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title, section, order, summary

title	section	order	summary
When a Locked Co-op Goes Bankrupt	The Co-op	31	Federal bankruptcy law would override the lock, so a failed co-op could be sold whole to anyone, and this page lays out the amendment Congress would need to pass, modeled on how it already treats charities, along with what it costs creditors and how workers get a real chance to buy.

When a Locked Co-op Goes Bankrupt

The lock says a co-op funded by the bank can never be sold to conventional owners. That holds while the co-op is healthy. It can break at the worst moment, when the co-op fails and a bankruptcy court takes charge of what's left.

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).
• 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

When a business files for bankruptcy, everything it owns goes into a pool the court controls, called the estate, and is used to pay creditors as much as possible. There are three main routes:

• Liquidation (Chapter 7). A trustee sells what the business owns and pays creditors in order of priority. The trustee can keep the business running for a limited time if that helps sell it (11 U.S.C. § 721).
• Reorganization (Chapter 11). The business keeps running under a plan the court approves. Debts are cut or stretched out, and ownership often passes to creditors. Under the absolute priority rule, if a group of creditors votes against the plan, the old owners can't keep anything until those creditors are paid in full (11 U.S.C. § 1129(b)(2)(B)).
• Small-business reorganization (Subchapter V). A faster version of Chapter 11 for businesses owing no more than $3,424,000 (11 U.S.C. §§ 1182(1) and 101(51D), as adjusted in 2025). Here the absolute priority rule doesn't apply. If creditors don't agree to the plan, the owners can still keep the business by paying creditors all of its projected disposable income, what's left after the costs of running it, for three to five years (11 U.S.C. § 1191). Most locked co-ops would fit under that limit.

The lock can fail in four places:

1. The estate ignores limits on selling. The Bankruptcy Code says a business's property goes into the estate "notwithstanding any provision" in an agreement or in state law "that restricts or conditions transfer" of it (11 U.S.C. § 541(c)(1)). The lock is exactly that kind of provision.
2. The court can sell everything, "free and clear." A trustee can sell the estate's property outside the ordinary course of business, free and clear of other people's interests in it (11 U.S.C. § 363(b) and (f)). A court could treat the lock-holder's rights as one of those interests and pay them off in cash. In practice, a failed business usually goes to the highest bidder.
3. A reorganization plan can hand the firm over. A plan can sell the business, merge it or rewrite its charter "notwithstanding any otherwise applicable nonbankruptcy law" (11 U.S.C. § 1123(a)(5)). A standard plan cancels the old ownership and issues new shares to creditors. The Code also requires the reorganized company's charter to ban shares that carry no vote (§ 1123(a)(6)), while this model relies on outside money that carries no vote (Capital, After).
4. A lender can sell without going to court at all. A lender with a claim on all of a business's assets can sell them, or take them, after a default under state law (UCC § 9-610). No bankruptcy is needed.

So without a change in the law, a failed co-op's whole business could be bought by a conventional company. The lock would protect only healthy co-ops, which need it least.

What Congress already does for charities

Congress already keeps some organizations' property dedicated to its purpose in bankruptcy. The way it does it is simple: the Bankruptcy Code steps back and lets the ordinary law that governs those organizations decide.

• A charity's property can go to a non-charity "only under the same conditions as would apply if the debtor had not filed" for bankruptcy (11 U.S.C. § 541(f)). This covers tax-exempt charities.
• Court-approved sales by a nonprofit corporation must follow the law that governs its transfers outside bankruptcy (§ 363(d)(1)), and so must transfers under its reorganization plan (§ 1129(a)(16)). These three rules were added in 2005.
• Since 1978, creditors can't force a nonprofit into bankruptcy (§ 303(a)), and a court can't turn its reorganization into a liquidation unless it asks (§ 1112(c)).
• Also since 1978, valid limits on transferring a person's interest in a trust hold in bankruptcy (§ 541(c)(2)). That rule keeps some assets away from creditors, so it's a precedent for protecting a purpose at creditors' expense, not a neutral one.

A locked co-op isn't a charity. It's a business that makes and shares profits. The comparison is narrower: in both cases, assets are meant to stay dedicated to a purpose, not sold for private gain. So the amendment copies the technique: the Code defers to the law that governs locked co-ops, and that law, the bank's statute, says what can be sold to whom.

Is it constitutional? Bankruptcy laws must be "uniform." In 1982 the Supreme Court struck down a law written for the workers of one bankrupt railroad, calling it "nothing more than a private bill." But it said a bankruptcy law must "apply uniformly to a defined class of debtors," and that its ruling didn't impair Congress's ability "to define classes of debtors and to structure relief accordingly" (Railway Labor Executives' Ass'n v. Gibbons, 455 U.S. 457). A rule for every locked co-op, defined by what it is and not by name, is that kind of class. The parts that reach sales outside bankruptcy (point 9 below) rest on Congress's power over interstate commerce instead.

What the amendment does

Who it covers

1. Every locked co-op on the federal register. The bank's statute sets up a public register of locked co-ops. A co-op is covered while its lock is on the register. The register decides the question. A notice in the state filing system lenders already search (a UCC financing statement) points to it, but if that notice lapses, the co-op stays locked.

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).

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). Most small businesses that try to reorganize are liquidated in the end (Morrison, 2007). 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. 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).

What can be sold, and to whom

4. The Code defers to the lock. In every chapter, and in plan sales too, the lock's limits hold. The estate takes the co-op's property subject to them. A sale "free and clear" can't strip them. The lock agreements can't be rejected as ordinary contracts. And no plan can override them. The detailed sale rules live in the bank's statute, as the rules for charities live in state law.

5. Workers can keep the business running while it's sold. Argentina changed its bankruptcy law in 2011 to do this. The trustee must report within 20 days on whether the business can keep operating. Workers making up two-thirds of the staff can ask to run it as a co-op while the case goes on, with a plan due within 20 days. The judge decides, and sets a time limit that can be extended once (Law 26.684, amending articles 190 and 191 of the bankruptcy law). The amendment adapts this: workers can ask to run the business as a new co-op, under court supervision, while it's up for sale.

6. The whole business goes only to a qualified co-op.

• A qualified bidder is a locked co-op whose members do at least three-quarters of its work hours, and whose outside money meets the limits in Capital, After: no vote, at most 15 years. A co-op formed by the failed co-op's own workers qualifies from the start. So does the federation. A shell set up by a conventional company doesn't.
• The minimum price is what the assets would bring sold off piece by piece, set by an appraiser the court appoints. A higher floor, like the full value of a running business, could stop any co-op from buying and force a breakup, which is worse for workers and creditors both. The co-op bidders compete in open bidding, so the price is usually higher than the floor.
• 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 (The Lock). In a reorganization where the members are running the case and also bidding, an independent officer runs the sale.
• The time limit is 90 days from when the sale is announced, or from when the workers' co-op files its plan, whichever is later. The court can extend it once if a qualified bidder is lining up financing.

7. Workers can pay with what they're owed. A secured lender can already bid using its claim instead of cash (§ 363(k)). Argentina lets workers do the same: a workers' co-op can count the wage and severance claims its workers voluntarily hand over toward the price, at their full amount, and the handover happens at a hearing before the judge (Law 26.684, article 27, adding article 203 bis). The amendment does this too, within limits:

• Only claims workers choose to hand over, in writing. Workers who don't join the new co-op keep their claims.
• At full value, up to the amounts bankruptcy law already puts first: unpaid wages and benefit contributions earned in the last 180 days, up to $17,150 per worker for wages (11 U.S.C. § 507(a)(4) and (a)(5)). That's a deliberate transfer from other creditors to workers, capped per person, as Argentina chose.
• The legal minimum is paid in cash, not handed over. Federal law requires minimum wage and overtime to be paid in cash or a cheque (29 CFR 531.27), "finally and unconditionally" (29 CFR 531.35), and workers can't waive them by private agreement (Brooklyn Savings Bank v. O'Neil, 1945). A stake in a new company isn't cash. Wage claims are bought and sold in bankruptcy, and handing one over at its full value isn't a discount, so this might be allowed. But the usual way a court blesses giving up wage claims is by approving a settlement of a real dispute over them (Lynn's Food Stores v. United States, 11th Cir. 1982), and there isn't one here. So the model doesn't rely on it.
  • The protected part is every unpaid hour at the highest minimum wage that applies, federal, state or local, plus all unpaid overtime at the worker's own overtime rate, taken from payroll records. For salaried staff whose hours weren't recorded, it's counted at 40 hours a week. Any damages the law adds for late wages stay with the worker.
  • Some states protect more. California bars employers from requiring a release of any wages due until they're paid, not just the minimum (Cal. Labor Code § 206.5), and no private agreement can get around its wage rules (§ 219). The bank's checked entry for each state (Owners Are Still Workers) says which wages can be handed over there. Where it's unclear, only severance and benefit contributions can be.
  • The pool pays first. The savings insurance pool pays up to eight weeks of each worker's unpaid wages in full, as it always does, and what it pays counts against the protected part first. Any protected wages beyond that stay the worker's own claim, and the court can't approve a bid that uses handed-over claims until the buyer has set aside cash to pay them.
  • Workers can hand over the rest: wages beyond what the pool paid that the protected part doesn't cover, benefit contributions and severance, within the cap above.
  • Handed-over claims buy savings, not votes. In the new co-op, they become credits in each worker's capital account. Votes stay one per member, so a manager with a larger claim doesn't get more say than an aide whose wages were paid by the pool.
• The insurance pool's claims count too. Normally, whoever pays a wage claim loses its priority (§ 507(d)). Without a fix, most low-paid workers' claims would be paid by the pool and couldn't be used to bid. So the pool keeps the priority, and when a qualified workers' co-op bids, it hands the claims it paid to that co-op for its bid. The new co-op repays the pool over time. Each worker's own claims use the $17,150 priority first, and the pool's claim for that worker only ranks after them.
• No last-minute claims. In the 180 days before filing, pay deferred by a vote, pay left unpaid for more than one normal pay period while others were being paid, and any increase in notice or severance terms rank as ordinary claims, not priority ones, and can't be used to bid.

8. If no qualified co-op buys it, the pieces go to anyone, but not the whole. No buyer, together with anyone financially tied to it, may end up with substantially all of the business. The brand, the core technology or the main customer contracts count as substantially all, whatever their size, as the lock already says. A buyer of the pieces who hires more than a third of the members within two years owes the difference between what it paid and what the running business was worth, as set by the court's appraiser. The sale order says so up front. That money goes to the co-op's creditors, not the federation fund.

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 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). The co-op opened in May 2013 (The Working World). 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, 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 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)). It can't rank ahead of an existing lender's lien without that lender's protection being shown (§ 364(d)). 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), 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). 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). 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). 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.

• Only working members hold votes. A plan can give creditors new debt, or voteless claims on the terms in Capital, After, 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), 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). 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)). 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).

Everything else

11. Former members are paid before current members. A former member's payout is a fixed debt the co-op owes (Member Capital Accounts). It ranks behind every other unsecured creditor, but ahead of current members' accounts. It isn't pushed down to the bottom as if it were a shareholder's claim (§ 510(b)). Anyone who left within a year before the failure has their balance recalculated first, as the insurance pool already does (Protecting Members' Savings).

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)). 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), and it's borrowing for the second-opinion rule. 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). 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, 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.

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). 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). 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)). 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)), 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

• 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). 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. 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.
• Some viable businesses will still be broken up. When no co-op can buy a failed co-op whole, a conventional buyer who would have kept it running and kept the jobs can't. While the co-op sector is small, this will happen. Whether to allow a conventional buyer as a last resort, with any surplus going to the federation fund, is an open question (Open Problems).

Draft text

For readers who want to see what this could look like in the statute, here is a first draft of the core Bankruptcy Code changes. The detailed sale rules (points 5 to 9) go in the bank's own statute. This is a starting point for lawyers, not finished legislation.

Sec. 101 (new definition). The term "locked cooperative" means an entity entered, as of the date of the filing of the petition, on the register of locked cooperatives kept under [the bank's authorizing act].

Sec. 541(g). Notwithstanding subsection (c)(1) and any other provision of this title, property held by a debtor that is a locked cooperative may be transferred only as permitted by the nonbankruptcy law governing locked cooperatives, as if the debtor had not filed a case under this title.

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.

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), 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

• 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).
• 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 make it much safer.
• 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.