Corporate Judgment Proofing: A Response to Lynn LoPucki's 'The Death of Liability.' (Yale Law Journal, Vol. 106, P. 1, 1996)
White, James J., The Yale Law Journal
In The Death of Liability,(1) Professor Lynn M. LoPucki argues that American businesses are rendering themselves judgment proof.(2) Using the metaphor of a poker game, Professor LoPucki claims American businesses are increasingly able to participate in the poker game without putting "chips in the pot."(3) He argues that it has become easier for American companies to play the game without having chips in the pot because of the ease with which a modern debtor can grant secured credit,(4) because of the growth of the peculiar form of sale known as asset securitization,(5) because foreign havens for secreting assets are now available,(6) and because firms can use traditional ways of avoiding legal liability--such as scattering their assets among subsidiary corporations.(7)
In Part I, I describe Professor LoPucki's thesis, and in Part II, I present an empirical response to it. Part II is composed principally of data collected from the Compustat database, which contains financial information on almost all American public companies. The data on secured debt, asset-to-liability ratio, and the presence of insurance show that the story Professor LoPucki tells is fictional. Part III explains why. It offers reasons that firms choose not to judgment proof themselves and considers various barriers to judgment proofing. The analysis explains not only why judgment proofing is less prevalent today than Professor LoPucki suggests, but also why it is unlikely ever to grow into a serious problem in the United States.
I. LOPUCKI'S THESIS
It is important to understand what in Professor LoPucki's thesis is explicit, what is implicit, and what is unclear. First, Professor LoPucki does not say merely that certain persons and firms have found ways to avoid their just liability by putting their assets beyond the reach of their creditors. A debtor's divestiture of assets in the face of creditors' claims or operation with too little capital are well-known and ancient practices. The infamous Twyne's Case(8) cast a shadow over modern commercial security law by suggesting that a debtor commits a fraudulent conveyance when he secretly conveys security to a creditor while retaining possession of the property. Taking secret security, making fraudulent conveyances, operating with insufficient capital, and distributing one's assets to shareholders in preference to creditors have been practiced for hundreds of years; they are explicitly not the subject of Professor LoPucki's complaint.
He makes a stronger claim. Through his poker game metaphor, he claims that "[m]ajor players are reducing their stakes"(9) and that "[s]ome large businesses now employ [judgment-proofing strategies] and market forces are driving their competitors to do the same."(10) Thus, he claims not that a few businesses are doing the things that businesses and individuals have always done, and not only that it is now possible with modern devices to do these things more broadly, but that American businesses are, in fact, judgment proofing themselves,(11) and that there is a trend for a larger number of all firms to do the same.(12) His assertion is not merely that devices are available; it is an empirical assertion that these devices are being used more systematically than ever before and that their use will become more widespread in the future.
It is important also to understand who Professor LoPucki believes are the victims of these transactions. The victims are not conventional unsecured creditors with contract claims; they are creditors with claims imposed by tort and statute.(13) Professor LoPucki recognizes that contract creditors--creditors ranging from banks to finance companies to suppliers--can and will bargain for protection.(14) He is concerned about people who are sometimes referred to as "involuntary" creditors,(15) creditors whose claims are thrust upon them as a result of an accident or a violation of a statutory obligation of the debtor. …