Judgment Proof Research Articles

Virtual Judgment Proofing: A Rejoinder

This is a rejoinder by the author of The Death of Liability, 106 Yale L.J. 1 (1996). The rejoinder is to a reply by Professor James J. White to the original article. Corporate Judgment Proofing: A Response to Lynn LoPucki's The Death of Liability, 107 Yale L.J. 1363 (1998). In response to specific points made by White, LoPucki argues that the judgment proofing of large companies would not be visible in Compustat data because it is not accomplished through secured debt or leasing and because Compustat data is aggregated by corporate group. Contracting parties will permit debtors to judgment proof themselves because by doing so the contracting parties and debtors can externalize liability and split the profits between them. LoPucki also responds to arguments that corporate veil piercing, fraudulent conveyance law, government and consumer reaction, and mandatory insurance will prevent judgment proofing by large companies. The rejoinder concludes that computerization will lead to the proliferation of virtual companies that are born judgment proof.

The Death of Liability

Based on systems/strategic analysis, this paper predicts the complete failure of legal liability system. Liability is the system by which injured persons recover money damages from those who injure them. The system operates through the entry and enforcement of judgments by the courts. The paper argues that the system is vulnerable to defeat by a variety of judgment proofing techniques which can be categorized as secured debt strategies, ownership strategies, exemption strategies, and foreign haven strategies. Computerization has recently brought about dramatic reductions in the costs of pursuing these strategies, making them cost effective for more potential defendants. As use spreads, the cultural and political barriers to judgment proofing will decline, leading to wider use of the techniques and ultimately to system failure. The paper examines a variety of strategies by which the system might respond, including shareholder unlimited liability, involuntary creditor priority, asset provider liability, enterprise liability, mandatory insurance, and financial responsibility laws. The paper concludes that judgment- proofing strategists will be able to overcome all of them.

The Essential Structure of Judgment Proofing

This article argues that substantially all judgment proofing can be described through a single model: a symbiotic relationship between two or more entities, in which one of the entities generates disproportionately high risks of liability while the other owns a disproportionately high level of assets. The two entities typically are joined by a contract that allocates the profits gained from externalization of the tort liability. Proof that the model is workable even in large businesses is made by demonstrating that a single business can be divided into two such entities without altering its components or its function. The courts cannot collapse the two entities into one because no principle exists for distinguishing them from each other or from their environment.

Vicarious Liability, Judgment Proofing, and Non-Profits

This paper addresses the related questions of whether non-profit organizations should be held vicariously liable for the acts of their agents and whether those organizations should be able to avoid liability by engaging in judgment proofing. The central claim is that permitting a non-profit enterprise to engage in judgment proofing should not be presumed to undermine the deterrent effects of imposing vicarious liability. In the context of a for-profit enterprise, judgment proofing undermines the incentive for investors, who generally control the enterprise, to induce the enterprise to avoid risky behavior. However, judgment proofing has more complex effects on the incentives of the actors - e.g., donors, volunteers and employees - who control non-profit enterprises. After developing this theoretical point the paper goes on to provide a general definition of judgment proofing, outline the ways in which it has been regulated under Canadian law, and evaluate the merits of a recent decision holding that assets held subject to a charitable trust may be available to satisfy tort claims brought against the trustee. This decision restricts non-profits' ability to engage in one particular form of judgment proofing but its justification is questionable in light of the theoretical analysis developed in this article.

Judgment Proofing, Bankruptcy Policy, and the Dark Side of Tort Liability

One need not be an astute student of the law of obligations to appreciate Professor Schwarcz's comprehensive rebuttal of Professor LoPucki's recent articles on judgment proofing.1 Schwarcz argues compellingly that judgment proofing is not likely to occur in arm's length contexts. Although judgment proofing may be more likely in non-arm's length situations, he also demonstrates persuasively that current doctrine is up to the task without the need for additional regulation.

The Inherent Irrationality of Judgment Proofing

In recent articles in the Yale Law Journal and the Stanford Law Review, Professor Lynn M LoPucki has sparked much academic discussion arguing that recent developments in corporate law have led to an erosion in the system of corporate liability, such that it might one day prove impotent. LoPucki has argued that transactions such as asset securitizations, sale-leasebacks, and corporate structures in which liabilities are placed in asset-poor subsidiaries are driving this change. One early critic to the LoPucki thesis, Professor James J. White, has argued that empirical data show no evidence of increasing use of judgment proofing techniques. In this article, Professor Steven L. Schwarcz joins this debate, arguing that an economic analysis of these transactions suggests that Widespread use of these judgment proofing techniques is unlikely. A key distinction in the analysis, Schwarcz argues, is between arm's length and non-arm's length transactions. Arm's length transactions are unlikely to lead to judgment proofing because corporations will receive value-often cash-for the assets they sell. It is only by paying out this value in dividends that a corporation begins to judgment-proof itself. The theoretical possibility to take value away from future involuntary creditors through such transactions will rarely be realized because of the costs-taxes, negative publicity, personal and criminal liability-of entering into such agreements. By contrast, in non-arm's length transactions, corporate owners do have the incentive to create judgment-proof structures. However, these structures are not innovative, and they will continue to be well-regulated ex post by existing legal doctrines in bankruptcy, corporate law, tort law, and criminal law. Following this article are a response from Professor Lynn LoPucki, a comment by Professor Charles Mooney and a brief rejoinder from Professor Schwarcz.

Judgment Proofing: A Rejoinder

Professors LoPucki and Mooney have responded to my article, The Inherent Irrationality of Judgment Proofing,' and I have been granted the opportuLity to write a short rejoinder. Given page limitations and the fact that Professor Mooney and I are in agreement on the fundamentals, I discuss only Professor LoPucki's response.2 Both that response and my rejoinder follow my analytical approach of dividing judgment proof structures into two categories: arm's length and non-arm's length.

The Irrefutable Logic of Judgment Proofing: A Reply to Professor Schwarcz

The Irrefutable Logic of Judgment Proofing: A Reply to Professor Schwarcz

The Essential Structure of Judgment Proofing

In order to insulate itself against debts resulting from unfavorable judgments, a business may seek to operate unencumbered by significant assets. In this essay, Professor Lynn LoPucki revisits this issue of 'judgment proofing and responds to arguments that large businesses cannot operate in judgment-proof conditions. He identifies a single structure that describes virtually all judgment proofing: a division of risks of liability and assets into two or more separate entities sharing a symbiotic relationship. An operating entity conducts the business activities and carries the risks of tort liability, while an owning entity owns the business assets. While the two entities are bound together by contract, the bifurcation of assets and risks shields the business from judgment debt. Professor LoPucki argues that current law cannot collapse the two entities into one for purposes of satisfying judgments, and concludes that large businesses of any type can successfully render themselves judgment-proof

Mandatory insurance and the judgment-proof problem

As shown by Shavell (1986), a firm that lacks assets to compensate the victims of an accident caused by it has incentives that are too low for accident prevention. Building on Shavell’s model, this paper examines possible policy responses to deal with the judgment proof problem. It is shown that the prohibition of voluntarily purchased insurance can never increase welfare and that a modified insurance requirement can achieve a second-best allocation, even if the level of care is not observable by third parties.

Virtual Judgment Proofing: A Rejoinder

This is a rejoinder by the author of The Death of Liability, 106 Yale L.J. 1 (1996). The rejoinder is to a reply by Professor James J. White to the original article. Corporate Judgment Proofing: A Response to Lynn LoPucki's The Death of Liability, 107 Yale L.J. 1363 (1998). In response to specific points made by White, LoPucki argues that the judgment proofing of large companies would not be visible in Compustat data because it is not accomplished through secured debt or leasing and because Compustat data is aggregated by corporate group. Contracting parties will permit debtors to judgment proof themselves because by doing so the contracting parties and debtors can externalize liability and split the profits between them. LoPucki also responds to arguments that corporate veil piercing, fraudulent conveyance law, government and consumer reaction, and mandatory insurance will prevent judgment proofing by large companies. The rejoinder concludes that computerization will lead to the proliferation of virtual companies that are born judgment proof.

Corporate Judgment Proofing: A Response to Lynn LoPucki's The Death of Liability

Corporate Judgment Proofing: A Response to Lynn LoPucki's The Death of Liability

The Death of Liability

Based on systems/strategic analysis, this paper predicts the complete failure of legal liability system. Liability is the system by which injured persons recover money damages from those who injure them. The system operates through the entry and enforcement of judgments by the courts. The paper argues that the system is vulnerable to defeat by a variety of judgment proofing techniques which can be categorized as secured debt strategies, ownership strategies, exemption strategies, and foreign haven strategies. Computerization has recently brought about dramatic reductions in the costs of pursuing these strategies, making them cost effective for more potential defendants. As use spreads, the cultural and political barriers to judgment proofing will decline, leading to wider use of the techniques and ultimately to system failure. The paper examines a variety of strategies by which the system might respond, including shareholder unlimited liability, involuntary creditor priority, asset provider liability, enterprise liability, mandatory insurance, and financial responsibility laws. The paper concludes that judgment- proofing strategists will be able to overcome all of them.

Office Malpractice Pitfalls

Familiarity with and adherence to the above principles may not make you claim or judgment proof, but they should improve patient care in your office and decrease your exposure to medico-legal interventions. Always bear in mind that medical practice is not a right conferred upon you by virtue of your medical degree, but rather a privilege granted you by state statute and licensure.

Suing Solely to Extract a Settlement Offer

Suing Solely to Extract a Settlement Offer

The judgment proof problem

Parties who cause harm to others may sometimes turn out to be ‘judgment proof,’ that is, unable to pay fully the amount for which they have been found legally liable.1 This possibility is an important and realistic one. Certainly individuals may readily be imagined to cause personal injury or property damage resulting in judgments that exceed their assets plus any liability insurance coverage; and the same is true of firms.2