September 2, 2007


How's this for bad behavior: Matter of Callaghan, 42 B.R. 821 (Bkrtcy. Mich. 1984).

Tom takes his $20,000 motor home to Bob to have the brakes fixed in time for his vacation. Bob does not fix the brakes in time and Tom ends up storing the motor home at Bob's garage while Tom is away. Vandals break in and trash the motor home. Tom's insurance company arranges repairs but asks Tom to pay a $100 deductible. Bob takes $3,000 from the insurance company and spends it on his corporation's operating expenses. But Bob never makes the repairs. He then offers to waive storage fees for the motor home if Tom agrees to hire Bob to make the repairs. Tom does so. Once again, the repairs are not accomplished in time for Tom's vacation the following year. Tom suffers a work-related injury, is bedridden, and never pays the $100 he still owes Bob for work that Bob may (or may not) have done on the motor home.

Bob threatens to sell the motor home to cover Tom's $100 indebtedness. A court issues a restraining order to prevent Bob from selling the motor home.

Bob sells the motor home the next day for $500 to satisfy the contested $100 bill. We assume he kept the other $400.

You lawyers out there know that Bob's action isn't legal: he did not engage in a commercially reasonable sale, he converted the insurance company's money, he violated a restraining order, and (as a bailee) he was probably liable for the vandalism to Tom's motor home in the first place.

Most everyone would agree that in addition, Bob's actions were just not right.

My question is this: why did Bob do it? It's like the financial version of "suicide by cop." Big surprise: Bob went bankrupt. Bob denied any personal responsibility for the motor home incident because his garage was a corporation. The bankruptcy court opined that "the entire transaction, orchestrated by [Bob], smacks of a grudge match over a $100 insurance deductible balance." Id. at 826. Miffed, the bankruptcy court imposed a $20,796 (plus) judgment on Bob, personally.*

What can we take from this little episode beyond the black-letter-law lessons? Obviously this: not everyone is a rational-self-interested-actor, John Stuart Mill / Adam Smith - style.

Business owners have a duty to act ethically, regardless of the law. Business ethics ought to involve "doing good," not merely "not doing bad." Consider the following: the story of Tom and Bob is probably more complex than can be revealed in a bankruptcy court's opinion. What seems to be a grudge match could just as easily be explained by simple inattention: poor communication between Bob and his employees brought on by any of a number of factors. Acting ethically in Bob's situation would have meant taking affirmative action - to make sure his garage was secure, to buy appropriate insurance coverage, to communicate with his employees, to monitor their actions, and to delegate authority to a manager if necessary.

We need an ethical paradigm for "doing good" that includes the merely quotidian actions that Bob should have taken, without the suspect morality associated with "the work ethic."

* - The court found that Bob's personal participation in the intentional tort of conversion justified finding him personally liable, but the court goes on to talk about applicability of the remedy of piercing the corporate veil. Bob can't win under either theory.

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