[Avodah] T'uM

[Chana Luntz]

RMB wrotes:

> > This is really where my head was, let's tell a different story...
> > 
> > Moshe and his son-in-law Baruch are in the shirt business. They 
> > commission shirts to be made in China and sell to stores. 
> One of their 
> > customers goes under, while owing him $75,000. M&B Shirts 
> is a small 
> > shop, and will really be stressed by the loss. Barukh 
> learns in shul 
> > that Avi, the owner of the store, had known for a while that it was 
> > likely he would have to close, and continued making orders 
> from them. 
> > Wouldn't they be angry about not getting as much forewarning as the 
> > store could have risked?

And RZS then wrote:
 
> But did Avi have the right to give such warning?  Presumably 
> at that point he still thought he had a chance of turning his 
> business around.

Most of this is, by the way, governed by secular law.  I know you are
talking about an LLC and hence American law, but my knowledge of
American law is not that strong, so I will just give you some examples
under English law.

Under English law, for example, there is a concept of wrongful trading -
under which a company director can be sued for continuing to trade when
he should not have done

To give you a flavour of that, here is a paragraph from a nice article
that can be found at:
www.insolvency.gov.uk/.../research/corpdocs/wrongfultradingandtheliabili
tyofcompanydirectors.doc -

"One of the primary roles of a liquidator of an insolvent company is to
augment the asset pool that is available for distribution to the
creditors of the company, so as to ensure that the creditors, who will
not of course obtain full payment for the credit that they have
extended, receive as large a return as possible on the debts that are
owed to them by the company.  One action which liquidators might
contemplate initiating is an action against the directors of the company
personally on the basis that they engaged in wrongful trading prior to
the liquidation of the company.  This action would be initiated pursuant
to s.214 of the Insolvency Act 1986.  Section 214 provides, in effect,
that the liquidator of a company that is in insolvent liquidation
(effectively the situation where a company's assets are not sufficient
to pay its debts at the time of liquidation ) may commence proceedings
against the company's directors, and these proceedings may ask that the
directors be ordered to make such contribution to the company's assets
as the court thinks proper.   Directors may only be liable where at some
time before the commencement of the winding up of the company, they knew
or ought to have concluded that there was no reasonable prospect that
the company would avoid going into insolvent liquidation."

There is also the concept of a "unfair preference" .To be an unfair
preference, the. payment must put the creditor receiving it in a more
favourable position than other unsecured creditors.  This is illegal in
most countries (and in general the benefit can be clawed back for the
estate and the benefit of the creditors as a whole).

There is, I believe, in most countries, case law on what is proper
behaviour for directors in insolvency and near insolvency circumstnaces
and quite detailed regulation of director's duties.  And I confess my
instinct is with RZS on this, that to warn a frum Jew over and above
anybody else would be a violation of dina d'malchusa dina and, if it
came out, a chillul HaShem.  Whether under the law Avi was required to
cease trading earlier than he did and hence not put M&B into difficulty,
would be, inter alia, a judgement for the secular courts, as to whether
his judgement not to do so was reasonable.

Note also that in many countries provision is made under the law to give
small creditors some sort of first right to at least at a portion of the
assets.  In those countries where their isn't such provision, the
decision has been made by the secular authorities that other
considerations are more important (entreprenarial activity, encouraging
lending or whatever).  These decisions are not straightforward, and
different countries have allocated their priorities in different ways.
However there is a fair amount of evidence that the level of
restrictiveness on insolvency can operates to dampen commercial activity
in general, so that a balance has to be struck.

    
> Because dinei momonos depend on the intentions of the people 
> involved; if they're doing business on the basis of secular 
> law, or merchant law, then that becomes the din.  If they all 
> agree that the corporation exists, then it does. 

This is less clear, however.

Firstly, it is hard to think of case that more closely matches that of
the gemora definition of asmachta than of people lending to or doing
business with a limited corporation in circumstances where what they see
is the owner of a business.  People (especially small time individuals)
don't believe the person they are going to lend to or do business with
is going to go under and they don't really think about the limited
liability nature of the person with whom they are doing business in a
transaction of the kind that RMB is describing.  Secular law may make
gambling completely legal, but it does not necessarily disallow the
gemora provision relating to asmachta and make participation theft.

 Hilchos 
> Pesach, though, doesn't depend on what anyone thinks; if the 
> corporation is really just Boruch, pretending otherwise 
> doesn't change the din.

In addition, the concept of a limited liability corporation depends on
it having legal personality and existence.  If the halacha really does
not recognise that person as a legal person, the fact that the secular
law does would not necessarily seem to get the underlying "mind" off the
hook. There is a concept in secular law of "piercing the corporate veil"
where in certain circumstances (usually fraud), the courts will look
beneath the corporate entity to the directors behind it.  It does not
seem to me to be so straightforward that the halacha, while recognising
the customs of business between parties, will necessarily take the leap
and recognise the concept of independent legal personality that
underpins a corporation, and therefore would not require a piercing of
the corporate veil in all cases.

It is said (I don't know if it is an urban myth) about the Reichmans
that when they went under, they took advantage of the limited liability
provisions to allow them to start over again and rebuild capital, but at
that point they went back and made sure that all of their old creditors
we paid in full (under secular law certainly lifnin mishuras hadin).  It
is not clear to me, however, whether such behaviour is lifnin meshuras
hadin in halacha a well, or perhaps it is in fact mandated by halacha
based upon the above - although presumably a deferral of payment when
payment is not possible is permitted halachically (ie to take advantage
of the insolvency provisions to start anew as the Reichmans reputedly
did).
 
> 
> -- 
> Zev Sero               Something has gone seriously awry with 
> this Court's
> zev at sero.name          interpretation of the Constitution.

Shabbat Shalom

Chana