Yes, legally Purism should have followed its stated refund policy and kept paying out refunds for the L5 until it declared bankruptcy. If disgruntled customers had organized a class-action lawsuit against Purism for not repaying their refund requests or a governmental agency had cracked down on Purism, they could have forced the company into bankruptcy.
That would have helped the people who demanded their refunds early before Purism ran out of funds and had to declare bankruptcy. However, it is likely that a bankruptcy would have cancelled the L5, deprived the world of the code produced for the L5 and resulted in far more people being harmed than Purism’s decision to delay paying the refunds and only provide immediate refunds in the form of credit to buy other Purism products. My conclusion is that there was no good decision that Purism could have made in early 2020 which wouldn’t have resulted in some customers getting harmed, but it appears to me that Purism made a decision in favor of the majority at the expense of the minority that wanted refunds. The law doesn’t work according to Thomas Bentham’s “utilitarian calculus”, but I don’t think the legal solution to the problem would have resulted in a good outcome for the majority of people involved.
@Privacy2 has pointed to the example of Jolla to argue that Purism could have reorganized under a Chapter 11 bankruptcy, but I’m skeptical that would have worked for Purism. Jolla was a company formed principally to continue the development of the mobile operating system which Nokia had abandoned, and its hardware sales were primarily a means to advertise its Sailfish OS so it could sell the OS. Jolla was able to retreat to just being a software company and it found new funders to avoid a formal bankruptcy.
Purism didn’t have another business to fall back on like Jolla and if Purism had declared bankruptcy, I doubt that it could have continued as a company selling Linux hardware, because customers for its other products (laptops, mini-PCs, etc) would have lost confidence in its ability to deliver and simply stopped ordering. Maybe Purism could have tried to do a Chapter 11 reorganization, but I’m pretty sure that Purism wouldn’t have lasted long without new orders and ended up in a Chapter 7 liquidation. This is all speculation on my part, since I haven’t seen Purism’s books, but it is hard to imagine anyone ordering from Purism if it had declared bankruptcy and had thousands of angry customers complaining about their lost deposits for the L5. In that situation, I don’t see how Purism could have gotten preorders for the L14 and Mini to bring them to market, how it could have raised any money on Kickfurther or how it could have raised $10 million in convertible notes.
It is instructive to look at what happened to Jolla’s customers. From what I read, Jolla was unable to deliver its Jolla C tablet, because one of its chief backers had financial problems, and couldn’t keep funding the company. Jolla was able to refund half of each pre-order, and it said that its customers could use the other half of their preorders for the Jolla C to get licenses for Sailfish OS that they could use to install the OS on Xperias and other phones. 163 customers were randomly selected to get their full refunds, but the vast majority only got half of their money back. In contrast, Purism has been able to deliver the L5 to the majority of customers who didn’t cancel their orders.
This isn’t excusing how Purism has handled the refunds. I think that it is disgraceful how Purism has treated those customers, telling them that they would get their refund when they got to their position in the queue, and then saying privately in email to some customers that they couldn’t get a refund and could only get credit to buy other products, while saying in the email to Rossmann that the company still is trying to pay back the refunds when it gets the funds. I have criticized Purism for not publicly clarifying its policy for the the 600 customers who are still awaiting refunds. At this point we don’t know if Purism intends to ever refund them or not. Still, they are in a better situation than Jolla’s customers who only got half refunds, since they at least have the possibility of recovering their deposits by accepting the Librem 5 and reselling it for at least as much as they paid.
If Purism had declared bankruptcy in 2020, then the development of Phosh probably would have stopped, which would have been a loss for the users of mobile Linux, since Phosh has become the leading mobile Linux interface (according to PINE64’s poll). In addition, libhandy, libadwaita, Calls and Chats wouldn’t have become part of GNOME, and GNOME wouldn’t have become adaptive and touch friendly, so we would lose the benefit of Purism’s dev work for the wider Linux community.
If Purism had disappeared as a company, work on PureOS would have stopped, which would have an effect on the FSF, since PureOS has become the leading distro with 100% free software (according to distrowatch.org). Without Purism, we would probably have fewer Linux laptops on the market today that support Coreboot. People had been asking System76 to support Coreboot for years (2008, 2010, 2015, 2015), but it was likely the competitive pressure from Purism that convinced System76 to finally start working on it, and that in turn pushed Tuxedo Computer, Star Labs and NovaCustom to also add support for Coreboot.
Finally, we have to consider what would have happened to customers if Purism had declared bankruptcy. The US Bankruptcy Code establishes an order of priority for the payout to creditors. If Purism had any bank loans (i.e. secured creditors with a lien on the assets of the company), they would have been paid first. Any tort claims and any employees owed back pay or benefits would be paid next. If any money were still left, customers who have deposits up to $1800 for the “purchase, lease, or rental of property, good or service” would get paid next according to 11 U.S.C. Section 507(a)(7). However, customers who preordered the L5 would have to file a proof of claim in the bankruptcy case and they would have to do it before the “claims bar date” set by the court. If the customers failed to file a proof of claim by that date, then they would forfeit their right to payment. In all likelihood, most customers probably wouldn’t file their claims correctly, and it is doubtful that there would be much money left for the customers at that point, since a Purism employee said in the email to Rossmann that the company didn’t have the money to pay out the refund requests.
I feel for the people that are still waiting for their refunds from Purism, but it looks to me that they would be in a worse position if Purism had declared bankruptcy in 2020.