CORPORATE BANKRUPTCY HYBRIDITY.

Author:Jacoby, Melissa B.
Position:Symposium on the Fortieth Anniversary of the 1978 Bankruptcy Code
 
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INTRODUCTION 1716 I. PRIVATE ACTORS, PUBLIC GOALS: THE PUBLIC-PRIVATE PARTNERSHIP 1719 A. What Is It? 1719 B. Utility for Corporate Bankruptcy 1721 C. Contracts and Other Liabilities 1723 D. Follow the Money 1726 E. Oversight and Standard-Setting 1727 F. Implications 1729 II. MODERN DEVELOPMENTS THAT SKEW THE PARTNERSHIP 1730 A. Control by Lending Agreement 1730 B. Court Concentration, Squared 1731 1. The Initial Forum 1731 2. Access to Appellate Review: Equitable Mootness and More 1733 C. Disabling a Disciplining Backstop 1735 D. Shifting Litigation Responsibility 1737 III. THREE STEPS TOWARD RESTORING HYBRIDITY 1739 A. Procedural Justice 1739 B. The Sunlight Fund 1742 C. Rewriting the Invitation List 1743 CONCLUSION 1747 INTRODUCTION

Spend a day in a busy bankruptcy court and your research agenda could be set for life. Bankruptcy is crisis management for individuals, business entities, and even governments. The entities that file for bankruptcy come in all shapes and sizes, as do their troubles. In addition to basic capital structure problems, bankruptcy dockets and courtrooms contain allegations of sexual harassment, race discrimination, systemic financial risk, First Amendment issues, toxic and defective products (medical devices, airplanes, and automobiles), global warming litigation, and pyramid schemes. This catastrophist's dream has the potential to provoke engagement from scholars spanning the law school curriculum. (1)

That breadth of engagement, however, is missing. In a public lecture, commercial law scholar and teacher Jay Lawrence Westbrook lamented the lack of "public interest" concerns in corporate bankruptcy scholarship. (2) That term signals something more than the aggregation of individual rights-based interests and arguments, to encompass the system's broader effects--matters that cannot simply be waived by creditors when they settle their own claims. In addition, the scholarship insufficiently attends to claimants whose rights against a bankrupt company arise through pathways other than the fine print of a contract.

In short, the field of corporate bankruptcy has been redistricted to wealth maximization, voluntary lenders, and investors. (3) Academic careers have flourished characterizing Chapter 11 as a mere corporate control transaction among investors, shuffling pieces of the company's capital structure. (4) Whether due to this framing, the lack of a popular alternative, or both, the redistricters tend to ignore scholarly contributions that construe the field more broadly. (5)

This Article is an invitation to explore an alternative model: corporate bankruptcy as a public-private partnership. In this model, allocating responsibilities to private parties can improve regulatory functioning, but parties cannot redefine system goals purely for their own benefit. The application of this framework is supported by an institutional analysis of the bankruptcy system, drawing on privatization and administrative law scholarship that has received too little attention in bankruptcy debates. (6) Scholars of the regulatory state understand that efficiency is not the exclusive objective: "the public law perspective asks not whether privatization is efficient, but whether it erodes the public law norms that these constitutional and statutory limits are designed to protect." (7) Private contributions to a system must be solicited and managed in ways that improve, not undermine, public regulatory objectives. (8)

In addition to enlivening academic debates, the public-private partnership model sheds new light on real-world problems. And problems abound. The American Bankruptcy Institute Commission on Chapter 11 recently released a report cataloging the ways in which Chapter 11 no longer functions in accordance with its original legislative mandate. (9) The public-private partnership model not only helps diagnose shortcomings in Chapter 11 as it operates on the ground, but expands the range of options for addressing them.

This Article unpacks these ideas as follows. Part I defines corporate bankruptcy's public-private partnership, interrogating the common assumption that bankruptcy is private law, using the analytical tools of administrative law and privatization scholarship. Topics include the nature of liabilities addressed in Chapter 11, the funding of the bankruptcy system, and the standard-setting and oversight regime set forth in black-letter bankruptcy law.

Part II explores features of modern Chapter 11 that distort the balance in the public-private partnership. The first is the most well-established: financing in Chapter 11 as a means of shifting control to private parties for private gain. The discussion then turns to features that connect

to the public-private partnership in subtler ways, including case venue and equitable mootness doctrine (which combine to concentrate cases and court authority); disabling the threat of trustee appointment as a disciplinary backstop; and shifting major debtor-in-possession obligations to creditors' committees.

Part III offers ideas, still in germinal form, for improving the system inspired by the public-private partnership model. First, all repeat players that shape the system, including powerful private actors, must attend to procedural justice to maintain the system's legitimacy. Social psychology research conducted in nonbankruptcy settings shows that procedural justice (the sense that the process was fair) is more critical to maintaining public confidence than economically efficient outcomes. (10) A legal procedure thought to be efficient (by whatever measure) cannot stand if the procedure imposes intolerable procedural justice costs. In a public-private partnership, procedural justice is not the sole responsibility of public officials. Private parties that dominate Chapter 11 cases also must be held accountable.

Second, I propose the Sunlight Fund, a not-for-profit enterprise. To moderate the leverage of private lenders, the Sunlight Fund could be tapped to finance portions of Chapter 11 cases with the potential to enhance the bankruptcy estate, or achieve other public objectives.

Returning to the academic realm, Part III lastly calls for a reckoning with the field's homogeneity--in ideology (traditional law and economics), (11) and demography (white and male). (12) Making readers more attentive to whom they cite and invite could reset the boundaries of not only who counts as a "leading scholar," but of the field itself, allowing the kind of engagement with a broader set of problems and methods that Jay Westbrook has endorsed.

  1. PRIVATE ACTORS, PUBLIC GOALS: THE PUBLIC-PRIVATE PARTNERSHIP

    1. What Is It?

      Governments and private parties collaborate on public projects in seemingly infinite patterns. (13) The nature and intensity of private involvement in any regulatory enterprise can vary. The public-private partnership is one way of expressing such collaborations. An early publication using the term defines the concept this way:

      a legal hybrid which possesses some characteristics of a purely private corporation and others of a purely governmental corporation. It may be owned jointly by government and private interests or owned privately and financed jointly with public and private funds. But however it is structured, it is formed to accomplish a public purpose. (14) This framework recognizes that private actors may offer expertise, efficiency, and innovation. (15) But there is an important catch: the partnership is meant to promote public values. Achieving those objectives requires planning, not merely a handover of the keys to willing profit seekers. (16) Private provision of public goods, without sufficient safeguards, risks end runs around constitutional obligations of state actors. (17) Erosion of the public foundation imposes stress on democracy, accountability, and general welfare. (18) Gillian Metzger notes that "[t]he concerns raised by privatization are not merely free-floating normative or policy concerns; they emanate from the basic constitutional accountability premise that government is subject to certain constraints in the way it operates." (19) Delegations to private actors must be "adequately structured to preserve constitutional accountability." (20) Left to their own devices, private actors may underinvest in socially useful activities and overinvest in activities with little or no social utility. (21) When governments use market mechanisms, they can and should advance public values. (22)

      Defining "the public interest" can be a contested exercise. Recognizing that the public interest is unlikely to be boiled down to just one thing is an important step. Martha Minow's work on privatization offers an illustrative list of public goals and values key to collaborations of many kinds:

      - Achieving social provision--human needs, redressing inequality;

      - Freedom of self-expression and political practice;

      - Pluralism--cultivate "participation, self-governance, mutual aid, and care for others";

      - Democracy;

      - Division of labor; and

      - Accountability. (23)

      The last point, accountability, is particularly critical, says Minow, to assess fulfillment of other values. (24) As the list suggests, the values need not be specific and exclusive to the substantive focus of the partnership and need not be winnowed to a single overriding purpose. We should speak of public values instead of "the public interest" as a monolith. (25)

    2. Utility for Corporate Bankruptcy

      Corporate bankruptcy's frequent characterization as private law, rather than public law or a hybrid, is curious and overdue for interrogation. Limited liability and other features associated with a corporate charter are forms of government largess, state-conferred public benefits. (26) Business restructuring and failure affect more than the coffers of voluntary investors; they impair the rights of individuals who made no conscious choice to dabble in distressed debt and yet may not be able to...

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