Socialism: say how a workers' bid for a failed co-op gets paid for, cap the bank's part at the break-up value so it can't hide its losses, and set the insurance pool's repayment terms

Co-Authored-By: Claude Opus 5.5 <[email protected]> Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx
2026-09-27 00:20:24 -06:00
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@@ -85,6 +85,18 @@ A locked co-op isn't a charity. It's a business that makes and shares profits. T
 **9. Lenders can't sell around it outside court either.** The same rules apply to any transfer of substantially all of a locked co-op's assets because it can't pay its debts: a lender's sale or taking of its collateral, a state receivership, an assignment for the benefit of creditors, or a tax sale. The [model state law](lock-state-law.md#what-the-model-law-does) writes these rules into state law too, and adds that a sale following these rules counts as "commercially reasonable" under the UCC, so lenders aren't penalized for following them.
 ### Paying for the workers' bid
 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.
 - **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.
 - **The same offer to every qualified bidder,** in writing. If the bank turns a bid down, it gives its reasons to the workers and the court. When two qualified bids are equal, the one whose members include more of the failed co-op's workers wins. People who managed the failed co-op in its last two years can join as members, but the bank won't lend to a bid they lead.
 - **Counted in the bank's record.** Nobody who worked on the failed co-op's loans decides on the new one. The failed co-op counts as closed ([Keeping zombies alive](pilot-safeguards.md#keeping-zombies-alive)). The failed loan's recovery counts only money that didn't come from the bank, and the new loan is reported together with it, as one lending decision. Any loss on the new loan in its first five years is added to the failed loan's loss, in the published recovery rate and in the losses that can stop the bank's lending ([The Pilot, in Numbers](pilot-spec.md#the-decision-rule)). So lending the workers the money to buy a failed co-op can't hide a loss.
 - **Repaying the insurance pool.** The pool chooses whether to hand over the wage claims it paid (point 7), under a test it publishes in advance. If it does, the new co-op owes it that amount at the one-year Treasury rate plus two points, the rate members' accounts earn, secured by a lien behind the bank's. That's below what a lender would charge a restarted business, a subsidy from the other co-ops' premiums, and it's stated as one. The co-op repays within ten years, which the pool can extend once. Each year's payment comes before any pay above the going rate and before any profit share paid in cash beyond what members need for tax.
 ### When the co-op reorganizes
 **10. A reorganized co-op stays a co-op, and creditors are treated as they would be anyway.**
@@ -136,5 +148,5 @@ For readers who want to see what this could look like in the statute, here is a
 - **Courts will test it.** Treating membership as something other than property the owners keep is new in bankruptcy law. The draft ties it to paying dissenting creditors full open-market value, which answers the fairness point, but the first cases will still be fought.
 - **Reaching lenders' sales outside court is a federal reach into state law.** It rests on Congress's power over commerce, not bankruptcy, and it will be challenged. States that adopt the [model law](lock-state-law.md#what-the-model-law-does) make it much safer.
 - **Lenders can route around it.** A co-op that leases its equipment, or sells its unpaid invoices to a lender, doesn't own those assets, so the lock doesn't cover them. Co-ops already report new leases to their members ([Investing for the Long Run](the-long-run.md#running-it-down)). How much of a co-op's business can sit outside the lock this way isn't limited.
- **Workers still have to find the money fast.** Keeping the business running and counting workers' claims toward the price help. But a new co-op still needs a lender within a few months, and whether the bank or federation will stand ready isn't settled.
+- **The money only comes if the numbers work.** Many businesses fail because they can't pay their way, and a lower price doesn't always fix that. The bank lends only up to what the assets would bring sold off, so the rest has to come from patient money. In the pilot's early years there's no federation fund to provide it, and where nobody does, the business is sold in pieces. And the bank, usually the biggest lender to the failed co-op, also decides whether to lend to its workers' bid. The rules above keep those decisions apart. They can't make the bank neutral about its own losses.
 - **The register has to exist and be trusted.** It's a new federal job, and every lender to a co-op will have to check it.
@@ -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. 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. 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.