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December 16, 2005
The Bramble Bush
by Kevin Morford

Shell Games

     A classic con man game at a carnival involves three walnut shells and a pea. The pea is placed under one of the walnut shells, the shells are shuffled around, and the rube wagers money that he can pick the shell that has the pea under it. The game is rigged, and the rube has no chance of winning money. As the Pentagon computer WOPR said in the movie War Games, “A strange game. The only winning move is not to play. How about a nice game of chess.”

     A similar but much more costly shell game takes place every day in our ordinary lives. Instead of a walnut shell, the con men use a corporate shell. They create and hide behind an artificial entity called a corporation. A corporation has some rather extraordinary characteristics. For one thing, it potentially has a perpetual duration. More importantly for this column, it is capable of being “owned,” and with ownership comes a shield or veil against liability that would not otherwise be available to the owner.

     Here is how the shell game works. The owner creates a corporation, gives it some money and has it engage in some sort of money making venture. Of course, the corporation is a non-corporeal entity, so it cannot do anything on its own. The owner controls the operations of the business, and the corporation gets the bills and the risk of liability. The owner can skim the profits at will. If the venture ever starts losing money, in many cases the owner can walk away with no further liabilities, and keep the profits that were extracted over the years. Because of the “corporate veil,” the owner can keep most or all of the profits, even if the corporation owes money to its creditors and cannot pay them. This is a slash and burn feature of capitalism which often gives rewards to antisocial behavior.

     Now compare that with the fate of some poor sap who runs up a bunch of liabilities without laundering them through a corporation. The corporation can shuffle the money off to someone else free and clear, and then escape its debts by ceasing to exist, but that is not an available option for an individual debtor. The money could be traced and recovered, and the debtor would rather like to continue to exist. So our debtor gets slapped with a money judgment, and has his or her wages garnished and possessions seized and sold until the debt is paid. Instead of walking away with the profits free and clear while the creditors go away empty, the individual debtor is forced to actually pay the money he owes to other people.

     I’ll be the first to admit that the description I just gave is highly simplified. For example, there can also be partners in a partnership with limited liability and limited liability companies which are not corporations . There are also many different laws that create exceptions and changes to general rules I have described above. But those laws do not diminish the importance of the limited liability veil, which is a major tool for risk management by almost everyone in business. Even the Catholic Church has taken advantage of this tool by having each diocese operate as a distinct legal entity, thereby limiting the assets of the church that are available to pay the victims of pedophile priests.

     There are some sophisticated players of this shell game, and some sophisticated variations on the basic theme. In the end, the goal is always to make sure that the owners can keep the profits without getting stuck with the liabilities. Knowledgeable creditors have counter measures that they can use to protect themselves. They can obtain a personal guarantee from the owner that the debt will also be covered by personal assets, or can they take a security interest in valuable property that can be foreclosed on if the corporation does not pay. So who is most likely to be left unpaid when a corporation goes out of business? Ordinary workers and consumers.

     When Enron went out of business, it left billions in unpaid pension liabilities, and it was Enron’s workers who were hurt. When Southeast Airlines abruptly stopped flying a year ago, hundreds of passengers with pre-paid airline tickets were stranded with no flight home, and no refund for the tickets they could not use. Southeast employees also had paychecks bounce. As for accumulated frequent flyer miles, just kiss them goodbye. Unsecured debts like these get wiped out by the liquidation of corporations on a daily basis.

     Workers and consumers are the rubes, and the game is rigged against them. Don’t want to lose your money? Don’t play their game.








Kevin Morford is a political activist and an attorney in private practice in the Anchorage area.  He can be reached at kmorford@insurgent49.com.
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The
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in-sur-gent (in sur'jent), n. 1. a member of a group which revolts against the policies of its leadership.