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Question 105: Must a man make up for various losses resulting from his bankruptcy?

I had an auto body shop in a suburban area, but lost my lease and had to move to a small city almost twenty-five miles away. I did everything I could to succeed at the new location, but the shop didn’t draw enough work, and the business, which was incorporated, went bankrupt after struggling a year.

I was behind in paying my employees. All of them knew how badly we were doing, but they kept working because they had no good job opportunities elsewhere and, like me, were trying to make a go of the business. Four of them were members of my wife’s family or mine, and I paid them off out of my own pocket. But I had a mechanic and a painter who were not related to us, and I did not pay them off. They learned that they had been treated differently and complained that I cheated them.

The court settled everything. Some pieces of equipment I was making payments on were returned to the company I had bought it from. When I closed down, no cash was left. The payments from insurance companies that came in after the shop closed went for legal expenses and taxes.

That was not quite two years ago now. I quickly got a job managing a body shop at a large dealership. My two best mechanics and I had paid off our home mortgages, and six months ago we remortgaged our houses, quit the dealership, and opened our own shop, which is already beginning to turn a good profit.

During the bankruptcy, I did not want to commit perjury, so in talking with my lawyer and in court I told the truth and answered questions honestly. Still, my conscience is bothering me. The other day one of our suppliers called because he had not received our check, though it was mailed on time. He reminded me that two years ago I was telling him (as, of course, I was telling everybody) that “the check is in the mail.” I began thinking about those days and recalled that, when we closed, some customers who had problems with work we had done were never taken care of. One lady even threatened to sue me, though nothing ever came of it. She had skidded on ice and rammed a utility pole, but was saved by the airbag. Though she never knew it, her car would have been totaled, but for the sake of getting the job I kept the estimate down and did the work.308 I knew there might be problems. If the shop had stayed in business, I would have taken care of everything and tried to collect something more from her insurance company for the extra work. When we closed down, she had to get the additional work done elsewhere, which cost her nearly a thousand dollars, and her insurance refused to pay any of it. Besides that situation, I am wondering whether I ought to pay off my two former employees.

What must I do to straighten all this out? If I have to make good on everything, I cannot do it all at once. What should I do first?


This question calls for clarification of the factors that could call for restitution and application of the Golden Rule to each case that requires restitution. Probably the questioner defrauded some of his creditors; he must reimburse them for what they lost through his fraud, with interest at a reasonable rate. Similarly, he owes restitution to the woman he wronged by deliberately giving a low estimate. A fair settlement can be determined only by considering all the facts of the case and applying the Golden Rule. He also owes restitution to other customers who suffered losses due to imperfect work if he accepted their jobs unfairly in view of looming bankruptcy. Perhaps he cheated the two employees he never paid off, perhaps not. If the family members were paid what was due them as employees, other employees were due the same. But if what he paid the family members was a gift not owed them as employees, he did not cheat the other two. The questioner can determine the proper order for making restitution only by applying the Golden Rule to the whole set of cases in which he owes it.

The reply could be along the following lines:

I assume not only that you were entirely honest in carrying out the bankruptcy proceeding but that the failure of the business was not your fault. If so, the bankruptcy itself was blameless, and you need only compensate someone who suffered a loss as a result if you either wronged that party in some specific way or had a special relationship that makes absorbing some or all of that loss appropriate for you.309

Not only owners but employees, customers, and suppliers are true participants in a business. All should cooperate for their common good, and cooperation presupposes candid communication. If all parties communicate candidly and cooperate fairly, none owes the others restitution should their common enterprise fail. However, if owners and/or managers regard some of the other parties as outsiders and omit candid communication, injustices calling for restitution are likely. Then too, in a common enterprise characterized by genuine cooperation, fairness and mercy can require that more affluent participants accept greater burdens, including a larger share of losses if things go badly.

Obtaining anything on credit involves a promise to pay, and that promise is untruthful unless the person making it expects to be able to pay. You say that when the business was failing, you were telling creditors, such as the supplier who pricked your conscience, that payment was imminent when, in fact, it was not. That was a lie, and I assume it was a means to obtain continuing credit. If so, or even if you simply continued buying things on credit when you no longer expected to be able to pay, you wrongfully caused creditors to suffer losses they otherwise would have avoided.

Suppliers and others who extended credit to your business undoubtedly knew in general that they might suffer losses from bad debts, and most such creditors probably do not make a practice of cutting off credit at the first sign of a debtor’s difficulty. So, at least some of your creditors’ losses probably resulted from their forbearance rather than your fraud. You owe no compensation for such losses. However, the mere fact that businesses extending credit foresee and allow for bad debts, and sometimes even deliberately accept significant risks of loss, in no way reduces your responsibility for any loss a creditor suffered due to your dishonesty. Moreover, dishonesty that results in creditors’ losses entails the moral duty of restitution even if it would not constitute fraud in a legal sense.

Losses due to a debtor’s dishonesty are no different from losses resulting from other sorts of fraud. They call for restitution (see LCL, 444–58). You should examine the facts about your transactions with each creditor who lost money when you went bankrupt, judge conscientiously whether and how much of the loss resulted from your dishonesty, and commit yourself to repaying that amount, with interest at a reasonable rate—for example, the rate creditors would have had to pay on money they owed their creditors during the same period.

Similarly, if your wrongdoing caused a loss to any customer after the shop closed, you personally ought to compensate that customer, with interest at a reasonable rate. In the case of the woman who threatened to sue, you clearly sinned at least by deliberately underestimating the damage, since that underestimate was a lie to her and her insurance company. Perhaps you also had in mind eventually getting more from the insurance company than it really owed. Then too, it appears that you deliberately imposed on the customer the risk, which she otherwise would have avoided, of the loss she eventually suffered. You owe her restitution.

But how much did she lose? You cannot assume it was no more than the nearly one thousand dollars she paid for additional repairs; much less can you assume it was simply the difference between what the insurance company paid out and what it would have paid had your estimate been honest. An honest estimate would have permitted (and even compelled) the woman to part with the car in exchange for the insurance payment, and she would not have had her subsequent problems with that car. It seems to me you should investigate—perhaps simply by asking the woman, perhaps in some less direct way—what she suffered by continuing to own that car. If all went well after she paid for the additional repairs, I think you could fairly take, as a basis for determining your debt to her, what she paid for those repairs plus a fair allowance for her time and inconvenience. But if she experienced additional harms and losses, I think the fair basis for your restitution will be greater. To establish the amount, consider everything and apply the Golden Rule. Provided the woman is still alive and is fair-minded, that probably can best be done by dealing directly with her. You could begin by telling her your conscience has been bothering you, and you wish to make up to her the losses you caused. If she cooperates, you can discuss her problems with the car and arrive at a settlement you both consider fair.

What about other customers who suffered losses due to imperfect work that had to be completed and/or corrected by others? Plainly, if you knowingly cut corners, you should compensate them for their additional cost to have it finished. But what about cases where you did your best? No doubt, every auto body shop sometimes does work that happens to be defective in some way and calls for correction without additional charge. If some customers’ losses resulted from such defects, you are not responsible for their extra costs unless you accepted those jobs even though you foresaw, or reasonably should have foreseen, that your business was at such risk of failing that, in the customer’s place, you would have taken the work elsewhere had you known how things stood.

Employees who lacked options but deliberately remained with the failing business freely chose to risk the loss of pay they eventually suffered. But perhaps the two employees you did not pay off were right in claiming you cheated them. You say you “paid off” out of your own pocket the employees who were members of your wife’s family or yours. Why did you do that?

Perhaps you had been cheating all your employees, but made restitution only to family members. Owner-managers of failing businesses sometimes continue to draw all or most of their own salaries while cutting employees’ wages or delaying paying them. That is unfair. Insofar as owner-managers draw salaries, they are employees no different from others, and should share the sacrifices other employees make by reducing their own salaries at least proportionately and delaying payments to themselves at least as long. If you treated yourself better than your employees, you certainly owed them restitution based on what they would have received had you treated them as you did yourself. And if you made such restitution to some, you should have made it to all.

Again, perhaps you paid off those you did because you realized you had a moral obligation, though not a legally enforceable duty, to do so. Incorporation limited your legal liability, so that you did not have to draw upon your personal wealth and possessions to pay your debts when the business went bankrupt. But you may have recognized that the personal loyalty of your employees, who cooperated in a valiant though unsuccessful effort to save the business, demanded that you compensate them out of some of your wealth, which probably came from profits they had helped you make during the years when the business was doing well. If your motivation was of that sort, then, again, all your employees deserved the same consideration, and you ought now to make restitution to the two you cheated.

However, perhaps you “paid off” family members because, despite the personal setback when the business failed, you remained better off than they, and this was a way of sharing your remaining wealth with people close to you who were experiencing hard times. Perhaps you would have given them similar help even if you all had been working together in someone else’s shop. Or, perhaps, the payment was really a gift meant to keep peace in the family. If motivated by any of those considerations, the payment was not really delayed wages, and the two employees who did not get it were not cheated, though you could and should have forestalled their resentment by making clear the nature of the payment.

In paying whatever compensation you owe, draw only on your personal funds, and do not charge off any of the cost to your new company. It is a separate and distinct entity, and your new partners are in no way responsible for your prior obligations. Moreover, it would be tax fraud to treat your restitution as an expense of your new business.

Assuming you cannot at once make all the restitution you should, in what order should you pay? There is no simple answer. Consider everything, put yourself in the place of each of the other parties involved, and apply the Golden Rule. Among the things to consider is whether the basis of your obligation is the same or different in each case. It seems to me that, other things being equal, those deliberately defrauded should be paid before any who were not. If any of the parties needs what you owe more urgently than others, that too is an important consideration. Other things being equal, you can take into account your personal interests and the interests of your new business. For example, if you owe something to the supplier who pricked your conscience, your new business perhaps will benefit by settling quite soon with him.

In dealing with each party, do your best not only to determine what you owe and arrange to pay it, but to restore or heal the good relationship destroyed or wounded by your wrongdoing. All or most of those parties knew they were wronged, probably were justifiably angry at you, and perhaps hate you. You need not explain to them the precise nature of the wrongs they suffered, but you should admit frankly that you wronged them, express sincere sorrow, and humbly beg forgiveness. That, along with treating them fairly, is likely to bring about reconciliation.

Someone might object that in trying to make matters right with people you defrauded you will remind them of what they suffered and admit responsibility, which might well lead at least some of them to sue you personally. But I doubt that risk is great. None of the people you wronged sought legal redress, and your offer of compensation hardly will be provocative. Whatever risk exists can be minimized by carefully avoiding explaining precisely how you wronged each party, and focusing on your desire to put your conscience at rest and remove their ground for dissatisfaction with you. Some risk will remain, of course, but fulfilling the obligation to make peace with those one has wronged always involves some risk. One simply must accept that irreducible risk as part of the price of having wronged others.

The preceding explanations constitute a guide for clarifying your guilty conscience. As with any more routine examination of conscience, begin by praying for the Holy Spirit’s light and strength, and proceed to sincere contrition and a firm purpose of amendment. Since you almost certainly committed sins at least grave in themselves, even if not fully deliberate, you have a good reason to confess them along with any other grave sins you may have committed since your last good confession (see LCL, 202–16). In this way, you will enjoy the help both of your confessor and of the sacrament’s grace.

Profit by this experience and prepare to resist future temptations to cheat in your business. Unfairness generates grave obligations of restitution that do not fade with passing years. Indeed, because fairness demands paying interest for the period others were deprived of what was due to them, the amount to be paid back grows steadily as the years pass.

308. Totaled means that the insurance company would have exercised its contractual right to declare the car a complete loss, pay the insured its estimated market value immediately preceding the accident, and, in exchange for that payment, receive the wreck and the right to the proceeds from its salvage. Thus, had the questioner given an honest estimate for repairing the car of, say, $10,000, and the estimated value before the accident been $9,500, the insurance company would have paid the woman $9,500 and taken the wreck. To get the work, the questioner kept the estimate for repair down to, say, $9,300. Presumably, all necessary work was completed as well as possible. But, as is common with such extensive jobs, additional work was found to be needed afterwards.

309. Some might challenge the justice of laws permitting businesses to limit liability by incorporating and allowing both businesses and individuals to escape indebtedness by bankruptcy. These deeper issues, not treated in this question, must be acknowledged. But I shall assume that the structural injustices involved in these laws, if any, cannot reasonably be taken into account by the questioner in determining his obligations to make restitution.