes in the walls, cut open a couch, [and] tore doors off of cabinets.”3 3.Id. at 661 (Hamilton, J., dissenting in part). Both the majority and dissenting opinions recounted the facts in the light most favorable to the plaintiffs because the case was on appeal from a grant of summary judgment for the defendants. Id. at 654 (majority opinion); id. at 661 (Hamilton, J., dissenting in part). Therefore, the account of property damage recited here came from the plaintiffs’ perspective. In the officers’ depositions, they “claimed they did not remember many of the events of March 31, 2011.” Id. at 662.Show More In total, the officers damaged, dismantled, or destroyed: a weight bench, clothing, the basement door, the stairs, bedroom dressers, an electronic tablet, a stereo, a television, photographs of Crutcher’s grandmother, wall insulation, a kitchen countertop, and shelf hinges.4 4.Id. at 661, n.1 (Hamilton, J., dissenting in part); id. at 652–53 (majority opinion).Show More The officers tracked dog feces through the house during their search.5 5.Id. at 652 (majority opinion).Show More One officer allegedly “unholstered his firearm and threatened to shoot Crutcher’s six-week-old puppy before leaving the dog outside, where it was lost.”6 6.Id. at 661 (Hamilton, J., dissenting in part).Show More Crutcher and Colbert subsequently brought a § 1983 civil rights suit against the City of Chicago and four individual officers for violating their Fourth Amendment rights.7 7.Id. at 653–54, 656 (majority opinion).Show More The district court dismissed the complaint, the Seventh Circuit affirmed, and the brothers were left to foot the bill.8 8.Id. at 654, 661. Most courts have held that harms like these do not violate the Takings Clause or related provisions of state constitutions, making this Note’s proposal all the more important. See Lech v. Jackson, 791 Fed. App’x. 711, 719 (10th Cir. 2019); see also Maureen E. Brady, The Damagings Clauses, 104 Va. L. Rev. 341, 394–95 (2018) (describing several instances in which the government compensated property owners for police-inflicted damage).Show More

Whether, or how, property damage should affect the reasonableness of a consent search has divided the lower courts. In some jurisdictions, property damage has no effect on the legality of a consent search or potential remedies. In other jurisdictions, when police damage property, a search that began with the owner’s permission becomes per se unreasonable. In still others, officers may damage property so long as they do not render it unusable. Drawing on Founding-era evidence and the common law, this Note argues that mishandling and destroying property during consent searches would have been anathema to the Constitution’s Framers. This Note is the first to use the Fourth Amendment’s history to answer whether consent searches are constitutional when they involve property damage. Academics and advocates have frequently attacked the lax “voluntariness” requirement of consent searches, and they rightly note that many individuals agree to invasive searches without knowing they have the right to refuse.9 9.See, e.g., James C. McGlinchy, Note, “Was that a Yes or a No?” Reviewing Voluntariness in Consent Searches, 104 Va. L. Rev. 301, 303 (2018); Gerard E. Lynch, Why Not a Miranda for Searches?, 5 Ohio St. J. Crim. L. 233, 237, 245 (2007); Marcy Strauss, Reconstructing Consent, 92 J. Crim. L. & Criminology 211, 212 (2001); Oren Bar-Gill & Barry Friedman, Taking Warrants Seriously, 106 Nw. U. L. Rev. 1609, 1661–62 (2012).Show More But the scope of consent searches is just as important and is more likely to be taken up by the Supreme Court.10 10.While the Supreme Court has explicitly rejected a requirement that consent be given knowingly or intelligently, the Court has said relatively little about the scope of consent searches. See, e.g., Schneckloth v. Bustamonte, 412 U.S. 218, 227 (1973). In addition, Justices on the Court today often find government overreach when private property is concerned. See, e.g., Cedar Point Nursery v. Hassid, 141 S. Ct. 2063, 2072 (2021) (holding that a California regulation giving union organizers access to farm workers constitutes a per se physical taking); Ala. Ass’n of Realtors v. Dep’t of Health and Human Servs., 141 S. Ct. 2485, 2489 (2021) (per curiam) (concluding that a federal eviction moratorium intruded on property owners’ right to exclude).Show More

Part I introduces consent searches, explaining their significance and situating them in Fourth Amendment doctrine. Part II describes how different circuits have addressed the question of property damage during consent searches and dissects their underlying reasoning. Part III uses Founding-era evidence to advocate limitations on consent searches. Part III also offers a workable test—one in accord with the primacy of property rights during the Founding—for identifying property damage that exceeds the scope of consent searches. Finally, Part IV anticipates and responds to objections.

  1. Colbert v. City of Chicago, 851 F.3d 649, 652 (7th Cir. 2017); id. at 661 (Hamilton, J., concurring in part and dissenting in part). ↑
  2. Id. at 652 & n.1 (majority opinion) (“The terms of Crutcher’s release required him to ‘refrain from possessing a firearm or other dangerous weapon,’ ‘consent to a search of [his] person, property, or residence under [his] control,’ and ‘comply with any additional conditions the Prisoner Review Board has or may set as a condition of [his] parole or mandatory supervised release including, but not limited to: ELECTRONIC MONITORING FOR DURATION.’” (alterations in original)). ↑
  3. Id. at 661 (Hamilton, J., dissenting in part). Both the majority and dissenting opinions recounted the facts in the light most favorable to the plaintiffs because the case was on appeal from a grant of summary judgment for the defendants. Id. at 654 (majority opinion); id. at 661 (Hamilton, J., dissenting in part). Therefore, the account of property damage recited here came from the plaintiffs’ perspective. In the officers’ depositions, they “claimed they did not remember many of the events of March 31, 2011.” Id. at 662. ↑
  4. Id. at 661, n.1 (Hamilton, J., dissenting in part); id. at 652–53 (majority opinion). ↑
  5. Id. at 652 (majority opinion). ↑
  6. Id. at 661 (Hamilton, J., dissenting in part). ↑
  7. Id. at 653–54, 656 (majority opinion). ↑
  8. Id. at 654, 661. Most courts have held that harms like these do not violate the Takings Clause or related provisions of state constitutions, making this Note’s proposal all the more important. See Lech v. Jackson, 791 Fed. App’x. 711, 719 (10th Cir. 2019); see also Maureen E. Brady, The Damagings Clauses, 104 Va. L. Rev. 341, 394–95 (2018) (describing several instances in which the government compensated property owners for police-inflicted damage). ↑
  9. See, e.g., James C. McGlinchy, Note, “Was that a Yes or a No?” Reviewing Voluntariness in Consent Searches, 104 Va. L. Rev. 301, 303 (2018); Gerard E. Lynch, Why Not a Miranda for Searches?, 5 Ohio St. J. Crim. L. 233, 237, 245 (2007); Marcy Strauss, Reconstructing Consent, 92 J. Crim. L. & Criminology 211, 212 (2001); Oren Bar-Gill & Barry Friedman, Taking Warrants Seriously, 106 Nw. U. L. Rev. 1609, 1661–62 (2012). ↑

  10. While the Supreme Court has explicitly rejected a requirement that consent be given knowingly or intelligently, the Court has said relatively little about the scope of consent searches. See, e.g., Schneckloth v. Bustamonte, 412 U.S. 218, 227 (1973). In addition, Justices on the Court today often find government overreach when private property is concerned. See, e.g., Cedar Point Nursery v. Hassid, 141 S. Ct. 2063, 2072 (2021) (holding that a California regulation giving union organizers access to farm workers constitutes a per se physical taking); Ala. Ass’n of Realtors v. Dep’t of Health and Human Servs., 141 S. Ct. 2485, 2489 (2021) (per curiam) (concluding that a federal eviction moratorium intruded on property owners’ right to exclude). ↑

Changing Guards: Improving Corporate Governance with D&O Insurer Rotations

Almost all public companies buy insurance for their directors and officers. D&O insurers should be active gatekeepers for the corporation, since they lose money if executives misbehave, but all available evidence suggests the opposite: insurers protect executives from liability for bad management, and they encourage wasteful settlement of even meritless lawsuits.

This Article diagnoses the failure of D&O insurance as a form of pernicious relational contracting. Insurers ignore even the worst corporate governance because they can recoup losses in the years to come. This recognition unlocks a potential solution: mandatory rotation. If insurers had only a few years to recoup any losses, they would seek to limit those losses by serving as an active gatekeeper.

Introduction

In a typical year, managers of corporations representing about 10% of America’s big public corporations are sued by their investors.1 1.Securities Class Action Filings: 2019 Year in Review, Cornerstone Research 13, https​://securities.stanford.edu/research-reports/1996-2019/Cornerstone-Research-Securities-Class​-Action-Filings-2019-YIR.pdf [https://perma.cc/PD8P-YL84] (reporting 10% of S&P 500 by market cap was sued for securities violations in 2019). Last year brought slightly fewer. Securities Class Action Filings: 2021 Year in Review, Cornerstone Research 15, https://www.cornerstone.com/wp-content/uploads/2022/02/Securities-Class-Action-Filings-2​021-Year-in-Review.pdf. [https://perma.cc/4JGL-35SH]. This 10% figure plainly understates the scope of litigation, since many investors’ suits are derivative actions with no securities violation component, but comprehensive data for derivative suits are not available.In this Article, I use the word “manager” to refer to both officers and directors.Show More These suits cost billions of dollars to litigate and settle.2 2.Alice Uribe & Leslie Scism, Companies Are Paying a Lot More to Insure Their Directors and Officers, Wall St. J. (June 21, 2020, 5:30 AM), https://www.wsj.com/articles/companies-are-paying-a-lot-more-to-insure-their-directors-and-officers-11592731801?mod=hp_listc_po​s2 [https://perma.cc/93HE-LMK9] (reporting that D&O litigation expenses are approaching $1 billion annually, not including jury verdicts or settlements).Show More Proponents of shareholder litigation argue that America’s corporate directors and officers are prone to gross negligence, bad faith, and self-dealing.3 3.E.g., Eugene V. Rostow, To Whom and For What End is Corporate Management Responsible?, in The Corporation In Modern Society 48 (Edward S. Mason ed., 1959) (characterizing derivative suits as “the most important procedure the law has yet developed to police the internal affairs of corporations”); Robert B. Thompson & Randall S. Thomas, The Public and Private Faces of Derivative Lawsuits, 57 Vand. L. Rev. 1747, 1786–87 (2004) (finding data that derivative suits play a valuable monitoring role in duty of loyalty cases and that the tool combats unscrupulous directors); see also Jill E. Fisch, Teaching Corporate Governance Through Shareholder Litigation, 34 Ga. L. Rev. 745, 746 (2000) (explaining how the rules of shareholder litigation can “deter[] corporate misconduct”).Show More Critics argue that these are attorney-driven “strike suits.”4 4.See Rostow, supranote 3; Stephen M. Bainbridge, Fee-Shifting: Delaware’s Self-Inflicted Wound, 40 Del. J. Corp. L. 851, 852–53 (2016); Roberta Romano, The Shareholder Suit: Litigation without Foundation?, 7 J.L. Econ. & Org. 55, 84 (1991); Sean J. Griffith, Correcting Corporate Benefit: How to Fix Shareholder Litigation by Shifting the Doctrine on Fees, 56 B.C. L. Rev. 1, 2 (2015).Show More

Nearly everyone agrees that directors’ and officers’ insurance (“D&O insurance”) is part of the problem.5 5.Dain C. Donelson, Justin J. Hopkins & Christopher G. Yust, The Role of Directors’ and Officers’ Insurance in Securities Fraud Class Action Settlements, 58 J.L. & Econ. 747, 748 (2015); see Sean J. Griffith, Uncovering A Gatekeeper: Why the SEC Should Mandate Disclosure of Details Concerning Directors’ and Officers’ Liability Insurance Policies, 154 U. Pa. L. Rev. 1147, 1189 (2006).Show More

Essentially all public companies buy insurance to protect their managers from the cost of shareholder litigation, and it is easy to see how widespread insurance can cause problems.6 6.Griffith, supra note 5, at 1168.Show More Insured officers and directors are protected against the legal consequences of their mismanagement and recklessness.7 7.Id. at 1163.Show More They can behave badly without ever seeing the bill. The insurance company pays the bill. Indeed, managers may ask insurers to pay lucrative settlements, even in meritless cases, just to minimize the hassle and cost of litigation.8 8.Tom Baker & Sean J. Griffith, How the Merits Matter: Directors’ and Officers’ Insurance and Securities Settlements, 157 U. Pa. L. Rev. 755, 797–98 (2009).Show More And it is insurers’ reputation as honeypots that draws plaintiffs’ lawyers to concoct meritless suits.9 9.See Richard M. Phillips & Gilbert C. Miller, The Private Securities Litigation Reform Act of 1995: Rebalancing Litigation Risks and Rewards for Class Action Plaintiffs, Defendants and Lawyers, 51 Bus. Law. 1009, 1014–15 (1996).Show More Thus, D&O insurance serves to clog up dockets with stories of misbehavior, both encouraged and imagined.

This critique is strange because it is at odds with a plausible theory of gatekeeper behavior.10 10.The “gatekeeper” idea is that trusted professionals near the corporation can be used as external checks on fraud and mismanagement. See John C. Coffee, Jr., The Acquiescent Gatekeeper: Reputational Intermediaries, Auditor Independence and Governance of Accounting 11–13 (Colum. L. Sch., Ctr. For L. & Econ. Stud., Working Paper No. 191, 2001), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=270944 [https://perma.cc/LM3D-3T6H].Show More Why would insurers sign up to be punching bags?11 11.See Joseph A. Grundfest, Punctuated Equilibria in the Evolution of United States Securities Regulation, 8 Stan. J.L. Bus. & Fin. 1, 7–8 (2002) (“D&O insurers could today easily make the retention of insurer-approved auditors a condition of coverage. They could today also require an element of control over the audit process. Yet they don’t. Why?”).Show More Insurers have strong incentives to watch for warning signs and drop customers before the hammer drops, or at least to increase insurance premiums vividly when clients stand on the precipice of trouble.12 12.Such responses were once common. Roberta Romano, What Went Wrong With Directors’ and Officers’ Liability Insurance?, 14 Del. J. Corp. L. 1, 12 (1989). Professor Romano’s article diagnosed insurer responses to a sudden increase in liability exposure, so it is unsurprising that insurers reacted in this way. Id. at 13. There is no indication that this tendency to withdraw is still commonplace.Show More They have strong incentives to monitor their insureds for dangerous risk. They have strong incentives to retain control of individual suits to fight meritless ones. All of these risk-controlling practices are commonplace when insurers offer nearly any other kind of multi-million-dollar coverage. 13 13.Richard V. Eicson & Aaron Doyle, Uncertain Business: Risk, Insurance and the Limits of Knowledge 94–211 (2004) (reporting research from a variety of contexts including building construction and disability management); Steven Shavell, On Liability and Insurance, 13 Bell J. Econ. 120, 121–22 (1982) (modeling the relationship between liability and insurance and concluding that, “[a]lthough the purchase of liability insurance changes the incentives created by liability rules, the terms of the insurance policies sold in a competitive setting would be such as to provide an appropriate substitute (but not necessarily equivalent) set of incentives to reduce accident risks”).Show More Critics of D&O insurance tacitly assume that these insurers are uniquely negligent in protecting themselves from moral hazard, adverse selection, and predation.14 14.Moral hazard is the tendency of insured parties to engage in riskier conduct. Kenneth J. Arrow, Uncertainty and the Welfare Economics of Medical Care, 53 Am. Econ. Rev. 941, 961 (1963); Daniel Schwarcz, Reevaluating Standardized Insurance Policies, 78 U. Chi. L. Rev. 1263, 1283 (2011). With respect to health insurance, smoking has been described as the “classic moral hazard.” Thomas R. McLean, International Law, Telemedicine & Health Insurance: China as a Case Study, 32 Am. J.L. & Med. 7, 25 (2006). Adverse selection is the tendency of the costliest clients to seek out coverage offered at a given price. Cf. George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488, 488 (1970) (setting out a canonical adverse selection model in a non-insurance commercial setting); Peter Siegelman, Adverse Selection in Insurance Markets: An Exaggerated Threat, 113 Yale L.J. 1223, 1223 (2004) (explaining that adverse selection is a process where “insureds utilize private knowledge of their own riskiness when deciding to buy or forgo insurance”).Show More

For now, it appears the critics are right and theory is wrong. D&O insurers do not drop their clients regularly; instead, renewal rates approach 100%.15 15.Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2018, at 9 (2018), https://www.aon.com/getmedia/20bfac85-dce6-4902-91cb-c61265abcd7e/2018-Q4-DO-Pric​ing-Index.aspx [https://perma.cc/PR58-CPUT] (95.7% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2017, at 9 (2017), https://ww​w.aon.com/attachments/risk-services/d-o_pricing_index/2017_Q4_DO_Pricing_Index.pdf [h​ttps://perma.cc/V33R-ZY9U] (93.2% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2016, at 8 (2016), https://www.aon.com/attachme​nts/risk-services/d-o_pricing_index/2016_Q4_DO_Pricing_I​ndex.pdf [https://perma.cc/HRY​4-4HTA] (95.3% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2015, at 8 (2015), https://www.aon.com/attachments/risk-services/d-o_pricing_index​/2015_Q4_DO_Pricing_Index.pdf [https://perma.cc/J5WG-K6QQ] (95% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2014, at 8 (2014), https://www.aon.com/attachments/risk-services/d-o_pricing_index/201​4_Q4_DO_Pricing_I​ndex.pdf [https://perma.cc/8CDA-MSYG] (93.7% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2013, at 3 (2013), https://www.aon​.com/attachments/risk-services/d-o_pricing_index/2013_Q4_DO_P​ricing-Index.pdf [https://​perma.cc/22DW-YDPB] (94.9% annual retention) Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2012, at 3 (2012), https://www.aon.com/attachments/risk-services/d-o_pricing_index/2012_4Q_DandOPricingI​ndex.pdf [https://perma.cc/4GJU-4PKG] (94% retention for Q4).Show More D&O insurers do not penalize risky clients with much higher premiums; instead, premium increases are almost lockstep.16 16.Alicia Davis Evans, The Investor Compensation Fund, 33 J. Corp. L. 223, 261 (2007) (“Currently, competitive pressures appear to make it impossible for D&O insurer premium prices to reflect governance risk fully.”).Show More D&O insurers do not monitor clients’ quality of governance and risk-exposure; instead, insurers devote essentially zero effort to monitoring existing clients.17 17.Infra Section II.C.Show More Insurers do not fight weak claims; instead, they cede control over litigation to the client and agree to settle essentially every well-pleaded complaint.18 18.Baker & Griffith, supra note 8, at 797–804.Show More Far from gatekeepers, insurers have become cheerful doormen for those who would cart the insurer’s wealth, and that of the corporate client, out the door.19 19.Cf. Grundfest, supra note 11, at 7 (noting that “the current structure of D&O insurance and auditor liability has failed to give rise to incentives” to address fraud risks even though “D&O insurers could today easily make the retention of insurer-approved auditors a condition of coverage”).Show More

Why? And what can be done to fix it? This Article explains the failure of the D&O insurance market and a solution. The analysis is moderate in that it accepts the good and bad of D&O insurance and tries to tilt the balance,20 20.See Shauhin A. Talesh, Insurance Companies as Corporate Regulators: The Good, The Bad, and the Ugly, 66 DePaul L. Rev. 463, 467 (2017) (“The debate going forward is not whether insurers are good risk regulators as prior scholars theorize, but more precisely, examining under what conditions can insurers make positive regulatory interventions into corporate behavior and nudge corporations toward a governance structure in line with societal values of fairness, equality, transparency, and safety.”); Chen Lin, Micah S. Officer, Thomas Schmid & Hong Zou, Is Skin in the Game a Game Changer? Evidence from Mandatory Changes of D&O Insurance Policies, 68 J. Acct. & Econ. 1–2 (2019) (arguing that the structure of insurance policies matters).Show More rather than, say, banning D&O insurance altogether.21 21.See, e.g., Merritt B. Fox, Civil Liability and Mandatory Disclosure, 109 Colum. L. Rev. 237, 288–89 (2009) (calling for an end to D&O insurance for certain securities violations).Show More This Article’s argument contains four premises.

First, insurance (D&O and otherwise) can be operated in an “active” or “passive” fashion.22 22.Most insurers do not embrace a purely active or passive strategy, and it can be difficult to distinguish them in many cases. An insured who makes a costly claim may see her future premium rise from either an active or passive insurer, but for very different reasons. The active insurer raises the rate insofar as the claim signals information about the client’s type and future riskiness. The passive insurer raises the rate simply because that is the deal: the insurer pays now and recoups later, even if the claim was a fluke and signals nothing about the insured’s risk.Show More An active insurer seeks to address clients’ risks by discovering current risk level, setting premiums that reflect it, and discouraging excessively risky behavior.23 23.Daniel Schwarcz, Coverage Information in Insurance Law, 101 Minn. L. Rev. 1457, 1487 (2017) (“[T]he risk of moral hazard only exists when the insurer does not observe policyholder levels of activity or care after purchase . . . .”).Show More By contrast, a passive insurer does little vetting, risk-pricing, or monitoring. Instead, the passive insurer just seeks to recoup losses on a costly client by charging that client more in the future.24 24.Infra Section III.A.Show More

Second, active insurance is socially preferable at the margin. Active insurers encourage least-cost avoiders to avoid risks. They force their customers to internalize their expected costs.25 25.Omri Ben-Shahar & Kyle D. Logue, Outsourcing Regulation: How Insurance Reduces Moral Hazard, 111 Mich. L. Rev. 197, 228 n.102 (2012).Show More And they generate information about the magnitude of risks.26 26.See Tom Baker & Sean J. Griffith, Predicting Corporate Governance Risk: Evidence from the Directors’ and Officers’ Liability Insurance Market, 74 U. Chi. L. Rev. 487, 489–90 (2007) (arguing that insurance premiums can publicize problematic governance).Show More At a minimum, the board may ask the chief executive officer (“CEO”) for an explanation if insurance costs treble. Conversely, passive insurers are more problematic. They protect bad managers from the cost of their bad conduct, and muddy the signal litigation might otherwise send, by spreading the cost of managerial malfeasance into distant future periods. For that reason, society will tend to be better served by relatively more active insurance and managers will tend to prefer relatively more passive insurance.

Third, the passive method is viable only if the market for insurance is rather uncompetitive and illiquid, because it requires customers to submit themselves to years of premiums that exceed the actuarially fair rate.27 27.Infra Sections III.B. & C.Show More If the insureds often switched under those circumstances, the passive insurance model would collapse. Passive insurance requires enduring relationships between insured and insurer, but it can thrive under those conditions.

Fourth, the existing insurance market is consistent with an excessive degree of passive insurance, owing to agency costs and transaction costs.28 28.Infra Sections II.C. & III.D.Show More Insurance relationships are long-lasting; switching insurers is rare. For a firm to switch from its longstanding passive insurer to a lower-priced active insurer, directors and officers must approve the change. But directors and officers would be exposed to greater pressure and transparency from an active insurer. At the same time, contracting conventions and market structure impose frictions on competition. Managers can cite these frictions as a reason to retain the passive insurer they like best.

These premises lead to the descriptive conclusion that insufficient client turnover has led D&O insurance to insufficiently address client risk. The normative conclusion is that we should impose mandatory D&O insurance rotation.

Insurers should be permitted no more than five years with a given client, at which time they must take their underwriting elsewhere. Mandatory rotation renders the passive insurance model impractical. Insurers can never hope to insure passively and then recoup their losses down the line. Every insurer will have to actively vet insureds for risks pending over the next few years, to monitor for abrupt changes during that period, and to take steps to limit a corporation’s slide toward increased risk; the result is that corporations and their managers will be more likely to internalize the expected cost of their harmful behaviors and, thus, take those harms more seriously.

Mandatory rotation has been used in other areas of law to destabilize corrupt relationships that compromise gatekeepers and fiduciaries. Auditing partners must rotate every five years.29 29.Infra Subsection IV.B.1.Show More The theory is that genuine auditing can jeopardize a long relationship, but auditors who know they will soon lose their client anyway are freer to audit honestly. Similar intuitions drive term limits for elected officials.30 30.Infra Subsection IV.B.2.Show More The temptation to buckle to special interests is greater if it secures reelection. If reelection is impossible, the politician is freer to act according to her best judgment of the public interest. Likewise, career diplomats with the foreign service are permitted only three years in a given foreign country.31 31.Infra Subsection IV.B.3.Show More While these changes may diminish some country-specific expertise, the alternative of long-service may tempt foreign service officers to strike implicit bargains with their host country that undermine America’s interests.

The deep economic intuition behind mandatory insurance rotation is that passive D&O insurance is a relational contract.32 32.See Jay M. Feinman, The Insurance Relationship as Relational Contract and the “Fairly Debatable” Rule for First-Party Bad Faith, 46 San Diego. L. Rev. 553, 556–57 (2009) (“The insurance contract is a relational contract par excellence. The relation created by the contract extends over time; although a typical policy term is a year, the rate of renewal is very high, often in the order of ninety percent, so a typical relation extends over years or even decades.”). Note that Feinman was not addressing D&O insurance.Show More Relational contracts are agreements that motivate cooperation without recourse to legal enforcement, but are instead embedded in a relationship.33 33.See Robert E. Scott, Conflict and Cooperation in Long-Term Contracts, 75 Calif. L. Rev. 2005, 2007–08 (1987); Morten Hviid, Long-Term Contracts and Relational Contracts, in 5The Encyclopedia of Law and Economics 54 (Boudewijn Bouckaert & Gerrit De Geest eds., 1999) (“Relational contract theory can be seen as an attempt to generate a model able to explain when transacting parties do not resort to contracts and by what means they ensure that each party fulfils their obligations. The theory focuses on the relationship between the ‘contracting’ parties and posits that this leads to cooperation and to implicit obligations being self-enforcing.”); Benjamin E. Hermalin, Avery W. Katz & Richard Craswell, Contract Law, in 1 Handbook of Law and Economics 123 (A. Mitchell Polinsky & Steven Shavell eds., 2007) (“Within the literature, self-enforcing contracts are often known as relational contracts.” (emphasis omitted)).Show More For example, a long-term supply agreement may include an unwritten term that the seller may sometimes deliver goods late or mark up prices to reflect rising costs, and the buyer may happily honor that agreement even if no court would enforce it, because the buyer wants to preserve an ongoing profitable relationship.34 34.For examples of this kind, see, e.g., Stewart Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 Am. Socio. Rev. 55, 61–67 (1963); Ian R. MacNeil, The Many Futures of Contracts, 47 S. Cal. L. Rev. 691, 721, 732 (1974); H. Beale & T. Dugdale, Contracts Between Businessmen: Planning and the Use of Contractual Remedies, 2 Brit. J.L. and Soc’y 45, 45–46, 51, 53 (1975).Show More Relational contracts are widespread, but they only succeed when certain fragile conditions are met.35 35.E.g., Hviid, supra note 33, at 55 (“Repeated interaction may enable cooperation, because of the potential for a current deviation to be punished in the future. For this to work, four conditions must be met.”).Show More Importantly, relational contracts require some mechanism for overcoming the “last period problem.”36 36.Sean J. Griffith, Afterward and Comment: Towards an Ethical Duty to Market Investors, 35 Conn. L. Rev. 1223, 1239 (2003) (“The last period problem is a concept drawn from game theory and experimental economics to explain individual defections from cooperative enterprises in the last period of a repeated situation.”).Show More

In relational contracts, enforceable contract rights underdetermine the parties’ relationship.37 37.Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 Va. L. Rev. 1089, 1091 (1981) (“A contract is relational to the extent that the parties are incapable of reducing important terms of the arrangement to well-defined obligations.”).Show More Cooperation is possible nevertheless because one party can detect and subsequently penalize defection by the other.38 38.Hviid, supra note 33, at 55 (“Any deviation must be observable and it must be punishable. This punishment must be credible so that it is clear that when required the punishment will be carried out, and the parties must be patient in the sense that the future matters to them.”).Show More Fear of reprisal keeps both parties cooperative. However, defection again becomes rational in the last period of a long game because reprisal becomes impossible.39 39.Christine Jolls, Contracts as Bilateral Commitments: A New Perspective on Contract Modification, 26 J. Legal Stud. 203, 231–32 (1997).Show More Passive insurance is a relational contract in which the managers agree (on behalf of the entity) to pay a higher-than-competitive rate in the future, and the insurer agrees to cover claims without any effort to expose or reduce governance problems. If both parties knew that the relationship was going to end soon, the insurer would have reason to breach the informal agreement by reducing its costs through monitoring and increasing its premiums now. And since they know they won’t get the cozy treatment that they want anyway, managers will no longer cheerlead an overpriced premium.

Part of what is interesting about this project is exploring the dark side of relational contracts. Most often, scholars of relational contracts adopt a laudatory tone: Is it not amazing that parties can accomplish their goals without much law?40 40.See, e.g., Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes 1, 1 (1991); Lisa Bernstein, Beyond Relational Contracts: Social Capital and Network Governance in Procurement Contracts, 7 J. Legal Analysis 561, 561–62 (2015) (discussing how master supply agreements, a type of relational contract between business firms, are designed to “keep the law . . . largely out of their relationship” and can “create a space in which private order can flourish.”).Show More But parties’ ability to informally secure a result is only laudatory if we would have been happy to honor their agreement had they made it formal. And not all contracts are of this sort. Business cartels use relational contracts to tacitly enforce restraints of trade that we would never countenance as formal contracts.41 41.Hermalin et al., supra note 33, at 122 (“It has long been understood from the repeated games literature that some agreements are self enforcing in the context of an ongoing relationship. The most prominent example of such ‘agreements’ is tacit collusion among competing firms.”).Show More Mob bosses use relational contracts to reward and govern their lieutenants.42 42.Curtis J. Milhaupt & Mark D. West, The Dark Side of Private Ordering: An Institutional and Empirical Analysis of Organized Crime, 67 U. Chi. L. Rev. 41, 43, 66 (2000).Show More And D&O insurers promise to help paper over managers’ mistakes and abuses in return for wastefully large insurance premiums. Relational contracts can allow parties to coordinate in ways we would never tolerate from formal contracts.

The structure of this Article is as follows. Part I introduces the practice and industrial organization of D&O insurance. Part II discusses the link between insurance and risk: while insurance can reduce riskiness, D&O insurers actually appear to exacerbate client risks, doing almost no monitoring or vetting. Part III provides a stylized introduction to two ways that D&O insurance business can operate—actively and passively. That Part shows that the market likely operates to generate excessive levels of passive insurance, and it explains that manager opportunism is central to the problem. Accordingly, Part IV presents a solution intended to increase the proportion of active D&O insurance: mandatory rotation of D&O insurers. It also explains analogies to other domains of law and addresses objections.

  1. Securities Class Action Filings: 2019 Year in Review, Cornerstone Research 13, https​://securities.stanford.edu/research-reports/1996-2019/Cornerstone-Research-Securities-Class​-Action-Filings-2019-YIR.pdf [https://perma.cc/PD8P-YL84] (reporting 10% of S&P 500 by market cap was sued for securities violations in 2019). Last year brought slightly fewer. Securities Class Action Filings: 2021 Year in Review, Cornerstone Research 15, https://www.cornerstone.com/wp-content/uploads/2022/02/Securities-Class-Action-Filings-2​021-Year-in-Review.pdf. [https://perma.cc/4JGL-35SH]. This 10% figure plainly understates the scope of litigation, since many investors’ suits are derivative actions with no securities violation component, but comprehensive data for derivative suits are not available.In this Article, I use the word “manager” to refer to both officers and directors. ↑
  2. Alice Uribe & Leslie Scism, Companies Are Paying a Lot More to Insure Their Directors and Officers, Wall St. J. (June 21, 2020, 5:30 AM), https://www.wsj.com/articles/companies-are-paying-a-lot-more-to-insure-their-directors-and-officers-11592731801?mod=hp_listc_po​s2 [https://perma.cc/93HE-LMK9] (reporting that D&O litigation expenses are approaching $1 billion annually, not including jury verdicts or settlements). ↑
  3. E.g., Eugene V. Rostow, To Whom and For What End is Corporate Management Responsible?, in The Corporation In Modern Society 48 (Edward S. Mason ed., 1959) (characterizing derivative suits as “the most important procedure the law has yet developed to police the internal affairs of corporations”); Robert B. Thompson & Randall S. Thomas, The Public and Private Faces of Derivative Lawsuits, 57 Vand. L. Rev. 1747, 1786–87 (2004) (finding data that derivative suits play a valuable monitoring role in duty of loyalty cases and that the tool combats unscrupulous directors); see also Jill E. Fisch, Teaching Corporate Governance Through Shareholder Litigation, 34 Ga. L. Rev. 745, 746 (2000) (explaining how the rules of shareholder litigation can “deter[] corporate misconduct”). ↑
  4. See Rostow, supra note 3; Stephen M. Bainbridge, Fee-Shifting: Delaware’s Self-Inflicted Wound, 40 Del. J. Corp. L. 851, 852–53 (2016); Roberta Romano, The Shareholder Suit: Litigation without Foundation?, 7 J.L. Econ. & Org. 55, 84 (1991); Sean J. Griffith, Correcting Corporate Benefit: How to Fix Shareholder Litigation by Shifting the Doctrine on Fees, 56 B.C. L. Rev. 1, 2 (2015). ↑
  5. Dain C. Donelson, Justin J. Hopkins & Christopher G. Yust, The Role of Directors’ and Officers’ Insurance in Securities Fraud Class Action Settlements, 58 J.L. & Econ. 747, 748 (2015); see Sean J. Griffith, Uncovering A Gatekeeper: Why the SEC Should Mandate Disclosure of Details Concerning Directors’ and Officers’ Liability Insurance Policies, 154 U. Pa. L. Rev. 1147, 1189 (2006). ↑
  6. Griffith, supra note 5, at 1168. ↑
  7. Id. at 1163. ↑
  8. Tom Baker & Sean J. Griffith, How the Merits Matter: Directors’ and Officers’ Insurance and Securities Settlements, 157 U. Pa. L. Rev. 755, 797–98 (2009). ↑
  9. See Richard M. Phillips & Gilbert C. Miller, The Private Securities Litigation Reform Act of 1995: Rebalancing Litigation Risks and Rewards for Class Action Plaintiffs, Defendants and Lawyers, 51 Bus. Law. 1009, 1014–15 (1996). ↑
  10. The “gatekeeper” idea is that trusted professionals near the corporation can be used as external checks on fraud and mismanagement. See John C. Coffee, Jr., The Acquiescent Gatekeeper: Reputational Intermediaries, Auditor Independence and Governance of Accounting 11–13 (Colum. L. Sch., Ctr. For L. & Econ. Stud., Working Paper No. 191, 2001), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=270944 [https://perma.cc/LM3D-3T6H]. ↑
  11. See Joseph A. Grundfest, Punctuated Equilibria in the Evolution of United States Securities Regulation, 8 Stan. J.L. Bus. & Fin. 1, 7–8 (2002) (“D&O insurers could today easily make the retention of insurer-approved auditors a condition of coverage. They could today also require an element of control over the audit process. Yet they don’t. Why?”). ↑
  12. Such responses were once common. Roberta Romano, What Went Wrong With Directors’ and Officers’ Liability Insurance?, 14 Del. J. Corp. L. 1, 12 (1989). Professor Romano’s article diagnosed insurer responses to a sudden increase in liability exposure, so it is unsurprising that insurers reacted in this way. Id. at 13. There is no indication that this tendency to withdraw is still commonplace. ↑
  13. Richard V. Eicson & Aaron Doyle, Uncertain Business: Risk, Insurance and the Limits of Knowledge 94–211 (2004) (reporting research from a variety of contexts including building construction and disability management); Steven Shavell, On Liability and Insurance, 13 Bell J. Econ. 120, 121–22 (1982) (modeling the relationship between liability and insurance and concluding that, “[a]lthough the purchase of liability insurance changes the incentives created by liability rules, the terms of the insurance policies sold in a competitive setting would be such as to provide an appropriate substitute (but not necessarily equivalent) set of incentives to reduce accident risks”). ↑
  14. Moral hazard is the tendency of insured parties to engage in riskier conduct. Kenneth J. Arrow, Uncertainty and the Welfare Economics of Medical Care, 53 Am. Econ. Rev. 941, 961 (1963); Daniel Schwarcz, Reevaluating Standardized Insurance Policies, 78 U. Chi. L. Rev. 1263, 1283 (2011). With respect to health insurance, smoking has been described as the “classic moral hazard.” Thomas R. McLean, International Law, Telemedicine & Health Insurance: China as a Case Study, 32 Am. J.L. & Med. 7, 25 (2006). Adverse selection is the tendency of the costliest clients to seek out coverage offered at a given price. Cf. George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488, 488 (1970) (setting out a canonical adverse selection model in a non-insurance commercial setting); Peter Siegelman, Adverse Selection in Insurance Markets: An Exaggerated Threat, 113 Yale L.J. 1223, 1223 (2004) (explaining that adverse selection is a process where “insureds utilize private knowledge of their own riskiness when deciding to buy or forgo insurance”). ↑
  15. Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2018, at 9 (2018), https://www.aon.com/getmedia/20bfac85-dce6-4902-91cb-c61265abcd7e/2018-Q4-DO-Pric​ing-Index.aspx [https://perma.cc/PR58-CPUT] (95.7% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2017, at 9 (2017), https://ww​w.aon.com/attachments/risk-services/d-o_pricing_index/2017_Q4_DO_Pricing_Index.pdf [h​ttps://perma.cc/V33R-ZY9U] (93.2% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2016, at 8 (2016), https://www.aon.com/attachme​nts/risk-services/d-o_pricing_index/2016_Q4_DO_Pricing_I​ndex.pdf [https://perma.cc/HRY​4-4HTA] (95.3% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2015, at 8 (2015), https://www.aon.com/attachments/risk-services/d-o_pricing_index​/2015_Q4_DO_Pricing_Index.pdf [https://perma.cc/J5WG-K6QQ] (95% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2014, at 8 (2014), https://www.aon.com/attachments/risk-services/d-o_pricing_index/201​4_Q4_DO_Pricing_I​ndex.pdf [https://perma.cc/8CDA-MSYG] (93.7% annual retention); Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2013, at 3 (2013), https://www.aon​.com/attachments/risk-services/d-o_pricing_index/2013_Q4_DO_P​ricing-Index.pdf [https://​perma.cc/22DW-YDPB] (94.9% annual retention) Aon, Quarterly D&O Pricing Index: Fourth Quarter and Full Year 2012, at 3 (2012), https://www.aon.com/attachments/risk-services/d-o_pricing_index/2012_4Q_DandOPricingI​ndex.pdf [https://perma.cc/4GJU-4PKG] (94% retention for Q4). ↑
  16. Alicia Davis Evans, The Investor Compensation Fund, 33 J. Corp. L. 223, 261 (2007) (“Currently, competitive pressures appear to make it impossible for D&O insurer premium prices to reflect governance risk fully.”). ↑
  17. Infra Section II.C. ↑
  18. Baker & Griffith, supra note 8, at 797–804. ↑
  19. Cf. Grundfest, supra note 11, at 7 (noting that “the current structure of D&O insurance and auditor liability has failed to give rise to incentives” to address fraud risks even though “D&O insurers could today easily make the retention of insurer-approved auditors a condition of coverage”). ↑
  20. See Shauhin A. Talesh, Insurance Companies as Corporate Regulators: The Good, The Bad, and the Ugly, 66 DePaul L. Rev. 463, 467 (2017) (“The debate going forward is not whether insurers are good risk regulators as prior scholars theorize, but more precisely, examining under what conditions can insurers make positive regulatory interventions into corporate behavior and nudge corporations toward a governance structure in line with societal values of fairness, equality, transparency, and safety.”); Chen Lin, Micah S. Officer, Thomas Schmid & Hong Zou, Is Skin in the Game a Game Changer? Evidence from Mandatory Changes of D&O Insurance Policies, 68 J. Acct. & Econ. 1–2 (2019) (arguing that the structure of insurance policies matters). ↑
  21. See, e.g., Merritt B. Fox, Civil Liability and Mandatory Disclosure, 109 Colum. L. Rev. 237, 288–89 (2009) (calling for an end to D&O insurance for certain securities violations). ↑
  22. Most insurers do not embrace a purely active or passive strategy, and it can be difficult to distinguish them in many cases. An insured who makes a costly claim may see her future premium rise from either an active or passive insurer, but for very different reasons. The active insurer raises the rate insofar as the claim signals information about the client’s type and future riskiness. The passive insurer raises the rate simply because that is the deal: the insurer pays now and recoups later, even if the claim was a fluke and signals nothing about the insured’s risk. ↑
  23. Daniel Schwarcz, Coverage Information in Insurance Law, 101 Minn. L. Rev. 1457, 1487 (2017) (“[T]he risk of moral hazard only exists when the insurer does not observe policyholder levels of activity or care after purchase . . . .”). ↑
  24. Infra Section III.A. ↑
  25. Omri Ben-Shahar & Kyle D. Logue, Outsourcing Regulation: How Insurance Reduces Moral Hazard, 111 Mich. L. Rev. 197, 228 n.102 (2012). ↑
  26. See Tom Baker & Sean J. Griffith, Predicting Corporate Governance Risk: Evidence from the Directors’ and Officers’ Liability Insurance Market, 74 U. Chi. L. Rev. 487, 489–90 (2007) (arguing that insurance premiums can publicize problematic governance). ↑
  27. Infra Sections III.B. & C. ↑
  28. Infra Sections II.C. & III.D. ↑
  29. Infra Subsection IV.B.1. ↑
  30. Infra Subsection IV.B.2. ↑
  31. Infra Subsection IV.B.3. ↑
  32. See Jay M. Feinman, The Insurance Relationship as Relational Contract and the “Fairly Debatable” Rule for First-Party Bad Faith, 46 San Diego. L. Rev. 553, 556–57 (2009) (“The insurance contract is a relational contract par excellence. The relation created by the contract extends over time; although a typical policy term is a year, the rate of renewal is very high, often in the order of ninety percent, so a typical relation extends over years or even decades.”). Note that Feinman was not addressing D&O insurance. ↑
  33. See Robert E. Scott, Conflict and Cooperation in Long-Term Contracts, 75 Calif. L. Rev. 2005, 2007–08 (1987); Morten Hviid, Long-Term Contracts and Relational Contracts, in 5 The Encyclopedia of Law and Economics 54 (Boudewijn Bouckaert & Gerrit De Geest eds., 1999) (“Relational contract theory can be seen as an attempt to generate a model able to explain when transacting parties do not resort to contracts and by what means they ensure that each party fulfils their obligations. The theory focuses on the relationship between the ‘contracting’ parties and posits that this leads to cooperation and to implicit obligations being self-enforcing.”); Benjamin E. Hermalin, Avery W. Katz & Richard Craswell, Contract Law, in 1 Handbook of Law and Economics 123 (A. Mitchell Polinsky & Steven Shavell eds., 2007) (“Within the literature, self-enforcing contracts are often known as relational contracts.” (emphasis omitted)). ↑
  34. For examples of this kind, see, e.g., Stewart Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 Am. Socio. Rev. 55, 61–67 (1963); Ian R. MacNeil, The Many Futures of Contracts, 47 S. Cal. L. Rev. 691, 721, 732 (1974); H. Beale & T. Dugdale, Contracts Between Businessmen: Planning and the Use of Contractual Remedies, 2 Brit. J.L. and Soc’y 45, 45–46, 51, 53 (1975). ↑
  35. E.g., Hviid, supra note 33, at 55 (“Repeated interaction may enable cooperation, because of the potential for a current deviation to be punished in the future. For this to work, four conditions must be met.”). ↑
  36. Sean J. Griffith, Afterward and Comment: Towards an Ethical Duty to Market Investors, 35 Conn. L. Rev. 1223, 1239 (2003) (“The last period problem is a concept drawn from game theory and experimental economics to explain individual defections from cooperative enterprises in the last period of a repeated situation.”). ↑
  37.  Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 Va. L. Rev. 1089, 1091 (1981) (“A contract is relational to the extent that the parties are incapable of reducing important terms of the arrangement to well-defined obligations.”). ↑
  38. Hviid, supra note 33, at 55 (“Any deviation must be observable and it must be punishable. This punishment must be credible so that it is clear that when required the punishment will be carried out, and the parties must be patient in the sense that the future matters to them.”). ↑
  39. Christine Jolls, Contracts as Bilateral Commitments: A New Perspective on Contract Modification, 26 J. Legal Stud. 203, 231–32 (1997). ↑
  40. See, e.g., Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes 1, 1 (1991); Lisa Bernstein, Beyond Relational Contracts: Social Capital and Network Governance in Procurement Contracts, 7 J. Legal Analysis 561, 561–62 (2015) (discussing how master supply agreements, a type of relational contract between business firms, are designed to “keep the law . . . largely out of their relationship” and can “create a space in which private order can flourish.”). ↑
  41. Hermalin et al., supra note 33, at 122 (“It has long been understood from the repeated games literature that some agreements are self enforcing in the context of an ongoing relationship. The most prominent example of such ‘agreements’ is tacit collusion among competing firms.”). ↑

  42. Curtis J. Milhaupt & Mark D. West, The Dark Side of Private Ordering: An Institutional and Empirical Analysis of Organized Crime, 67 U. Chi. L. Rev. 41, 43, 66 (2000). ↑

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