Bankruptcy and the future of aggregate litigation: the past as prologue?

• Author: McKenzie, Troy A.
• Position: Introduction into I. The Rise and Fall of the Equity Receivership C. The End of the Equity Receivership 2. The Chandler Act and the Turn to Administrative Supervision in Bankruptcy, p. 839-866 - F. Hodge O'Neal Corporate and Securities Law Symposium: The Future of Class Actions

TABLE OF CONTENTS INTRODUCTION I. THE RISE AND FALL OF THE EQUITY RECEIVERSHIP A. Railroads and the Problem of Group Resolution B. The Equity Receivership 1. The Expansion of Receiverships 2. The "New-fashioned" Receivership C. The End of the Equity Receivership 1. The First Wave of Statutory Reforms 2. The Chandler Act and the Turn to Administrative Supervision in Bankruptcy II. THE RETURN OF BANKRUPTCY A. Reorganization Practice After the Fall 1. The Chapter XI Loophole in Agency Supervision 2. Exploiting the Loophole B. The Bankruptcy Bar and Reform III. LESSONS FOR THE FUTURE OF AGGREGATE LITIGATION A. The Cycles of an Aggregation Device 1. Stages of Innovation and Reform 2. Assessing Proposals for Class Action Reform B. Lawyers, Aggregation, and Institutional Reform CONCLUSION INTRODUCTION

You have heard this story before. A promising new procedure for the aggregation and efficient resolution of dispersed claims develops from more rudimentary antecedents. The device rapidly evolves through experimentation and innovation on the part of lawyers and judges. At first, this new way of gathering together claimants is recognized as a necessary means to achieve socially useful ends, and those involved in its development are seen as public-minded advocates. Then, as the device matures, a different mood sets in. Courts become increasingly skeptical of its more adventurous expansions. Commentators--sometimes for ideological purposes--attack the procedure as the creature of parasitic lawyers preying on a helpless public. The bar that has grown up around the procedural device attempts to preserve the gains of two generations of lawyering. Eventually, however, Congress steps in and whittles away the space for further innovation. In the end, judicial, academic, and legislative criticisms diminish the usefulness of a once promising procedural advancement.

That is the story of bankruptcy, but it should sound familiar to those who follow the development of the class action. Any discussion of the future of the class action frequently involves looking to its past. (1) That tale is a familiar one, too. Although not wholly a creature of the modern age, (2) the class action in its current shape was formed by the hydraulic pressures of contemporary society. Mass production and communication, combined with the wide distribution of goods and services, exposes large numbers of people to common wrongdoing. (3) At the same time, individual adjudication of mass claims presents high transaction costs for litigants and serious institutional concerns for courts fearing crowded dockets and inconsistent judgments. (4) Together, these realities channel litigation, perhaps inevitably, toward aggregation: The class action--at least the version of the procedural device born in 1966 when Rule 23 was revamped--answered the drive toward aggregation with a form of representative litigation. From that origin story, the class action is then said to trace an Icarus-like arc from rise to ruin. Hubris, combined with the heat of political, (6) judicial, (7) and academic (8) criticism, brought the class action back down to earth. The desire for aggregation now has to seek other outlets for relief.

Bankruptcy, when it gets mentioned in a discussion of the development of the class action, usually appears only as a digression from the main narrative. Bankruptcy became relevant over the last twenty-five years as a form of aggregation that could be a substitute for the class action. (9) Although not able to serve as a complete substitute, bankruptcy came to play a key role in the resolution of some mass tort claims that could not be resolved through class actions. Asbestos litigation represents the prime example of bankruptcy's use as an aggregation device once attempts at global resolution through the class action had failed. (10) Bankruptcy, it has been said, was transformed by the asbestos crisis in order to become a viable alternative to the class action. (11) Outside of the relatively confined niche of enterprise-threatening mass tort liability, however, bankruptcy does not figure prominently in the debate about the possible future course of aggregate litigation.

This view of the place of bankruptcy is too narrow. Bankruptcy is more than a limited substitute for the class action, and it holds broader lessons for those interested in the future of aggregate litigation. It can serve as a reference model for judging the proper shape of aggregation. But I do not tackle that broader claim in this Article. Instead, I wish to press a more limited line of argument. I will draw out parallels between the twin arcs of the development of bankruptcy law and the class action.

My goal is to demonstrate that bankruptcy serves as a rich source of historical guidance for those interested in the future path of aggregate litigation. Bankruptcy law--and, more specifically, the law governing the reorganization of firms--is the oldest, most enduring, and most far-reaching form of procedural aggregation in use in the United States. (12) To be sure, courts have resorted to other examples of collective litigation in various forms throughout history. (13) I do not argue that bankruptcy is sui generis in that sense. But bankruptcy law is unique in two respects. First, the Bankruptcy Code (14) retains much of the basic working order of the procedural innovations that first debuted more than 150 years ago with the development of the equity receivership--the non-statutory form of reorganization that contains the antecedents of Chapter 11 of the modern Code. Second, like the rise of aggregation in civil litigation, the law of business reorganizations developed as a direct result of the pressing needs of a modern industrial economy in which mass resolution was required to address the claims of widely dispersed individual claimants. Thus, bankruptcy law has taken a long path that hints at the direction other forms of aggregate litigation may follow in the future.

What draws me to this comparison? When viewed in its broad sweep, the history of American bankruptcy law bears a close resemblance to the more recent history of the class action. The earliest form of court-centered business reorganization arose out of the realities created by the great corporations of the day--the railroads. (15) An increasingly sophisticated reorganization practice in railroad cases drove the development of a large body of case law--and an influential body of lawyers specializing in the area. Beyond the railroads, other business enterprises made use of the nascent reorganization device as it was refined. Those developments spurred the formulation of procedural rules that embraced, expanded, and influenced the practice. (16) But success bred serious attacks on reorganization law. Most prominently, commentators came to see the reorganization bar as corrupt. Rather than being viewed as public-spirited professionals providing a necessary service in the best traditions of the bar, reorganization lawyers were painted as deeply conflicted actors who placed their own self-interest above those of claimants. (17) A sustained legislative reform effort followed, then grew into an outright attack in the New Deal era that limited the freewheeling development of reorganization law. The mood of suspicion persisted, and reorganization practice continued at a diminished level. Yet, bankruptcy law returned in more vibrant form at the end of that period of exile. (18) Only after a generation, however, did the cycle reverse when the modern Bankruptcy Code was adopted in 1978. (19)

Will the class action follow a similar arc? The answer to that question is, of course, unknowable. But the revival of bankruptcy after its dramatic fall (20) may offer some lessons for the future trajectory of the class action-and aggregate litigation more broadly.

First, the pressures that drove the development of a court-centered form of business reorganization did not dissipate in the years after the legislative attack in the 1930s on reorganization practice. Instead, other mechanisms served as an outlet for those pressures. The New Deal reforms sought to make a regime under the auspices of an administrative agency (the Securities and Exchange Commission (SEC)) the principal route through which reorganizations would be channeled. Nevertheless, a more flexible route to business reorganization did not disappear entirely. Instead, when the court-centered but SEC-supervised regime proved inadequate to handle the realities of resolving the financial distress of firms, lawyers and the courts took the lead in forging an alternative reorganization process. (21) A small and limited form of court-centered and lawyer-driven reorganization returned to fill the gap.

Second, the control and supervision of lawyers was an integral part of bankruptcy's revival story. While acknowledging that a court-centered and lawyer-driven process would remain crucial to business reorganizations, the later generation of reformers who led the way to the Bankruptcy Code in 1978 were particularly concerned about the role of lawyers in the bankruptcy process. They recognized that the tarnished reputation of bankruptcy lawyers had impeded efforts at bankruptcy reform. (22) So, partly out of concern about actually deterring lawyer misconduct and partly out of...