Socialism: make whoever carries on a failed co-op's business answer for people its products hurt later, honor warranties and household deposits, and put members' plans to keep a co-op through a market test

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

JoshHeaps.Net/Content/Socialism/bankruptcy.md

@@ -116,6 +116,7 @@ A workers' co-op can only use these rules if someone lends it the money in time,
 - **Only working members hold votes.** A plan can give creditors new debt, or voteless claims on the terms in [Capital, After](capital.md), but never ownership, and no loan terms giving a lender approval over the co-op's management or strategy. The rule requiring a ban on voteless shares doesn't apply.
 - **Small co-ops follow the ordinary small-business rule.** In Subchapter V, owners of any small business can keep it by paying creditors all of its disposable income for three to five years. A co-op gets the same deal, no better. To stop members shrinking that income by paying themselves more, disposable income is worked out with members' pay at the going rate ([Investing for the Long Run](the-long-run.md#the-rules)), and raises in the two years before filing are reversed.
 - **Larger co-ops pay creditors the business's full value.** If a group of creditors votes against the plan, they must get at least what the business would sell for on the open market, as if the lock didn't exist, in cash, new debt or voteless claims. That's what the absolute priority rule protects in any company. Members can keep a co-op they can't sell, but not at their creditors' expense.
+- **That value is tested, not just appraised.** The Supreme Court held in 1999 that owners can't keep a business over a creditor group's objection through a deal nobody else could compete for, because "the best way to determine value is exposure to a market" ([*Bank of America v. 203 North LaSalle Street Partnership*](https://www.law.cornell.edu/supremecourt/text/526/434)). It left open what kind of market test is enough. Here the test is weaker than a real one, because a conventional buyer can never win. So when members propose to keep a co-op over a creditor group's objection, the court picks the appraiser, as in point 3, and invites offers for the business. Offers have to be in binding form, with a deposit the offeror loses if the offer turns out to be unfinanced or is withdrawn, and creditors and anyone tied to them can't make them. The fund pays reasonable costs of checking out the business to offerors who make one. The highest such offer sets the floor. If none comes in, the floor is the higher of the two appraisals. Any creditor can also propose a competing plan, including a sale to another qualified co-op, and the members lose their exclusive right to propose a plan. Whether that satisfies the courts is untested. Small co-ops under Subchapter V aren't affected: the absolute priority rule doesn't apply there, and only the debtor can propose a plan ([§ 1181(a)](https://www.law.cornell.edu/uscode/text/11/1181)). That's also a way around the test, so a co-op facing injury claims above its yearly sales can't use Subchapter V.
 - **Members' own accounts go first.** What members have in their capital accounts is wiped out before creditors lose anything. Members were taxed each year on those allocations, so this is a real loss, and it's the cost of being an owner ([Member Capital Accounts](capital-accounts.md#protecting-the-co-op-and-the-people-who-stay)).
 
 ### Everything else
@@ -146,6 +147,20 @@ A workers' co-op can only use these rules if someone lends it the money in time,
   Selling invoices counts as borrowing for the second-opinion rule, and it's reported to members each year alongside new leases. While the co-op owes the bank, it needs the bank's consent, which is given automatically while the invoices sold and not yet collected are under a tenth of a year's sales.
 - **It's measured.** The pilot publishes how much of its co-ops' premises, equipment and software is leased or licensed, what the rent costs as a share of what the co-op produces, and how concentrated the lessors are, so if this becomes a way around the lock, it shows.
 
+**14. Customers and people hurt later.** A buyer of a bankrupt business usually takes it "free and clear" of the old company's debts. That's the ordinary rule, not the lock's. But a workers' co-op that buys a failed co-op is often the same people, making the same things under the same name. Outside bankruptcy, state law can make a buyer answer for the seller's debts when it's a "mere continuation" of the seller, and a few states, like California, make a buyer that carries on the same product line answer for injuries from the seller's products ([*Ray v. Alad Corp.*, 1977](https://static.case.law/cal-3d/19/cases/0022-01.json)). How far a bankruptcy sale cuts those claims off is unsettled for people who are hurt only after the sale. When GM was sold in 2009, the appeals court later held that the sale order couldn't bind people who bought used Old GM cars after the sale, since they'd had no dealings with Old GM ([*In re Motors Liquidation Co.*, 2d Cir. 2016](https://cases.justia.com/federal/appellate-courts/ca2/15-2844/15-2844-2016-07-13.pdf)). Points 3 and 6 already stop members from using a failure to shed claims people have now: the fund pays the covered creditors what the lock cost them, and the new co-op pays the fund back. This point covers the people who aren't in the case yet.
+
+- **Whoever carries on the business takes on a minimum.** GM's buyer agreed to answer for accidents after the sale, to make repairs under the old company's written warranties, and to answer for lemon-law claims. That was a negotiated deal, under political pressure, and most buyers in bankruptcy sales don't take on injury claims. The lock requires it. These obligations bind a co-op that buys the whole business under point 6, a co-op whose members keep it through a plan under point 10 or Subchapter V, and anyone caught by the back-door rules in points 8 and 13, in court or out of it:
+  - injuries after the sale caused by products the old co-op made or work it did. In a plan, these aren't wiped out by the discharge;
+  - repairs or replacements under the old co-op's written warranties. Money claims for breaches before the sale stay in the case;
+  - household customers' deposits for things not yet delivered: the business delivers, or refunds the deposit, up to the amount bankruptcy law already puts ahead of other unsecured claims per person ([§ 507(a)(7)](https://www.law.cornell.edu/uscode/text/11/507)). A delivery or refund cancels that customer's claim in the case and any payment for it under point 3, so nobody is paid twice. Business customers' deposits stay in the case.
+
+  These are a minimum. The amendment doesn't cut off any claim against a buyer that state law would allow.
+- **Who pays for it.** In a sale, these come on top of the cash price, which still has to meet the floor in point 6, so the bidders price them in. In point 3's comparison, the open-market sale carries only what the appraiser finds buyers usually take on in such sales, like warranty repairs and deposits, not future injuries. So protecting people hurt later doesn't shrink what the fund pays people hurt already. The bank's bid lending counts the estimated cost too.
+- **Insurance carries most of it.** Injuries from the old co-op's products and completed work have to be insured, on the terms the payer sets for all co-ops (point 3). The estate can buy that cover, called tail or discontinued-products insurance, before creditors are paid, or the buyer can. Where nobody sells it at a sane price, the buyer sets aside a reserve from its profit instead, sized by the representative below and backed by the federation fund.
+- **The limits.** Beyond insurance, what the lock requires lasts ten years after the sale or the state's own limit on product suits, whichever is longer. It's capped, in total for all such claims, at the business's open-market value found under point 3. There's no cap or time limit where insiders hid a defect they knew about, or where a known claimant didn't get notice. If the new co-op is later sold, the next buyer takes on what's left.
+- **Someone speaks for people who aren't hurt yet.** Where the old co-op built, made or handled something that could injure people years later, like buildings, machinery, food or chemicals, the court appoints a representative for future claimants. The idea is borrowed from asbestos cases ([§ 524(g)(4)(B)(i)](https://www.law.cornell.edu/uscode/text/11/524)), where the representative's job is bargaining over a trust. Here it's narrower: the representative can object to the sale, the plan, the insurance, the reserve and the value. Known claimants get notice by mail, not just by publication. The GM ruling held that people the old company knew or should have known about, and who didn't get real notice, weren't bound by the sale.
+- **Outside bankruptcy, state law still applies.** When a lender sells a failed co-op under point 9, there's no court order cutting off old debts, and state successor-liability law applies in full, on top of the minimum above. It's one more reason a workers' bid will usually go through the court.
+
 **What it doesn't do.** Unlike charities, locked co-ops *can* be forced into bankruptcy by their creditors, and a failed reorganization *can* be turned into a liquidation. A business that can't pay its debts shouldn't be able to shelter behind the lock. The amendment only decides who can buy it, not whether it can fail.
 
 ## What it costs, and who pays
@@ -176,7 +191,11 @@ For readers who want to see what this could look like in the statute, here is a
 >
 > **Sec. 1129(a)(17).** If the debtor is a locked cooperative, (A) all transfers of property under the plan are made in accordance with the nonbankruptcy law governing locked cooperatives; and (B) no equity security carrying voting power is issued to any entity other than members who work for the reorganized debtor.
 >
-> **Sec. 1129(b)(2)(B)(iii).** In a case in which the debtor is a locked cooperative, membership in the reorganized debtor held by persons who work for it is not property received or retained on account of a junior interest, if each holder of a claim of the class receives or retains under the plan property of a value, as of the effective date of the plan, not less than the amount such holder would receive if all of the debtor's property were sold as a going concern without regard to section 541(g).
+> **Sec. 1129(b)(2)(B)(iii).** In a case in which the debtor is a locked cooperative, membership in the reorganized debtor held by persons who work for it is not property received or retained on account of a junior interest, if each holder of a claim of the class receives or retains under the plan property of a value, as of the effective date of the plan, not less than the amount such holder would receive if all of the debtor's property were sold as a going concern without regard to section 541(g), as determined under the nonbankruptcy law governing locked cooperatives after the court has invited binding offers for the debtor's business and has permitted any party in interest to file a competing plan, and not less than the highest such offer.
+>
+> **Sec. 1121(f) (new).** In a case in which the debtor is a locked cooperative, if the debtor files a plan under which members retain membership over the objection of an impaired class, any party in interest may file a plan.
+>
+> **Sec. 1182(1) (amended).** Insert at the end: "A locked cooperative is not a debtor under this subchapter if unliquidated claims for personal injury or wrongful death against it exceed its gross receipts for the preceding year."
 
 ## What this doesn't solve
 

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, 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.
+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. Whoever carries on the business, including members who keep it through a reorganization, takes on injuries from the old co-op's products, its warranties and household customers' deposits. When members keep a co-op over creditors' objections, the value faces a market test, though a weak one, since a conventional offeror can never win. 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.
 

JoshHeaps.Net/Content/Socialism/the-lock.md

@@ -134,7 +134,8 @@ Argentina changed its bankruptcy law in 2011 so that when a firm fails, its work
 - **Workers can keep it running while it's sold,** and count the unpaid wages they choose to hand over toward their bid, up to the amounts bankruptcy law already puts first. The legal minimum wage and overtime aren't handed over. The savings insurance pool pays them in cash first, up to eight weeks.
 - **No buying back your own failure cheaply.** People who managed the co-op in the two years before it failed can't get bank financing to buy it back.
 - **If no co-op buys it**, the assets are sold off separately to anyone. But no single buyer and its related companies may assemble enough of the pieces to add up to the business.
-- **A reorganization can't hand over control.** If a locked co-op reorganizes in bankruptcy instead of closing, the plan can't give voting shares to anyone but members. Creditors who vote against the plan still get what the business would be worth on the open market.
+- **A reorganization can't hand over control.** If a locked co-op reorganizes in bankruptcy instead of closing, the plan can't give voting shares to anyone but members. Creditors who vote against the plan still get what the business would be worth on the open market. That value is tested by inviting outside offers, not just appraised.
+- **The buyer answers for the old co-op's products.** A co-op that buys the business takes on injuries from what the old co-op made, its warranty repairs and customers' deposits. So does a co-op whose members keep it through a reorganization.
 
 **This does cost creditors something.** When only co-ops can bid on the whole business, the price may be lower than an open auction would fetch, and lenders will charge for that risk. Creditors who never chose to lend, like people the co-op injured, are paid the difference from the federation fund. That's part of the lock's price (below).