Socialism: size what the lock can cost creditors who never chose to lend, say who's covered, keep the appraisal honest, and have the co-op that buys the business pay it back

Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx

JoshHeaps.Net/Content/Socialism/bankruptcy.md

@@ -12,7 +12,7 @@ summary: Federal bankruptcy law would override the lock, so a failed co-op could
 This page explains why, what Congress already does for a similar kind of organization, and what the amendment would say. A few terms first:
 
 - **The lock-holder** is the independent organization that holds the co-op's *lock share*, a single share that pays nothing but can veto a sale ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)).
-- **A going concern** is a business sold whole and still running, with its customers, contracts and trained staff. It's usually worth much more than the same equipment sold off piece by piece.
+- **A going concern** is a business sold whole and still running, with its customers, contracts and trained staff. It can be worth much more than the same equipment sold off piece by piece.
 - **Creditors** are everyone the co-op owes: lenders, suppliers, workers, tax agencies, and anyone it has injured.
 
 ## Why bankruptcy breaks the lock
@@ -53,7 +53,19 @@ A locked co-op isn't a charity. It's a business that makes and shares profits. T
 
 **2. Old debts are protected.** A lender already secured on the co-op's assets when the lock is registered has to consent in writing before registration. For a business that converts to a co-op, that's part of the buyout deal ([When an Owner Wants to Sell to the Workers](buyouts.md)).
 
-**3. Creditors who never chose to lend are made whole for the lock's cost.** Some creditors never had a chance to price the lock in: people the co-op injured, tax agencies, and creditors whose unsecured claims came before registration. If the lock makes them recover less than they would have from an open sale, the federation fund pays them the difference. For co-ops outside a federation, the bank pays it. Locked co-ops must also carry standard liability insurance, so injured people are mostly paid by insurers anyway.
+**3. Creditors who never chose to lend are made whole for the lock's cost.** Some creditors never had a chance to price the lock in: people the co-op injured, tax agencies, and creditors whose unsecured claims came before registration (exactly who counts is below). If the lock makes them recover less than they would have from an open sale, the federation fund pays them the difference. For co-ops outside a federation, the bank pays it. Locked co-ops must also carry standard liability insurance, so injured people are mostly paid by insurers anyway.
+
+**How big that bill could be.** Counted in cases, usually nothing. Counted in dollars, the cost sits in a few large cases, and nobody has measured how often they happen.
+
+- **Most failed small businesses have little to fight over.** In one study of small firms liquidated under Chapter 7, creditors got back a median of 5.8% of what they were owed, and an average of 27% (Bris, Welch and Zhu, 2006, as summarized in [Corbae and D'Erasmo, NBER w23515](https://www.nber.org/papers/w23515)). Most small businesses that try to reorganize are liquidated in the end ([Morrison, 2007](https://ideas.repec.org/a/ucp/jlawec/v50y2007p381-419.html)). That's background, not an estimate. Those are firms nobody would buy whole, where the lock changes nothing. The fund pays in the other case: a business still worth more than it owes the bank, brought down by a debt nobody chose, like a large injury claim. That's also where the payment is biggest.
+- **The bank stands in front.** A failed co-op usually owes the bank more than the business is worth, and any extra an open sale would have brought goes to the bank first. The bank lent knowing about the lock. So the fund only pays when an open sale would have covered the bank and everyone else ranked ahead, with money left over.
+- **Who's covered.** People the co-op injured; state and local tax agencies; claims listed when the lock was registered, less whatever has since been paid; customers' deposits; and workers who don't join a new co-op, for what they're owed beyond the part bankruptcy law puts first, including damages for late wages and missing layoff notice. Federal tax claims aren't covered, because the federal government chose the lock when it passed the law. Nor are insiders, the parties to a buyout, or anyone tied to them. A court judgment counts only if the fund was told about the case in time and could defend it. Where someone is personally liable for a tax the co-op didn't pay over, like taxes withheld from wages, the fund takes over the claim against them.
+- **The comparison changes only the price.** Both sides of the comparison use the same list of claims, in the same order, with the same costs of the case, and the insurance pool keeps its place in both. Workers' handed-over claims count as paid in full. The open-market price is taken after the costs a normal sale would have had. Anything a buyer of the pieces pays back under point 8 is subtracted.
+- **An example.** A co-op owes the bank $100,000, its workers $30,000 of wages the pool paid, and $60,000 in state taxes, and it lost a $400,000 injury lawsuit beyond its insurance. The case costs $40,000. Sold whole on the open market, the business would bring $500,000: after costs, the bank, the wages and the taxes, the injured person would get $270,000. The workers' co-op pays $200,000, so the taxes get $30,000 and the injured person nothing. The fund owes $300,000. A co-op that owed the bank more than the business was worth would owe nothing.
+- **The open-market figure has to be earned.** Nobody can test it with a real sale, and everyone involved has a reason to bend it: the buyers want the price low, the covered creditors want the gap high, and the payer wants it small. So the court picks the appraiser, and neither the fund nor the bank takes part in choosing. The payer and the covered creditors can each ask for a second appraisal, paid by the fund. The court also invites conventional buyers to make offers. They can't win, but an offer backed by a deposit sets the open-market figure. Otherwise the court decides between the appraisals.
+- **The buyer pays it back.** The gap is the discount the new co-op got. So the new co-op owes the fund what it paid out, repaid from profit within ten years, behind its bank loan and its debt to the insurance pool. The fund guarantees the creditors are paid now. Only what the new co-op can't repay is a cost the whole sector bears.
+- **Insurance, checked every year.** The payer, not the co-op, sets how much liability insurance each kind of co-op must carry. It covers claims from the years it was in force even after the co-op fails, and includes pollution cover where the work calls for it. A lapse counts as a default on the co-op's loan and triggers the early warning in [Paying for the workers' bid](#paying-for-the-workers-bid). Co-ops outside a federation pay the bank a premium based on their risk. In a buyout, the selling owner sets aside money for, or guarantees, the debts from before the sale that the co-op takes on.
+- **During the pilot, the bank pays,** because there's no federation fund yet. Those payments are reported case by case, with each failure's appraised gap, and count as the bank's losses in the losses that can stop its lending ([The Pilot, in Numbers](pilot-spec.md#the-decision-rule)).
 
 ### What can be sold, and to whom
 
@@ -89,7 +101,7 @@ A locked co-op isn't a charity. It's a business that makes and shares profits. T
 
 A workers' co-op can only use these rules if someone lends it the money in time, on terms a failed business can meet. The best-documented US case is New Era Windows in Chicago. Its workers had occupied their factory in 2008. When a later owner closed it in 2012, a group of them formed a co-op. They didn't buy a running business. The plant was shut, and they bought the equipment they wanted at the creditors' auction for $430,000, at salvage prices. They needed $850,000 in all, counting money to restart and run it, and put in about $20,000 themselves, $1,000 each. One mission lender, The Working World, provided the rest, in ten-year loans at 5% repaid only once the co-op made a profit ([Project Equity](https://project-equity.org/ownership-story/new-era-windows-deal-structure/)). The co-op opened in May 2013 ([The Working World](https://www.theworkingworld.org/us/new-era-windows/)). Money repaid only from profit is closer to ownership than to a loan, and a bank lending on past cash flow would probably have turned New Era down. So the case shows what kind of money a restart needs, and the rules below don't pretend the bank's ordinary test can supply all of it.
 
-- **Warning early, and privately.** Members and the lock-holder are told what these rules let them do at the first of: 60 days behind on a loan from the bank, a missed payroll, unpaid payroll taxes, deferred insurance pool premiums, loan terms eased to avoid a default, or a layoff notice. Members own the business, so they're told privately, through an adviser, not in a letter that reaches suppliers. Every worker, including temporary and agency staff, is told once a loan is called in or a case is filed, in the languages they speak.
+- **Warning early, and privately.** Members and the lock-holder are told what these rules let them do at the first of: 60 days behind on a loan from the bank, a missed payroll, unpaid payroll taxes, deferred insurance pool premiums, loan terms eased to avoid a default, lapsed liability insurance, or a layoff notice. Members own the business, so they're told privately, through an adviser, not in a letter that reaches suppliers. Every worker, including temporary and agency staff, is told once a loan is called in or a case is filed, in the languages they speak.
 - **An adviser who works for the workers.** The workers pick one from a panel the [federation](federation.md) keeps. The adviser is paid from a small charge on all the bank's loans, not by the co-op's managers or by the bank case by case.
 - **Keeping it running.** A court can already approve new lending to a business in bankruptcy that ranks ahead of the case's other costs ([11 U.S.C. § 364(c)](https://www.law.cornell.edu/uscode/text/11/364)). It can't rank ahead of an existing lender's lien without that lender's protection being shown ([§ 364(d)](https://www.law.cornell.edu/uscode/text/11/364)). When workers run the business while it's up for sale (point 5), the bank may make such loans for day-to-day costs, on limits the statute sets: they can't rank ahead of wages earned while the workers run it, can't be used to pay off the bank's old loans or to pledge assets for them, and can't carry a deadline that forces a sale before the 90 days in point 6. If the workers' co-op wins, the loan can be folded into its purchase loan.
 - **A separate test for buying a failed co-op.** The bank's usual buyout test looks back at two or three years of checked cash flow ([When an Owner Wants to Sell to the Workers](buyouts.md#the-seller-shares-the-risk)), which a failed firm doesn't have. So the bank lends against what the assets would bring sold off piece by piece, as set by the court's appraiser, and no more. The rest of the price and the money to run it have to come from the workers' handed-over claims, the insurance pool's claims, another lender, or the federation's fund, which can lend on terms like New Era's, repaid only from profit, within the limits it sets in advance ([Investing for the Long Run](the-long-run.md#spending-it-badly)). That also stops the bank from raising the price, and its own recovery, with its own money.
@@ -118,7 +130,7 @@ A workers' co-op can only use these rules if someone lends it the money in time,
 
 - **Lenders get back less when a co-op fails.** The whole business can only go to a co-op, so it may sell for less than on the open market. Lenders who lend after the lock is registered know that, and they'll charge for it, in higher rates or more collateral.
 - **The bank bears it first.** The bank is usually the biggest lender, so the pilot publishes its recovery rate on failed loans ([The Pilot, in Numbers](pilot-spec.md#what-gets-measured)). That shows what the lock costs.
-- **The federation fund bears the rest.** Creditors who never chose to lend are paid the lock's cost from the fund. That's a real call on money the co-ops put in.
+- **The federation fund bears the rest.** Creditors who never chose to lend are paid the lock's cost from the fund. Most failures cost it nothing, but a single case with a large uninsured claim could cost it hundreds of thousands of dollars or more, until the co-op that bought the business pays it back. That's a real call on money the co-ops put in.
 - **Other lenders may lend less, or not at all.** Some banks will refuse locked co-ops, or lend only against equipment they can take back. Lenders willing to fund a failing co-op through a rescue may be harder to find, because they can't sell the business to anyone. That's a real cost, and it's part of why the model needs its own bank.
 - **Workers' claims come ahead of other creditors when workers bid.** That's a choice to favor keeping a business running in its workers' hands. It's capped per worker, and it's paid for by other creditors.
 - **Low-paid workers bring less of their own to the bid.** Their unpaid wages are mostly the legal minimum, which is paid in cash rather than handed over, so more of the bid rests on the pool's claims and on better-paid workers' claims. Whether the rule is needed at all depends on a legal question nobody has tested: whether a worker can freely hand over a wage claim at full value.

JoshHeaps.Net/Content/Socialism/open-problems.md

@@ -15,7 +15,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.
 
 3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and US closure and default rates: at least 0.25% of payroll for final wages, and probably 2% to 3% a year of covered savings, which takes nearly all the interest on a protected slice. The reserve target is sized for a five-year wave of failures like 2008–2012, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws. Also open: an account paid out when a member leaves would probably be a pension plan under federal law, which would forbid the co-op from using the money. So accounts now pay each year's credit back on a fixed schedule of three to seven years, whether or not the member has left. That's designed to stay outside pension law, but it isn't settled until the Labor Department answers, and federal appeals courts weigh programs like it differently. Because nobody loses their account for leaving, much of what's paid goes to people who've left, which weakens the case. So co-ops where more than a third of payouts go to people no longer working there shorten the wait, then stop making new credits, and credits taxed only when paid wait for the Department ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)). In high-turnover work, that almost always means no accounts, so the lowest-paid members lose the savings the model promises them. An ordinary retirement plan outside the business, with the co-op adding 3% of wages for everyone and, from 2027, a federal match for low earners, makes up part of that ([Member Capital Accounts](capital-accounts.md#saving-for-retirement)). It gives up the trust, disclosure and fiduciary rules that pension law would bring, which the model only partly replaces, and it leaves the co-op less of its members' money to invest for the long run. State wage laws are a second risk: in some states, California likely among them, a credit in a member's account could count as wages, which can't be held back, charged with losses or paused. Co-ops in those states don't use accounts until the state changes its law ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), so members there build no savings in the co-op. A third: account credits look like the notes the Supreme Court has held to be securities, so the model keeps members from putting money in and asks the SEC for an answer ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)). If the answer is no, the nearest exemption means calling credits pay, which works against the model's positions on tax, pension and wage law.
 
-4. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. [When a Locked Co-op Goes Bankrupt](bankruptcy.md) drafts that amendment. It's modeled on how bankruptcy law already treats charities. Only co-ops can buy a failed co-op whole, its workers can keep it running and bid with the wages they're owed, and creditors who never chose to lend are paid the lock's cost from the federation fund. The bank lends toward a workers' bid only up to what the assets would bring sold off piece by piece, so the rest has to come from the workers' claims, the insurance pool or patient money from the federation, and a failed firm often won't find it. It still needs Congress, a later Congress can repeal it, and while the co-op sector is small, some viable businesses will be broken up for lack of a co-op buyer. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.
+4. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. [When a Locked Co-op Goes Bankrupt](bankruptcy.md) drafts that amendment. It's modeled on how bankruptcy law already treats charities. Only co-ops can buy a failed co-op whole, its workers can keep it running and bid with the wages they're owed, and creditors who never chose to lend are paid the lock's cost from the federation fund, which the co-op that buys the business repays. That cost is usually nothing but can be large, and nobody has measured how often. The bank lends toward a workers' bid only up to what the assets would bring sold off piece by piece, so the rest has to come from the workers' claims, the insurance pool or patient money from the federation, and a failed firm often won't find it. It still needs Congress, a later Congress can repeal it, and while the co-op sector is small, some viable businesses will be broken up for lack of a co-op buyer. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.
 
 5. **Scale.** *(Partly answered.)* Even a total success at pilot scale leaves most workers in conventional firms. The labor-market effect needs a sector large enough to move wages, and nobody knows how long growth to that size takes, if it happens at all. That's the price of not forcing it. [After a Pass: How Big, How Fast](scale.md) works through the numbers: even growing at twice the recent pace every year, co-ops would take about 19 years to reach 1% of today's private jobs. Growth after a pass comes in capped stages sized to demand the reviewers certify, and the labor-market effect gets its own test, by lottery, in local markets where co-ops could become a large share of one kind of work. Still open: the closest evidence cuts both ways (big retailers paying more didn't lift other employers' pay; hospitals hiring nurses did), and co-ops may never become a big enough share anywhere to find out. A first-draft power calculation from public pay records ([The numbers, in a first draft](scale.md#the-numbers-in-a-first-draft)) says the local test could only see an effect of about 5% of pay, bigger than the union evidence suggests a 10% co-op share could produce. So on public numbers the test fails its own rule and wouldn't run. Unless better records change that, the labor-market effect may stay untested. And as a way to raise pay across a whole kind of work, wage boards are faster, more direct and cheaper for the government's budget, though their effect on jobs is disputed ([Compared with wage boards and unions](scale.md#compared-with-wage-boards-and-unions)). The labor-market effect isn't a reason to prefer co-ops for that job.