Class Actions and Bankruptcy Reform

The last commentary, which I circulated, was entitled, Reagan, Unions and Welfare, and I ended it with the comment, “Next time I will discuss these issues specifically, and set forth my views as to how Democrats ought to be approaching them.” So here goes!

First we must realize that the Republican agenda is far more insidious than is generally realized. The program for Social Security is not simply to have private accounts. It is to abolish Social Security. (I will address this in greater detail at a future date.)

I believe the Bush program is not only to do away with a women’s right to choose but to do away with any and all birth control or any family planning. The Evangelicals and the Catholic Church have formed an alliance on this and it is powerful.

Furthermore, I believe that Bush and his allies in the Congress want nothing less than to do away with all the reforms that have been enacted since the Presidency of Theodore Roosevelt at the dawn of the 20th century. By that I mean doing away with all consumer protections, all labor protection and all environmental protection. But they are smart! They know that if they admitted to this being their program they would be out of office and out of power in a wink and without a prayer. So they keep identifying problems and then offer, “reforms“ which by their nature, do not solve the problem, but rather undermine the program. The longer they are in power the more the very foundations of these reforms will be undermined and a resurgence of progressive forces, if and when they come, will take decades to undo the damage. So comments about a swinging pendulum miss the seriousness of the situation. Nor do they focus on the suffering being inflicted on tens of thousands, or even millions of people in the meantime.

The only thing that stands between them and their objectives is the Democratic Party. It most certainly isn’t going to be a third party.

But the Democratic Party has become a Party without a program. All they do is oppose. They do not identify problems and they most certainly do not offer solutions. While we are all focused on the threat to Social Security, the President and his followers in the Congress are busy enacting less controversial legislation, which chips away piece by piece at the framework of our protections from an ever more greedy and rapacious business community. We must understand that the battle is not fought during election campaigns, but in between, when subtle and not so subtle public relations campaigns condition the public to favor their programs. Once the public is sufficiently conditioned Democrats can no longer oppose such programs if they are to win elections, and even if they win, they cannot fly in the face of public opinion.

While we are trying to stop the emasculation and ultimately the abolition of Social Security they have already enacted class action “reform” forcing such actions into the Federal Courts. This is indeed clever for on the face of it is difficult to object to important litigation residing in the Federal courts, thus preventing forum shopping (though Republicans do not seem concerned at forum shopping to avoid paying income taxes or forum shopping to get the best forum where they can get the lowest costs and charge the highest interests-see below) and placing the actions in a court staffed with judges, who by and large are more independent and more competent than most state court judges. What they do not tell us is that the Federal Courts have held that they will not certify class actions where a multiplicity of state laws are in conflict with each other. Thus, this apparently, harmless, “reform” deals the death knell to class actions to a very large degree.

Why are class actions important? Because they are the only means by which a large group of people who individually do not have the resources to take on the deep pockets of large corporations can obtain redress, as is so well shown in, e.g. Jonathan Harr’s book and the Disney movie, 'A Civil Action’ and even more strikingly in the movie, “Erin Brockovitch” both of which are based on actual events. John Grisham’s ‘The King of Torts’ shows the sleazy side of both the offending corporations and the greedy lawyers.

But even more important Class Actions are the only way to punish outrageous conduct on the part of big business by allowing private parties to exact punishment that may act as something of a deterrent against ongoing or even future anti-social and in many cases murderous conduct. It allows private parties to act, where government authorities fail to defend and protect the public.

On the other hand Class Actions have become something of a scandal for many of us have been aware of, or been involved in class actions, which are settled with each member of the class getting nothing more than a small promotional discount coupon from the defendant, while the lawyers collect millions in fees as part of a settlement. Even then the actions serve a social purpose because whatever the offending party has to pay is a deterrent against abhorrent conduct.

But settlements that enrich lawyers while defendants are sold out, cry out for real reform. This, like so many other things that require real reform need to be identified by the Democratic Party, and solutions which keep the benefits, while addressing the abuses, need to be proposed and publicized. Otherwise Republicans will use the vacuum to propose “reforms” which throw out the baby with the bath water, or more accurately use abuses or failures as an excuse for legislation intended to protect rich malefactors from being brought to justice.

Similarly, Republicans have for years been pushing for more stringent bankruptcy laws because the banking industry has been clamoring for such laws arguing that the filing for bankruptcy by wage earners has been on the rise. That bankruptcies by the middle class have indeed been on the rise is indisputable, but what is also indisputable is the cause. Banks in an effort to increase their bottom lines have found a golden calf in credit cards.

It is almost an axiom that banks do not extend credit except to credit worthy clients. However, this fundament of banking practice has been negated by interest rates which together with penalties have brought such a high rate of return to banks that their profits more than make up for a substantial default rate. Most people probably assume that we have usury laws. There is no Federal usury law. Before 1978, 37 states had usury laws that capped rates at 18%, a pretty exorbitant rate, and the law that applied was that of the state of the consumer, but in 1978 the Supreme Court held the laws that applied were the laws of the bank’s home state. Banks promptly moved to states without usury laws and now it is not unheard of for banks to charge up to 34% on some credit cards and they can even raise the rate while a debt is outstanding. In addition they encourage people to pay a minimum against their principal thus assuring that the lender will fall deeper and deeper into debt and the banks will keep increasing their profits. In addition, if one payment is missed (and the banks keep sending their statements out later and later, thus shortening the grace period) a penalty of up to $39. - in late fees is often charged on top of the interest. (A summary of the history and practices is appended as a PDF document, entitled Industry Practices.)

Have Democrats made an issue of this. Have they loudly advocated a Federal usury law? I haven’t heard of it, if they have. Even in New York State the law sets the interest limit at 21%, but that hardly matters, because banks can simply do their forum shopping to states that have no limit. In my opinion a federal law that would cap rates at prime plus 5% would make lots of sense and would stop banks from seeking customers who they know cannot afford the loans that they are being enticed into.

Instead the banking industry has a compliant Congress, which passes bankruptcy “reform” so that the entrapped can rarely escape. This is penalizing the victim and rewarding the usurer. To make it worse, it exempts from the law those with substantial assets who can set up a trust in one of five states and assets put in that trust are protected. Or as the NY Times reported:

There is a big, gaping loophole for wealthy Americans in the bill:

"The loophole involves the use of so-called asset protection trusts. For years, wealthy people looking to keep their money out of the reach of domestic creditors have set up these trusts offshore. But since 1997, lawmakers in five states -- Alaska, Delaware, Nevada, Rhode Island and Utah -- have passed legislation exempting assets held domestically in such trusts from the federal bankruptcy code. People who want to establish trusts do not have to reside in the five states; they need only set their trust up through an institution in one of them."

Which brings me to Tort reform, which is another of the many programs our President has been pushing. He appears to be on the verge of succeeding. It’s a problem that cries out for a solution. But the President’s solution as usual strikes at the consumer and not at the problem, and the Democrats are against it, but have no program of their own.

Next time, which will be in about three weeks, I will discuss Tort reform in greater detail