Sunday, August 03, 2003

Rights & Reason: Defining Corporate Liability

MCI faces a bumpy road, to its planned emergence from bankruptcy court, due to continued attacks by the company's competitors. Leading the charge are AT&T and Verizon--whose general counsel is a former U.S. attorney general--who seek to have MCI liquidated rather than reorganized. Among the reasons cited are allegations that MCI illegally routed long-distance calls to shift its costs from MCI (then WorldCom) to rivals like AT&T and Verizon. Because calls often cross networks owned by different providers, there is a complex system in place to determine which firm is responsible for the charges. MCI allegedly manipulated the system by, among other things, routing U.S. calls through Canada, thus leaving Verizon and AT&T to pick up the tab when the calls re-entered this country.

There is, of course, something unseemly about AT&T and Verizon asking the government to forcibly liquidate MCI rather than proceed with the reorganization approved by MCI's creditors. A liquidation would almost certainly result in some MCI assets and business being acquired by AT&T and Verizon (unless antitrust regulators stick their thumbs in the dyke, which they almost certainly would). Thus, while I respect the two telecom giants' selfish motivations, a federal bankruptcy judge must consider other factors in deciding MCI's eventual fate.

In the early aftermath of the various corporate scandals, I found myself vigorously opposed to the Justice Department's criminal prosecution of the Arthur Andersen firm, which resulted in a conviction that effectively shut down the company. In my view, a company can never be criminally liable. This is not a statement of blind pro-business arrogance, but of simple reason. A criminal act requires intent, and a corporation--an artificial person--cannot form or act upon intent. Individuals within a corporation, however, can form such intent, and thus only the specific individuals involved for a criminal act should be held liable.

Civil liability is obviously a different matter. One can commit a civil tort without specific intent. More importantly, civil actions arise from contractual obligations, and such duties are at the heart of a corporation's existence. A corporation itself is nothing more than an agreement among individuals to work together for a specific purpose (such as the pursuit of profit). Within the framework of this agreement, the group as a whole assumes certain risks and liabilities, including potential damages for civil wrongs committed. This can be the case even where individuals within a company act outside the bounds of their fiduciary duty to other members of the company.

Now in the case of MCI, we're faced with determining the proper role of the bankruptcy court. Verizon and AT&T seek liquidation because, among other reasons, they believe allowing MCI to emerge from bankruptcy largely intact will give it an unfair competitive advantage--why should MCI, after all, be allowed to shed its debt while remaining a viable competitor? This is a valid point, and the court should give it some weight. But the principal job of a bankruptcy court is not to protect the "competitiveness" of a marketplace; it is to protect the interests of MCI's creditors, whose property rights are directly at stake. If the creditors believe their interests are better served by reorganization than liquidation, the court should give that far greater weight than the objections of MCI's competitors.

Unfortunately, one of the consequences of modern legal theory is that private contractual rights--such as the creditors' interests in MCI--are often rendered subservient to invented legal interests, such as "promoting competition" and "protecting the public interest," and other wonderful socialist euphemisms. Bankruptcy, however, has generally remained above this fray, and hopefully the judge supervising MCI's case will do so as well. And remember, there is nothing preventing AT&T and Verizon from filing suit against MCI if they believe they are victims of the latter's fraud. Such is the wonder of a civil court system.

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