Bankrupt Cities

Here are some quick Friday thoughts on ethical issues of bankrupt cities:

There seem to be two main issues: How to work out who gets what monies from the city (similar to the issues of a company going bankrupt) and which if any assets the city has the right to retain.  

Here are my 4 thoughts - just initial thoughts:

1. First discussion (of two) of debtor's obligation:

According to Mishna Arakhin  6:3-4, a debtor retains the right to basic necessities of survival (a roof and bed etc) and of generating income (tools of his trade if he must own his own in order to work).

Based on this model, what if anything does the right of retaining basic necessities mean for a group of people (as in a city)?

We have m. Megilla's references that a sefer Torah and a beit knesset are basic.  Does that mean even in the face of debt?  Actually, we have a history of Halakha of defaulting communities (Vaad ha-Kehilot of Poland and Lithuania; some famous kupot/kollelim of Yerushalayim).  I have never looked into the Halakhic rulings but I recall that some exist.

2. As regards multiple creditors and Detroit, how should limited money of default be divided fairly?

a. One angle on the issue is to view everyone owed money as in the same mess and ask what to do now.  Do we (society) wish to divide the money equally [obviously no more to anybody than he is actually owed] so that each party gets minimally the same amount to help them survive and move on in life from this point forward?  OR do we wish to divide the losses proportionately since each party had made decisions/set up their life in reliance on future repayment of a certain sum of money and so each party's damage depends on the proportion lost?

The matter is debated in Halakhic history. 

a-1. First, let's see how m. Ketubot 10:4 plays it out.  In this mishna one person is owed 100, another 200, and a third is owed 300.  In this case, the two concerns are balanced:

      מי שהיה נשוי שלש נשים ומת 

כתובתה של זו מנה ושל זו מאתים ושל זו שלש מאות 

ואין שם אלא מנה - חולקין בשוה

   (75 =) היו שם מאתים - של מנה נוטלת חמשים, של מאתים ושל שלש מאות שלשה שלשה של זהב 

  (150 =)היו שם שלש מאות - של מנה נוטלת חמשים ושל מאתים מנה ושל שלש מאות ששה של זהב 

וכן ג' שהטילו לכיס פיחתו או הותירו כך הן חולקין:

First case: everyone gets the same amount - 33.3 + 33.3 + 33.3 - and the losses are very disproportional.  The concern seems to be that everyone has an equal right to receive the same share of the sum needed to move forward in life.  Losses are ignored.

Second case: The smallest sum creditor gets half of his money with the others also getting the same sum and more.  The others then divide the difference equally. 50/100, 50+25, and 50+25.  The concern seems to be to balance between granting everyone the same sum but only up to half of the debt.   Anything beyond half goes to the parties that are owed more money

Third case: Everyone get the ideal (in this type of case) - half of the money that they were owed: 50/100, 100/200, 150/300.

a-2. The Geonim, however, say that everyone gets their proportion (referenced in Rambam malveh ve-loveh 20:10).

For those who prefer concrete numbers:

If only 100 were available, it would be approximately: 16+/100, 32+/200, 48+/300.

a-3. Rambam says that the money is divided so that each smaller party gets as much as up to their whole debt and not just half - and only then is the rest divided equally (malveh ve-loveh 20:7).  The position codified in the Rambam prioritized giving everybody equal footing to move forward [obviously not beyond the money a party was owed]

For those who prefer concrete numbers:

If only 100 were available: 33.3/100 + 33.3/200 + 33.3/300

If 300 were available: 100/100 + 100/200 + 100/300

If 400 were available: 100/100 + 150/200 + 150/300

If 500 were available: 100/100 + 200/200 + 200/300

b.  A problem with this analysis, however, is that although it can express values and is great for the classroom, it seems to ignore the intuition of greater damage to workers than to banks.  It is true that big lenders need to be appeased so that they will lend to and service cities in the future (she-lo tin'ol delet), but we seem to be missing an attempt to balance that and the workers' more severe need.  Anybody who has actually done business will realize, however, that it is also possible that a contractor and his employees or heavy bond holders etc will go under due to the canceled debt.

So let us clarify what underlies that intuition if it does make sense.  The intuition that workers deserve money more than the banks deserve the money seems to come from two related considerations:  Banks tend to evaluate their risks well, and banks can absorb the loss.

Although this is not always true (Enron etc etc), one basic reason that it seems to be true is because banks banks try to protect their loans.  So, we possibly should distinguish between liens (which also facilitate loans - she-lo tin'ol delet) and other monies owed.  In Halakha: when it comes to liens, first creditors collect first on the assumption that later creditors knew that they had less powerful liens. Notice that this is not an issue of the mess of debts owed later but of acquiring rights/guarantees at the time of the initial loan.  According to this reasoning, banks have the upper hand as regards mortgaged but not as regards unprotected debt.

c. That is still problematic, however, because we have not discussed who we think deserves the money:

A libertarian will say that workers overdrew on the city's resources and brought about their own ruin.  A liberal will say that the banks cooperated with the city's rich (and the suburbians) to drain the city and brought about the end of their own party.

A non-ideological analysis, however, would more simply recognize that each side's responsibility grew as the situation worsened:  

1. Imagine that I am a worker who fights for a more pay while facing a rich city. No reason to avoid that.  Imagine that I am a bank lending to a rich city suffering cash flow problems or a temporary income shortage.  I similarly lend them money to our mutual advantage.

2. Now, however, imagine that I am a worker who demands higher wages as the city is slowly spiraling to ruin.  Imagine that I am a banker lending for the profit of drawing interest until the debt collapses.

Well, aside from mekorot forbidding trying to destructively drain another person economically, civil law Halakha has a response to that.  Liens. This time liens against future property: 

1. Under Western capitalist arrangements in which debts are liens against property that will exist at the time of collection, Halakha would reflect the issue of responsibility.  In collecting from city assets - building, paintings, etc - an earlier contract (whether loan or employment, including retirement funds etc) takes precedence over a later contract.  

Thus, our earlier discussion of how much money to fairly give each debtor would apply only to monies left at the city's demise.

THIS DISCUSSION COULD BE NUANCED but I will stop it here.

3. Second discussion (of two) of debtor's obligation:

What about the city's residents, however?  What are they supposed to do?  True, they (or their elected officials) made bad decisions but those bad decisions were also in part due to the creditor's past demands.

Here the Halakhic discussion gets messier and more interesting.

What does ribbit mean as regards cities?

What does ribbit mean as regards cities and destructive clauses [not just interest]?

What does asmakhta mean as regards cities' contracts?

Is the argument that asmakhta is not applicable to shetarot relevant to shetarot signed by officials who don't pay the price for the commitments they made on behalf of others?  [cf. m. Bava Mezia on a father hired farmhand making a deal for himself and his minor child versus himself and his adult dependents]

Since it is late on Friday here, I will not expand these further.

4.There is only point that I would add out-of-the-box. It begins with technical info (a) and then I state the argument (b).

Technical background: 

a.  Halakha has recognized the right to bankruptcy

In Tanakh it is either every seven years (Sefer Devarim) or fifty years (Bahar).

Among Tannaim, the right was originally maintained - except as regards property that had been placed in lien (i.e. land and pawns).

Even when Halakha later allowed for permanent debts against a debtor's person, it allowed it only for purely commercial loans (such as loans in which the debtor had some assets and the documents were drawn up and deposited in the city records - prosbul [see my article]).

In other words: Loans between relatives and other people in reciprocal relationships  - loans without a shi'abud clause - were still canceled by shemitta (although a debtor who has the money is expected to repay).

This combination of rulings makes sense when we realize that the borrower and other family members/people of that circle are expected to lend to the lender in the future if he should need money.

Since the expectation is that the lender will cancel for poor family members who also have a reciprocal relationship with him, the expectation never dissapeared in Halakha:

When even oral loans became potentially permanent, the creditor had to declare publicly and in writing each specific debt that he was not foregoing [i.e. even when prosbul changed, there used to be a seperate document for each debt].  This means that there was still public pressure to forego debts from family members etc

Even when a blanket written prosbul became accepted, aharonim ruled that there is mitzva to cancel some debts [like burning some hametz] - so that there is still an expectation that a creditor will forego debts from relatives [etc]

b. What does bankruptcy based on reciprocity mean for a community?

What would that mean for a worker who lives in his town (forget a large city for the moment)?  

A town utilized the right to leave the debt: Would the ethical basis for such a right be a reciprocal relationship between the other residents and the worker?

Would a worker have a right to expect priority in being hired (cf. b. Bava Mezi'a 109a-b and rishonim through poskim)?

Would a worker have a right to expect right to tax benefits and/or a right to free use of [some] city services? [see rishonim on ha-anek ta'anik and workers versus indentured servants while keeping in mind that workers were not payed and that there is a perpetual mitzva on a debtor to pay even as he has no civil law obligation to repay after shemitta]

Shabbat shalom!