March 23, 2023

German Court Hearing Becomes Debate on Euro

Technically, the Federal Constitutional Court was merely considering whether measures by the central bank to contain the euro crisis infringed on German law. But the oral arguments, on suits brought by numerous citizen groups, inevitably turned into a debate on the future of the euro currency project itself.

The star witnesses at the hearings were two friends and former classmates who symbolize German ambivalence about the common currency.

Jörg Asmussen, a member of the European Central Bank’s executive board, defended the bank’s promise last year to buy bonds in any quantity necessary to eliminate fears of euro zone breakup. Jens Weidmann, president of the German central bank, the Bundesbank, said the E.C.B. would violate European treaties if it bought bonds — which it has not yet had to do.

As the justices pointed out, the court does not have the power to block actions by the European Central Bank. But it might restrict participation by the German government or the Bundesbank in measures intended to address the crisis. As the euro zone’s paymaster, Germany plays a crucial role in any efforts to prop up the common currency.

Some complainants clearly hoped for a ruling that would effectively force Germany to leave the euro.

Karl Albrecht Schachtschneider, a retired law professor and well-known euro opponent, told the court he hoped that “the euro adventure will be brought to an end for the good of Germany and the good of Europe.”

Others did not go that far, but argued that the E.C.B. had bypassed elected officials when it declared itself ready to buy bonds of euro zone members.

“The price of the so-called euro rescue may not be to injure democracy,” said Dietrich Murswiek. He argued before the court on behalf of Peter Gauweiler, a member of the German Parliament who is one of the individuals and political groups that have filed suits against the central bank’s crisis measures.

On the opposite side, Wolfgang Schäuble, the German finance minister, warned that the cost to Germany would be incalculable if the country left the currency union. And he pointed out that under the European Central Bank, inflation has been lower than it was with the deutsche mark. “The E.C.B. is acting within its mandate,” he told the court.

During his appearance before the court, Mr. Asmussen sought to assuage concerns that German taxpayers could be left with bill if the E.C.B. suffers losses from buying government bonds. Unlike a commercial bank, the European Central Bank can operate at a loss, he said. That would mean it would not need to ask governments for money to cover short-term losses.

Answering accusations that the central bank is remote from the democratic process, Mr. Asmussen said its measures had given elected officials time they needed to deal with the crisis.

“The risk of not acting would have been greater,” he told the high court.

Mr. Weidmann, who studied economics at the University of Bonn with Mr. Asmussen, argued a point of view widely held in Germany: that the E.C.B. is making it too easy for struggling members of the euro zone to continue their wayward ways.

“Interest rates have a central disciplinary function,” Mr. Weidmann said. “Monetary policy can’t solve the problems of the euro zone. Only political leaders can solve the problems.”

Both men are members of the European Central Bank governing council, which sets monetary policy. Mr. Weidmann is known to be the only member of the 23-member council who voted against the bond-buying program, which was announced in September.

The discussion was largely theoretical. The European Central Bank has not needed to buy any bonds because the announcement alone was enough to keep speculators at bay and quiet talk of a euro zone breakup.

Some of the justices’ questions after the testimony Tuesday morning revolved around whether it was permissible to file a lawsuit to stop bond buying when no purchases had yet taken place. The questions suggested the court might rule on narrow grounds, arguing that at least some aspects of the complaints were premature.

The objections raised by the opponents of European Central Bank action tended to follow a similar set of themes. The central bank’s policies, opponents said, will evolve into a means to transfer German wealth to Greece, Italy and other European Union countries against the will of the German people. Gregor Gysi, a member of Parliament who spoke on behalf of the German Left Party, said E.C.B. action benefited big investors without solving the problems like high unemployment rates among youths and rightist extremism.

The chief judge in the hearing said it was irrelevant whether the central bank measures had been successful. “Otherwise the ends would justify the means,” Andreas Vosskuhle, president of the eight-judge panel that will decide the case, said in an opening statement Tuesday morning.

Mr. Vosskuhle acknowledged that the case presented the court with extremely difficult legal issues. The German court, Mr. Vosskuhle said, does not have the power to rule on the actions of the European Central Bank, which answers solely to European Union law. The issue, he said, is whether the central bank has taken on duties that, according to the German Constitution, rightfully belong to the country and may not be transferred.

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Bucks Blog: Gay Couples May Want to File a Protective Tax Refund Claim

The recent decision by a federal appeals court regarding the Defense of Marriage Act suggests gay couples may want to file something known as a protective refund claim with the Internal Revenue Service in the event the Supreme Court overturns the law, according to accounting experts.

The Court of Appeals for the Second Circuit in New York struck down the law’s definition of marriage as a union between a man and a woman as unconstitutional. The decision was the second by a federal appeals court striking down DOMA, as the law is known. The law’s constitutionality is expected eventually to be considered by the United States Supreme Court.

If the high court invalidates DOMA, legally married same-sex couples will be able to file claims for refunds of federal tax overpayments, said Janis Cowhey McDonagh, a partner at Marcum LLP in New York and a specialist in the firm’s national LGBT and non-traditional family practice.

Currently, same-sex marriage is recognized by six states — New York, Connecticut, Iowa, Massachusetts, New Hampshire, Vermont — and the District of Columbia.

Patricia Cain, a law professor at Santa Clara University and an authority on legal issues faced by same-sex couples, said others might want to consider filing a protective claim, too.

For instance, she noted that an additional nine states, as well as Washington, D.C.,  recognize “marriage equivalent statuses” for same-sex couples, like domestic partnerships or civil unions. While most people presume those relationships aren’t marriages, she said in an e-mail, “there’s a good argument that absent DOMA such relationships should be treated as marriages for tax purposes.”

In light of such uncertainty, she said, some details may end up being settled by further litigation. “I actually would advise anyone who would benefit from joint filing to file an amended return as a protective claim for refund if they are married (no matter where they live) or in a marriage equivalent status.”

Ms. McDonagh said couples should file a protective refund claim now because there is a three-year statute of limitations on tax refund claims. By filing a claim now, couples will have standing for overpayments dating to 2009, while DOMA wends its way through the court system. The claim applies to income taxes, estate taxes as well as gift taxes, she said.

It’s possible, Ms. McDonagh said, that if the Supreme Court voids the law, the I.R.S. could waive the three-year statute of limitations. That would seem the fair thing to do, she said, but there isn’t any precedent for the agency doing so. So to be safe, filing a protective claim makes sense.

Couples should consult their accountants for advice about filing a protective claim, which essentially involves filing an amended tax return, she said.

The case decided earlier this month was brought on behalf of Edith Windsor of New York City, who married her longtime partner, Thea Clara Spyer, in 2007 in Canada. When Ms. Spyer died in 2009, Ms. Windsor inherited her property. Because the I.R.S. was not allowed, under the Defense of Marriage Act, to consider her as a surviving spouse, she faced a tax bill of $363,053 that she would not have had to pay if the marriage had been recognized.

Do you intend to file a protective claim?

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DealBook: Bankrupt, Kodak Vows to Rebound

A Kodak sign in Times Square.Eduardo Munoz/ReutersA Kodak sign in Times Square. The company’s chief executive, Antonio Perez, below, says the bankruptcy filing should help Kodak rebound.Kodak's chief executive, Antonio Perez, says the bankruptcy filing should help the company rebound.Jonathan Fickies/Bloomberg News

In filing for bankruptcy protection early Thursday morning, Eastman Kodak executives say they are seeking to follow the path of American corporations that have reinvented themselves after a court-supervised reorganization, like United Airlines and Chrysler.

Antonio M. Perez, the company’s oft-criticized chief executive who has been trying to turn the company around since 2005, said the bankruptcy was a step “in our transformation in order to build the strong possible foundation for the Kodak of the future.”

“What everyone should expect from Kodak is business as usual,” he said, in a video message.

For critics, business as usual is exactly the problem with Kodak. They questioned how Kodak would emerge from bankruptcy as a viable company since it has not yet proved that its turnaround strategy, focusing on consumer and commercial printers, can turn a profit.

“My sense is they have played every card they can dig out of the deck,” said Jay Lawrence Westbrook, a business law professor at the University of Texas. He predicted that Kodak would liquidate most of its assets, with some parts remaining as viable companies, perhaps even called Kodak.

But he added, “I would be very surprised if they reorganized and look anything like the Kodak that went in.”

Shannon Cross, an analyst who has had a sell rating on Kodak since 2001, said the problem for Kodak was that its core businesses had not been making money and the company had been living off licensing fees for intellectual property.

“To me it’s not clear that the pieces that will be left at the end make sense as a stand-alone company,” she said. “It’s sad that it happened. It’s not a surprise, the way it’s been managed.”

The predecessor to Kodak, Eastman Dry Plate Company, was formed as a partnership in 1881 by George Eastman, and it became one of America’s blue-chip giants, a company whose name became synonymous with taking pictures and its ubiquitous yellow film box. But the company was slow to respond to competition in the film business from Fujifilm of Japan, which undercut Kodak’s prices.

And though one of its own researchers invented the digital camera, Kodak was slow to embrace digital photography.

At a court hearing on Thursday evening, a lawyer representing Kodak creditors questioned management’s plan to borrow $950 million from Citigroup to stay afloat during the bankruptcy process, noting that the company had burned through $2 billion in the last two years trying to reinvent itself.

“From our perspective, what’s past is prologue,” said Michael Stamer, the lawyer. “They have taken what we believe is reckless and destructive spending and imposed them on this case.”

Under Mr. Perez, who joined Kodak from Hewlett-Packard in 2003 and became chief executive in 2005, the company has tried to reinvent itself by focusing on printers, packaging and work force software.

Mr. Perez financed those efforts with billions in licensing fees from Kodak’s intellectual property, but analysts warned that Kodak was burning through cash too quickly and could eventually run out.

Kodak announced last July that it would try to sell some of its digital imaging patents, hoping to cash in on a frenzy for intellectual property that drove Google’s $12.5 billion takeover of Motorola Mobility. But Kodak failed to garner enough interest among potential buyers, driven in part by fears of the company’s deteriorating financial health.

In explaining the bankruptcy, Mr. Perez said his turnaround efforts were hurt by the recession, which slowed new business growth and expedited the decline of the film business. He said the objectives of the reorganization included obtaining new financing to shore up confidence in Kodak, selling some of the company’s patents and adjusting “legacy” costs — like health care benefits for retirees — to the company’s now smaller size.

“Kodak is taking a significant step toward enabling our enterprise to complete its transformation,” he said in prepared remarks.

The bankruptcy is expected to help with the patent sale, and it could also allow Kodak to shed some of its retiree obligations.

Bob Volpe, president of EKRA, an association of Kodak retirees, said the pension fund was well funded, and it generally could not be clawed back by the company or creditors. But the company also provides health benefits to its 38,000 retirees in the United States, he explained, and that coverage will probably be vulnerable in bankruptcy court. Last year, those health care benefits cost $240 million, according to company figures.

“If you look at the pattern of what has happened from other companies in bankruptcy, that’s what happened,” he said.

Allan L. Gropper, the federal bankruptcy judge overseeing the case, said, “Kodak is a great American institution, and every creditor here, I’m sure, wants to see it get out of Chapter 11 as soon as possible and to prosper. The question today is how to do that quickly and simply.”

The first task may be for Kodak to sell the patents it has been trying to unload, said Daniel C. McElhinney, managing director of corporate restructuring for Epiq Systems. Though buyers may have been skittish, he said a court-supervised sale provided greater protection against liens and other claims. A Kodak lawyer estimated the patents were worth $2.2 billion to $2.6 billion.

If the sale is successful, and depending on how much money remains, Kodak will then have to convince the court that it has a viable business plan. Lawrence R. Perkins, senior managing director at Conway Mackenzie, a restructuring and financial advisory firm, said that a bankruptcy could provide Kodak with a fresh start, but it would not be easy.

“This is going to be a tough one,” he said. “Just like anything else, the business has evolved. It’s going to be hard to unwind 130 years of history.”

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Supreme Court Allows Contracts That Prohibit Class-Action Arbitration

Though the decision concerned arbitrations, it appeared to provide businesses with a way to avoid class-action lawsuits in court. All they need do, the decision suggested, is use standard-form contracts that require two things: that disputes be raised only through the informal mechanism of arbitration and that claims be brought one by one.

“The decision basically lets companies escape class actions, so long as they do so by means of arbitration agreements,” Brian T. Fitzpatrick, a law professor at Vanderbilt University, said. “This is a game-changer for businesses. It’s one of the most important and favorable cases for businesses in a very long time.”

The decision fits in with recent rulings that have favored arbitrations and been wary of aspects of class actions.

The case was brought by a California couple who objected to a $30 charge for what was said to be a free cellphone. They had signed a “take it or leave it” standard contract from ATT Mobility that required them to resolve disputes through arbitration and barred them from banding together with others to seek class-action treatment, whether in arbitration or in traditional litigation in court.

The couple, Vincent and Liza Concepcion, filed a lawsuit against ATT Mobility seeking class-action treatment. The company, relying on the contract, responded that the case could neither proceed in court nor as a class action in any forum. But lower federal courts refused to enforce the arbitration agreement and allowed the case to go forward. They relied on a 2005 ruling from the California Supreme Court that barred class waivers as unconscionable.

Justice Antonin Scalia, writing for the majority on Wednesday, said the lower courts had failed to properly apply the Federal Arbitration Act, which overrides some state court decisions disfavoring arbitration.

The California Supreme Court decision had barred class waivers in all standard-form contracts, whether applicable to arbitrations or court proceedings, as unconscionable if they gave rise to claims that the companies issuing them had set out “to deliberately cheat large numbers of consumers out of individually small amounts of money.”

Though neutral on its face, the ruling placed an unlawful burden on arbitration agreements and so ran afoul of the federal arbitration law, Justice Scalia wrote.

“Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration,” Justice Scalia wrote. He was joined by Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito Jr.

Arbitrators are ill suited to handling sprawling cases, Justice Scalia said, and sensible businesses would not agree to participate in informal proceedings from which very limited appeals are possible when faced “with even a small chance of a devastating loss.”

“We find it hard to believe,” Justice Scalia wrote, “that defendants would bet the company with no effective means of review, and even harder to believe that Congress would have intended to allow state courts to force such a decision.”

Justice Scalia added that the arbitration agreement at issue in the case, ATT Mobility v. Concepcion, No. 09-893, was more than fair in the procedures it used and the payments it contemplated in individual cases.

The company, in a statement on Wednesday, said the decision was “a victory for consumers.”

“We value our customers,” the statement said, “and ATT’s arbitration program is free, fair, fast, easy to use and consumer friendly.”

Justice Stephen G. Breyer, writing for himself and Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan, said the state court decision banning class waivers did not violate the federal law favoring arbitrations.

Class arbitrations, Justice Breyer wrote, are perfectly appropriate ways to resolve claims that are minor individually but significant in the aggregate.

He said he was puzzled by Justice Scalia’s assertion that there was tension between the goals of arbitrations and class treatment. “Where does the majority get its contrary idea — that individual, rather than class, arbitration is a fundamental attribute of arbitration?”

The apt comparison, Justice Breyer continued, is not between individual and class arbitration but between class arbitration and class actions in court. Class arbitrations, he said, are more efficient.

But the most fundamental problem, he said, is that minor frauds like the one asserted here by the California couple will not be remedied.

“What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?” he asked. Quoting from a decision in another case, he answered his own question. “Only a lunatic or a fanatic sues for $30,” he said.

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