The problem with (federal) judges

Mark Ramseyer has an interesting take on the venerable Jordan v. Duff Phelps case that has long bedeviled corporate law teachers (ht PoL).

Easterbrook wrote a majority opinion that imposed a hypothetical bargain; Posner dissented in favor of enforcing the deal. Ramseyer likes the Posner approach, and I sympathize. Moreover, Ramseyer makes a broader and more interesting point that I also sympathize with:

the bench is properly a place for honest jurists of moderate talent who are, ideally, monitored for their work. It is not a place for men and women with the independence and sophistication of these two men. Such judges can muddy the law by trying to fix bad precedent, and worsen the law by setting interventionist examples for their far less talented peers.

But there's a more interesting nugget buried here about federal and state courts.  Ramseyer says that the state courts routinely still revere Meinhard v. Salmon. This would suggest that a federal court sitting in diversity should have the same reverence, and not look at fiduciary duties as merely contractual.  So maybe both judges stepped out of their proper federal role.

The issue is rather complicated in this case. To begin with, the state court reverence for fiduciary duties doesn't really show up in the holdings of cases (as distinguished from the moralistic language), as I've discussed in Are Partners Fiduciaries?  Moreover, Jordan is a 10b-5 case, not a diversity jurisdiction case, so it's not clear how much the court needed to follow the state law reverence.

But apart from the complications of this case, there is clearly a problem with diversity jurisdiction cases. I have found in my detailed review of partnership and LLC cases over the years that federal judges – and not just the scholarly ones – are often rather impatient with the nuances of state law, and quite often get state law at least a little wrong.

This provides some practical support for the seemingly artificial distinction between limited partnerships and corporations the Supreme Court made in Carden v. Arkoma Associates (also applied to limited liability companies) that makes it very difficult to get diversity jurisdiction in these cases because you have to look to the citizenship of the individual members.

So the problem Ramseyer identifies may, to a significant extent, be a problem with federal courts deciding diversity cases. It isn't that state judges are immune from the disease, but that they may be more disciplined to resist its worst symptoms because they're dealing with state issues all the time, and are likely to be more tied to the state's politics.

To be sure, the politics may sometimes be a problem and therefore a justification for diversity jurisdiction.  But not when the parties can choose the state, as they can in partnerships, corporations and many other kinds of contracts.  See my and Erin O'Hara's Corporations and the Market for Law. Thus, Jordan was precisely the sort of case that should have been in state court.

Anyway, this is a current research project, so comments and ideas are particularly welcome.

Comments

[Florens]

Thanks for the interesting paper "Corporations and the Market for Law". Let me make one short remark on the European market for corporate law (page 44). I don’t agree with you, that the EC regulatory apparatus is so slow that it doesn’t have an impact: In fact the opposite is true. One of the strongest constraints on a market for law is the European legislation, which tries to align the different jurisdictions for the sake of standardization (but ignoring the benefits of regulatory competition). Many directives on corporate law and securities law have ultimately limited the legislative discretion of the member states. The impact of this legislation is so severe that law schools have reacted by offering classes on European Corporate Law. A recent example is the so called shareholder directive, which hasn’t been enacted yet but will probably pass European Counsel and European Parliament at the end of the year. It establishes a bundle of shareholder rights, which member states have to grant. The market for corporate law, which might ultimately show, that shareholder democracy is too expensive due to high collective decision costs, rent seeking etc., can’t fulfil its task, because member states can’t deviate.