4 changed files with 29 additions and 5 deletions
@@ -124,6 +124,28 @@ A workers' co-op can only use these rules if someone lends it the money in time,
 **12. The lock-holder can go to court, carefully.** The lock-holder can take part in the case. If the trustee declines to challenge a deal the co-op made with insiders before it failed, the lock-holder can ask the court's permission to challenge it, and pays the other side's costs if the court finds the challenge frivolous.
 **13. Leased equipment, licenses and sold invoices.** A co-op doesn't own what it leases or licenses, or the unpaid invoices it has sold to a lender (called factoring), so the lock can't hold them directly. A business that rents its shop, leases its machines and licenses its software could be taken apart by the people it rents from. So the lock sets terms for the things a co-op can't run without.
 - **In bankruptcy, many leases can go with the business.** The trustee can keep a lease and hand it to the buyer, even if the lease forbids transfers, as long as rent that's behind and the lessor's other money losses are made good and the buyer shows it can pay ([§ 365(b) and (f)](https://www.law.cornell.edu/uscode/text/11/365)). There are big exceptions. A commercial lease the landlord ended before the filing can't be revived. Where other law lets the other side refuse to deal with anyone new, as it usually does for patent, software, trademark and franchise licenses, the license can't be handed on without consent, and in several circuits the co-op can't even keep it (§ 365(c)(1)). Credit lines, including a factoring line, end at filing (§ 365(c)(2)).
 - **Deadlines are held open, and the user pays the rent.** In a liquidation, leases of equipment and other ongoing contracts count as ended if they aren't kept within 60 days (§ 365(d)(1)). A commercial property lease ends after 120 days, extendable once by 90, and after that only with the landlord's written consent (§ 365(d)(4)). The co-op sale can outlast those deadlines. So the amendment holds them open until the co-op sale ends, which has its own time limit (point 6). The rent in the meantime is paid by the workers' co-op running the business under point 5 if there is one, and otherwise by the federation fund, or the bank in the pilot, not by the other creditors. The lessor can still ask the court to protect its property from damage.
 - **Essential leases and licenses carry the lock's terms from the start.** The things a co-op can't run without are its premises, its main production equipment, the software that holds its customer and operating records, and its brand or franchise. Any lease or license of one of those has to:
  - consent in advance to being handed on to a locked co-op that takes over the business, including the workers' own new co-op under point 5, on the same terms and with no transfer fee or rent increase. The lessor must accept that co-op if the federation fund, or the bank in the pilot, guarantees its first 12 months of payments. Advance written consent is what the bankruptcy exception for licenses requires;
  - not let the lessor end it just because the co-op is insolvent or in bankruptcy, only for real default after notice and a chance to fix it;
  - for premises, give a co-op successor the same renewal rights the co-op had; for software, let the co-op export its own data in a usable form.
  The lock-holder checks these clauses when the lease is signed. Where the only supplier of something is a large firm that won't negotiate, like a mass-market software service, the lock-holder can waive the clauses if the co-op can move its data and switch to a comparable supplier. Some lessors will charge more for these terms, or refuse to deal.
 - **A sale-leaseback is a sale.** Selling something the co-op owns and leasing it back counts toward the lock's limit on selling a quarter of the business in three years ([The Lock](the-lock.md#closing-the-back-doors)), and it's borrowing for [the second-opinion rule](the-long-run.md#spending-it-badly). Selling and leasing back the premises or main equipment needs the lock-holder's consent, whatever its size, and the lease has to carry the terms above.
 - **Nobody can reassemble the business through the back door.** Point 8 already charges a buyer of the pieces who hires more than a third of the members within two years. The same goes for anyone who, within two years, gets the use of property the co-op leased, licensed or financed, by buying, leasing or licensing it, and runs the same business with more than a third of the co-op's former workforce, members or not, or takes over its main customer contracts. A lessor that re-leases to a new company is caught through that company. What's owed is the value of the running business, less the fair value of the property the payer already owned or paid for. In bankruptcy it goes to the creditors, as in point 8. Outside bankruptcy it goes to the federation fund, as the lock's matching rule says.
 - **A "lease" that's really a loan is the co-op's property.** If the co-op can't end the lease early and has to pay for the equipment's whole useful life, or can own it at the end for a token price, the law treats the deal as a loan secured on the equipment ([UCC § 1-203](https://www.law.cornell.edu/ucc/1/1-203)). Then the equipment is the co-op's, still subject to the lender's claim, and a lender's sale of it follows point 9. Lessors can easily write leases that stay on the right side of that test, so this catches only careless ones.
 - **Selling invoices is limited, not banned.** Selling invoices one at a time is a common way for small firms to get paid sooner, and it doesn't move the customers, workers or equipment. Some deals go further. A merchant cash advance buys a share of future sales, takes daily withdrawals from the bank account, and often comes with a blanket claim on everything the firm owns and a signed confession of judgment. So, as part of the lock, for as long as it lasts:
  - buying a share of future sales counts as outside money, on the terms in [Capital, After](capital.md), or as a loan;
  - a buyer of invoices can have a claim only on the invoices it bought, never on everything the co-op owns;
  - no confessions of judgment;
  - no clause barring the co-op's customers from dealing with a successor co-op.
  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.
 **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
@@ -146,6 +168,8 @@ For readers who want to see what this could look like in the statute, here is a
 >
 > **Sec. 363(q).** In a case in which the debtor is a locked cooperative, (1) the trustee may use, sell, or lease property under subsection (b) or (c), including under subsection (f), only in accordance with the nonbankruptcy law governing locked cooperatives; (2) the rights of a lock-holder under that law are not an interest that may be sold free and clear under subsection (f); and (3) section 365 does not permit rejection of any agreement required by that law.
 >
 > **Sec. 365(p) (new).** In a case in which the debtor is a locked cooperative, (1) no period under subsection (d)(1) or (d)(4) shall end before the close of any sale of the debtor's business under the nonbankruptcy law governing locked cooperatives, and the obligations of the debtor under such contract or lease arising during the extended period shall be paid as provided in that law and shall not be an administrative expense of the estate; and (2) consent given in a contract or lease to assignment to a locked cooperative that acquires the debtor's business is consent for purposes of subsection (c)(1)(B).
 >
 > **Sec. 507(d) (amended).** Insert at the end: "except that an insurance pool established under [the bank's authorizing act] that pays a claim of a kind specified in subsection (a)(4) or (a)(5) is subrogated to the holder's right to priority, but such priority is subordinate to any claim of the same individual under subsection (a)(4) or (a)(5) that the pool has not paid."
 >
 > **Sec. 1123(e).** Notwithstanding subsection (a), a plan for a debtor that is a locked cooperative (1) may not provide for any transfer of property, merger, consolidation, or amendment of the debtor's charter except as permitted by the nonbankruptcy law governing locked cooperatives; and (2) need not comply with subsection (a)(6) as to any nonvoting interest permitted by that law.
@@ -159,6 +183,6 @@ For readers who want to see what this could look like in the statute, here is a
 - **It needs Congress, and a later Congress can undo it.** The lock's other layers hold if the bank's law is repealed. This one doesn't ([Making It Last](durability.md)).
 - **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.
+- **Renting leaves the co-op exposed.** Essential leases and licenses have to allow a co-op successor (point 13), but a landlord can still refuse to renew when a lease runs out, and raise the rent to whatever the market will bear. A co-op that rents most of what it uses is paying a lot of its surplus to owners outside it, and nothing in the lock stops that. Only buying its premises and equipment does. The terms above will also make some lessors charge co-ops more, or refuse them, and mass-market software can't be made to follow them at all.
 - **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.
@@ -35,7 +35,7 @@ Mondragon's original split was similar: 10% to education and the community, at l
 The members' share is then split again, between cash now and the account:
- **At least 20% of it is paid in cash right away.** Members owe income tax on their whole allocation in the year it's made, including the part that goes into the account. The cash is there so they can pay that tax. This is how US co-op tax law works ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The default is half in cash.
+- **At least 20% of it is paid in cash right away.** Members owe income tax on their whole allocation in the year it's made, including the part that goes into the account. The cash is there so they can pay that tax. This is how the usual kind of co-op credit works under US tax law; a second kind, taxed only when paid out, is in [How a Locked Co-op Is Taxed](taxes.md#capital-accounts) ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The default is half in cash.
 - **Lower-income members can take it all in cash.** For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash, or the standard split, with nothing in between, so nobody chooses how much to invest. They choose before the year starts, and one low year doesn't qualify. All cash is the default, and like everyone they're signed up for a retirement plan outside the co-op ([below](#saving-for-retirement)). Once the Labor Department has answered on pension law, those who take the standard split won't be taxed on the account part until it's paid out ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)).
 - **The rest goes into each member's account.**
@@ -69,7 +69,7 @@ The lock stops a co-op being sold to conventional owners. It doesn't freeze it i
 A lock on the company is worthless if the business can walk out the side door. These rules are part of the lock itself, so they last as long as it does, not only while a bank loan is outstanding.
 - **Selling the business piece by piece counts as selling it.** If a co-op sells, leases or licenses more than a quarter of its assets or its revenue-producing business within any three years, counted together, that's treated as a sale of the business, and the lock share can veto it. The same goes for the brand, the core technology, or the main customer contracts, whatever their size.
- **Buying the assets and hiring the workers counts too.** If a buyer of the co-op's assets hires more than a third of its members within two years, the deal is treated as a sale of the whole business after the fact. The buyer owes the federation fund the difference between what it paid and the value of the business as a going concern. People are always free to change jobs. This rule makes a buyer pay full price for a whole business, even if it picks the business up in pieces.
+- **Buying the assets and hiring the workers counts too.** If a buyer of the co-op's assets hires more than a third of its members within two years, the deal is treated as a sale of the whole business after the fact. The buyer owes the federation fund the difference between what it paid and the value of the business as a going concern. The same goes for anyone who gets the use of what the co-op leased, licensed or financed and runs the same business with a third of its workers or its main customers. Leases and licenses of what a co-op can't run without carry the lock's terms too ([When a Locked Co-op Goes Bankrupt](bankruptcy.md#everything-else), point 13). People are always free to change jobs. This rule makes a buyer pay full price for a whole business, even if it picks the business up in pieces.
 - **Subsidiaries are covered.** Any company a locked co-op controls is also locked, and its workers are covered by the membership rule. Otherwise a co-op could grow through an ordinary subsidiary and then sell it. That's the pattern behind Mondragon's non-member foreign subsidiaries. How that works, including when a co-op buys a company, is [below](#when-a-co-op-owns-another-company).
 - **No outside control through the back door.** The limits in [Capital, After](capital.md) (outside claims last at most 15 years, rank behind lenders, and carry no vote) apply forever, not just while a bank loan is outstanding. No investor, lender, supplier or licensee can hold a veto over the co-op's budget, hiring or management. No contract can give one outside party an exclusive claim on most of what the co-op produces for longer than five years.
 - **Insiders can't drain it through contracts.** Rent, fees and prices paid to insiders are checked for as long as the lock lasts, not just while the bank's loan is outstanding ([below](#deals-with-insiders)).
@@ -122,7 +122,7 @@ That still leaves two real ways to run it down, and both come from how accountin
 There's no fair way to set how much every business should spend on upkeep, so this model doesn't try. Instead there's a warning light:
- **Every year, the co-op shows members how much it spent on new buildings and equipment**, including new leases, next to how much its existing ones wore out that year, adjusted for inflation.
+- **Every year, the co-op shows members how much it spent on new buildings and equipment**, including new leases and any unpaid invoices it has sold, next to how much its existing ones wore out that year, adjusted for inflation.
 - **If spending stays below wear for three years running, an independent inspector reports** on the condition of the main buildings and equipment. The lock-holder picks the inspector and the co-op pays. The report goes to every member, and to the bank if it's still owed money. After a buyout, buying the business puts its used equipment on the co-op's books at today's value, spread over the few years it has left, which makes it look like it's wearing out fast. So for the first five years, wear is measured on the seller's old book values instead. The upkeep the seller put off, which the [pre-sale check](buyouts.md#a-fair-price) already counts, is the starting point: spending that doesn't catch up on it counts as falling behind. A conversion without a sale doesn't re-value anything, so nothing changes for it.
 - **A co-op that's shrinking on purpose,** because its market is, says so in a written plan its members vote on. That's a warning light, not a spending order.
@@ -139,7 +139,7 @@ The danger is real, but reserve money isn't free to members.
 The risks that remain are the ones Fagor shows: big bets that members can't judge, losses that show up after the people who voted have left, and help from other co-ops that keeps a failing business going. So:
- **A second opinion on big commitments.** Some commitments need an independent written opinion before members vote: a single investment, a purchase of another business, or borrowing, including leases and guarantees, bigger than a quarter of the co-op's own capital (its reserve plus members' accounts) or $250,000, whichever is larger. Anything bigger than the co-op's whole capital needs one too, if it's over $50,000. So does buying any business for more than $350,000, the price above which the SBA requires an independent valuation before it backs a loan to buy a business ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)). The SBA rule protects a lender's price, not members' judgment, but it marks where a purchase is big enough to need an outside look. Related commitments within three years are added together, and the dollar figures rise with inflation. An outside opinion can easily cost thousands of dollars, so for commitments under $250,000 the federation's staff can give it for a flat fee, and the federation's fund pays that fee for co-ops with less than $250,000 of their own capital. The lock-holder picks the adviser from an approved list, and the co-op pays. A lender to the project can't give the opinion. The opinion comes with a one-page plain summary, including what the plan means for members' jobs, and there's a members' meeting to ask questions before the vote. It's advice, not a veto. The co-op publishes it with the result of the vote, and three years later reports how the project did against the plan. Replacing worn-out equipment like for like, and loans the bank has already checked, don't need it, except for buying a business. [Spin-offs](growth.md) get a similar opinion at a lower threshold.
+- **A second opinion on big commitments.** Some commitments need an independent written opinion before members vote: a single investment, a purchase of another business, or borrowing, including leases, guarantees and selling unpaid invoices, bigger than a quarter of the co-op's own capital (its reserve plus members' accounts) or $250,000, whichever is larger. Anything bigger than the co-op's whole capital needs one too, if it's over $50,000. So does buying any business for more than $350,000, the price above which the SBA requires an independent valuation before it backs a loan to buy a business ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)). The SBA rule protects a lender's price, not members' judgment, but it marks where a purchase is big enough to need an outside look. Related commitments within three years are added together, and the dollar figures rise with inflation. An outside opinion can easily cost thousands of dollars, so for commitments under $250,000 the federation's staff can give it for a flat fee, and the federation's fund pays that fee for co-ops with less than $250,000 of their own capital. The lock-holder picks the adviser from an approved list, and the co-op pays. A lender to the project can't give the opinion. The opinion comes with a one-page plain summary, including what the plan means for members' jobs, and there's a members' meeting to ask questions before the vote. It's advice, not a veto. The co-op publishes it with the result of the vote, and three years later reports how the project did against the plan. Replacing worn-out equipment like for like, and loans the bank has already checked, don't need it, except for buying a business. [Spin-offs](growth.md) get a similar opinion at a lower threshold.
 - **Losing parts of the business are visible.** Where a co-op has separate lines of business, each one reports its own results to members every year ([Does Sharing the Profit Mean Less Effort?](free-riding.md#small-teams-open-books)). A line losing money for years can't hide inside the total.
 - **A board that can follow the plans.** The federation offers training in reading the accounts, on paid time and open to every member, not just the board. The standard bylaws let members elect outside directors, from other co-ops or with business experience, but never more than a quarter of the board. The members choose them and can remove them.
 - **Limits on propping up a firm, decided in advance.** The [federation's fund](federation.md) helps a co-op through a bad year. Help to keep a firm going comes with a recovery plan and a limit set before any crisis, and cuts to members' pay or jobs in that plan need the members' vote. Help for the *workers*, like finding them jobs in other co-ops if the firm closes, has no such limit. Mondragon kept supporting Fagor and then said no. It's better to agree on where the line is before anyone's firm is on the wrong side of it.