Private Law Theory

ABSTRACT
Limited liability is an entity characteristic that excuses the entity’s investors from liability for damages caused by the entity’s wrongful acts. Although prominent scholars have referred to limited liability as ‘one of mankind’s greatest ideas’, limited tort liability is a costly economic mistake. Limited liability channels investment away from projects that increase social wealth into projects that take excessive risks, harm third parties, and shift their costs to their victims and government. Limited liability puts businesses that capitalize and insure to meet their obligations at a competitive disadvantage. The loss to the economy from limited liability’s externalization of risk has been estimated at 20% of GDP, making it perhaps the largest single drag on the American economy.

Building on Professor Nina Mendelson’s ‘control-based’ approach, this Article proposes a federal Controller Liability Statute that would make the beneficial owners of entities doing business in the United States liable for the entities’ torts. Unlike Mendelson’s proposal, Controller Liability would be based on control, not capacity to control, and would attach to non-shareholder controllers. The controller at the time of the wrongful act, not the occurrence, would be liable.

Controller Liability solves the problems with Professors Hansmann and Kraakman’s pro rata unlimited liability proposal. Controller Liability could usually be enforced in a single lawsuit rather than the thousands of lawsuits required by pro rata liability. Controller Liability would also solve the arbitrage-to-non-enforcing-jurisdictions problem identified by Professor Joseph Grundfest. The solution, first proposed in this Article, is to require beneficial owners worldwide to consent to the jurisdiction of U.S. courts, enter Controller Liability judgments in the United States, and bar those with unsatisfied Controller Liability judgments from doing business in the United States.

LoPucki, Lynn M, Against Limited Liability (January 1, 2026), University of Florida Levin College of Law Research Paper Forthcoming: Boston University Law Review (forthcoming 2026).