Fly by Night or Face the Music? Premature Dissolution and the Desirability of Extended Liability

Premature dissolution can be a rational corporate response to the threat of future liability. Although early dissolution is costly to a firm, liability may be more so. The way in which liability rules can exacerbate this extreme form of liability avoidance is of interest, since "fly-by-night" firms generate particularly large social costs. In particular, we explore the consequences of liability that is extended to the business partners of an insolvent or absent tortfeasor--a relatively common legal response when tortfeasors abandon obligations. Extended liability can be desirable; however, if extended liability is anticipated, business partners themselves may choose to fly by night. We show how the preferred liability rule, including no liability, depends on the relative costs of premature dissolution and future obligations. The analysis also sheds light on a set of interrelated legal issues, such as the role of the trust fund doctrine and state dissolution statutes. Copyright 2003, Oxford University Press.