Limited liability in a free market society...

[angelatc]

I am saying that only real human beings should be able to own things and they should bear responsibility for it. People should not be able to create imaginary people to take responsibility for them.

Why should you be able to take BP profit but not be liable for the damage they do in obtaining that profit?

BP had insurance, the value of the investment was reduced - settlements came out of his part of the profit. There wasn't even any malice. He did nothing to cause the accident. His personal assets should not be on the table.

[Danan]

In bankruptcy, lenders (bondholders, banks and vendors) get first dibs, after payroll obligations. Stockholders (owners) are last on the list of people who get anything.

I don't know about the American situatoin, but here the laws are really silly.

If you go bankrupt, you file for bankruptcy and get a guy assigned to you by a judge who earns quite a fortune out of your already failing business. Then you can make a plan, say every first level creditor gets 30%, everyone else nothing. If the majority of those creditors agree (or 2/3, I don't know exactly) it's over and you are debt-free. If not the process continues and judges, lawyers, etc. suck ever more money out of the company, decreasing the expected return for creditors ever more.

There's also a lot more to it, but basically creditors are getting forced into accepting ridiculously low quotas while debtors get a chance to be debt-free again relatively easy. That obviously makes it more interesting to amass huge amounts of debt.

I do understand that banks and other lenders calculate those regulations in when they lend out money, but still, it's pretty stupid imho.

[angelatc]

Good post. On this issue there are two things I would change, the first being a ZERO CONFLATION law. Corporate personhood, as it were, is never, ever to be confused with individual personhood, despite the fact that some rights, powers, privileges, etc., may be common to both. So to begin with:

1) Two entirely separate sets of laws: one for corporations, another for free and natural individuals. And ne'er the twain shall be conflated. You can NEVER have one law that applies to both. In such a case, there must be two separate laws, which would eliminate even the need for disambiguation.

We already have that. For example, SCOTUS has ruled that corporations can't donate directly to political campaigns. Corporations don't have the same right to privacy as individuals do. The legal threshold of justifying search and seizure of corporate property is much, much lower than it is for individuals. Taxation is different, licensing and reporting requirements are different....it goes on and on and on.

[angelatc]

I don't know about the American situatoin, but here the laws are really silly.

If you go bankrupt, you file for bankruptcy and get a guy assigned to you by a judge who earns quite a fortune out of your already failing business. Then you can make a plan, say every first level creditor gets 30%, everyone else nothing. If the majority of those creditors agree (or 2/3, I don't know exactly) it's over and you are debt-free. If not the process continues and judges, lawyers, etc. suck ever more money out of the company, decreasing the expected return for creditors ever more.

There's also a lot more to it, but basically creditors are getting forced into accepting ridiculously low quotas while debtors get a chance to be debt-free again relatively easy. That obviously makes it more interesting to amass huge amounts of debt.

I do understand that banks and other lenders calculate those regulations in when they lend out money, but still, it's pretty stupid imho.

It's much the same here. The corporate structure is such that a bankruptcy can flow relatively seamlessly through the system in most instances. Creditors do indeed fight over the assets, but unless the Obama exception comes into play, people generally know where they fall in the priority line.

Well, I don't think that anybody goes into business with the expectation that they will fail. Here in America, we don't have debtors prisons, and it's probably best for the system to flush out the bad debt quickly and move along.

[angelatc]

Now that I think about it, if we get rid of limited liability, why should the corporation be held responsible for the actions of the employees?

If a delivery driver has an accident, why should the company be held responsible for his actions, just because he happened to be driving one of their trucks? Why not sue him personally, and let the corporation off the hook?

[Bohner]

Now that I think about it, if we get rid of limited liability, why should the corporation be held responsible for the actions of the employees?

Even with LL, a corporation can STILL be held accountable for the actions of it's employees. It has more to do with the ability of the shareholders to screw over the people the corporate person owes money to during bankruptcy.

If a delivery driver has an accident, why should the company be held responsible for his actions, just because he happened to be driving one of their trucks? Why not sue him personally, and let the corporation off the hook?

The courts determine whether or not the corporation bears any responsibility. This has nothing to do with LL unless it causes the corporation to go bankrupt.

[Acala]

Now that I think about it, if we get rid of limited liability, why should the corporation be held responsible for the actions of the employees?

If a delivery driver has an accident, why should the company be held responsible for his actions, just because he happened to be driving one of their trucks? Why not sue him personally, and let the corporation off the hook?

I agree. Unless the employer was the proximate cause of the harm, the employer should not have to pay. But a court-made legal doctrine called respondeat superior holds employers liable for the acts of employees while on company business. But that doesn't mean you CAN'T sue the employee. Nobody does because they typically don't have any money.

[Acala]

Angelatc's argument about insurance is a good one and deserves more comment.

If the corporation has insurance, the current shareholders are paying for it and, therefore, paying for any damage that is covered by that insurance even though they are not directly liable. Of course not all corporations carry insurance and not all injuries are covered by insurance. But there is another problem. I'll give an example based on the real world.

Publicly owned Corporation X operates a missile factory. It has been operating since 1985. From 1985 to 1995 some of its employees, under direction from the plant manager, dumped spent solvents into a French drain out in the back of the facility rather than paying to have the solvent recycled or properly incinerated. During that time period, the shareholders of Corporation X enjoyed slightly increased profits due to the short cut taken in solvent disposal. But they also had a slightly decreased profit due to paying premiums on a Comprehensive General Liability (CGL) insurance policy.

Now suppose the solvent entered the aquifer and, over a period of ten years, migrated a few hundred yards where it crossed a property boundary and contaminated a drinking water well owned by a neighbor, making it unfit for use. It is now 2005. The neighbor comes to Corporation X and says "You need to pay me for the damage you have caused me." Corporation X says "Let's tender the claim to our insurance carrier!"

If the insurance carrier pays, then everything is hunky dory. But the insurance carrier refers Corporation X to the absolute pollution exclusion that has been contained in virtually every CGL policy in the USA since 1985. (Any corporation you own stock in has no pollution coverage unless they have purchased, potentially at great expense, additional coverage. Chances are they have not.)

So, Corporation X, after wasting a bunch of money consulting its lawyers, says to the neighbor "Fine, here's a bunch of money." Neighbor goes away satisfied (only because Corporation X had assets), but who paid for the damage? Corporate stock is traded freely and rapidly. After the passage of twenty years, the stock holders who gained by the dumping in 1985 are NOT the same as the stockholders who have to pay the judgement in 2005. As a result of the corporate shield, even when the corporation has assets and doesn't just tell the victim to pound it, the WRONG owners pay.

And this is not some fanciful made-up scenario. It happens all the time. If there is any significant gap in time between the corporation's bad conduct and the payment of compensation for the bad conduct, many or even most of the people who benefitted from the bad conduct are gone with their profits leaving latecomers who did not benefit to pay the damages. This is a result of the government-created liability shield.

[Bohner]

Angelatc's argument about insurance is a good one and deserves more comment.

If the corporation has insurance, the current shareholders are paying for it and, therefore, paying for any damage that is covered by that insurance even though they are not directly liable. Of course not all corporations carry insurance and not all injuries are covered by insurance. But there is another problem. I'll give an example based on the real world.

Publicly owned Corporation X operates a missile factory. It has been operating since 1985. From 1985 to 1995 some of its employees, under direction from the plant manager, dumped spent solvents into a French drain out in the back of the facility rather than paying to have the solvent recycled or properly incinerated. During that time period, the shareholders of Corporation X enjoyed slightly increased profits due to the short cut taken in solvent disposal. But they also had a slightly decreased profit due to paying premiums on a Comprehensive General Liability (CGL) insurance policy.

Now suppose the solvent entered the aquifer and, over a period of ten years, migrated a few hundred yards where it crossed a property boundary and contaminated a drinking water well owned by a neighbor, making it unfit for use. It is now 2005. The neighbor comes to Corporation X and says "You need to pay me for the damage you have caused me." Corporation X says "Let's tender the claim to our insurance carrier!"

If the insurance carrier pays, then everything is hunky dory. But the insurance carrier refers Corporation X to the absolute pollution exclusion that has been contained in virtually every CGL policy in the USA since 1985. (Any corporation you own stock in has no pollution coverage unless they have purchased, potentially at great expense, additional coverage. Chances are they have not.)

So, Corporation X, after wasting a bunch of money consulting its lawyers, says to the neighbor "Fine, here's a bunch of money." Neighbor goes away satisfied (only because Corporation X had assets), but who paid for the damage? Corporate stock is traded freely and rapidly. After the passage of twenty years, the stock holders who gained by the dumping in 1985 are NOT the same as the stockholders who have to pay the judgement in 2005. As a result of the corporate shield, even when the corporation has assets and doesn't just tell the victim to pound it, the WRONG owners pay.

And this is not some fanciful made-up scenario. It happens all the time. If there is any significant gap in time between the corporation's bad conduct and the payment of compensation for the bad conduct, many or even most of the people who benefitted from the bad conduct are gone with their profits leaving latecomers who did not benefit to pay the damages. This is a result of the government-created liability shield.

I agree... I believe the original shareholders should be the ones who are primarily liable for the damages. If you kill someone in your own house, then you sell the house to me... It shouldn't be me who goes away for murder just because I now own the house.