The Ethics of Bankruptcy


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A case presentation for MBA-520: Leadership and Ethics.

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  • Good evening, I’m Brian McDanielMy presentation is Case 4.20: The Ethics of Bankruptcy
  • Rather than discuss the bankruptcy policy, I will focus on a central issue.Is it ethical to declare bankruptcy in order to maximize your income?It may appear an odd question, but not if you understand the context of bankruptcy before revisions to the law in 2005.
  • In 1980, about 280,000 personal bankruptcies.By 1996, bankruptcies topped 1-million for the first time.Chapter 7: PersonalChapter 13: Consumer Debt RestructuringGiant Loopholes: you could keep equity in your homeLawyers advised “Strategic Bankruptcies” as a resultMany times to avoid contractual obligationsThe Music Industry provides two examples
  • The first example is a bankruptcy.TLC is an Atlanta-based trioSigned in LaFace Records in 1991A five-year agreementRoyalties were on a graduated scale starting at 7 percent, with increases for platinum salesLaFace had the right to renew in 1996 following negotiation of a long-term contract
  • They were successfulBoth On The TLC Tip and CrazySexyCool went platinumCrazySexy was R&B Album of the YearWaterfalls was Record of the YearEstablished artists can command 13 percent royalties with a new contract, higher for multi-platinum salesBefore their agreement with LaFace expired, all three declared personal bankruptcyLloyd’s of London sued Lopes for an unpaid policy held on her boyfriend’s homeTLC pled to discharge the LaFace contract, claiming that the old contract would impede their fresh financial startsLaFace countered that the bankruptcy was about wanting more moneyFought for 2 years before settling
  • The second example is an alternate to bankruptcy.Billy Joel signed his first agreement in 1970It was bad, even by prevailing standardsThe agreement stripped Joel of future rights to his musicBy contrast, The Beetles and Ray Charles kept their rightsThe deal didn’t start wellMastering error made Joel’s voice a half-step higherThis album has She’s Got a Way
  • Rather than sue, Joel got evenHis contract limited him to night clubs and piano bars if he didn’t recordSo he didn’t…for several yearsRather than produce, Joel let the contract expireSigned with Columbia in 1972That album has Piano Man on it
  • The Ethics of Bankruptcy

    1. 1. Case Study Presentation
    2. 2. The Ethics ofBankruptcyCentral IssueIs it ethical to declarebankruptcy in orderto maximize yourincome?
    3. 3. The Ethics ofBankruptcySituationPersonal bankruptcies topped1-million for first time in 1996Chapter 7, not Chapter 13Loopholes widely abusedAvoid contractual obligations
    4. 4. The Ethics ofBankruptcyTLCSigned with LaFace Records5 Year agreementTypical royalties for anunknown groupContract expired in 1996
    5. 5. The Ethics ofBankruptcyTLCFirst 2 albums go PlatinumR&B Album of the YearRecord of the Year (Nominated)EstablishedDeclared bankruptcy in 1995Accused of misusing bankruptcySettled and resigned in 1996
    6. 6. The Ethics ofBankruptcyBilly JoelSigned 10 album agreementwith Family Productions in 1970Stripped Joel of tape andpublish rights on future songsRocky start on First AlbumMastering error and poor sales“She’s Got a Way”
    7. 7. The Ethics ofBankruptcyBilly Joel“Piano Bar” clauseDid not produce second albumAllowed contract to expireSigned with Columbia in 1972Released “Piano Man”
    8. 8. TLC JOEL Focused on Revenue  Focused on Career Active Adjudication  Passive Adjudication Seize the Spotlight  Shun the Spotlight Earned Higher Royalties  Earned Higher Royalties More Expedient  More Ethical
    9. 9. Case Study Presentation