Doing Equity in Bankruptcy

• Publication year: 2017

Doing Equity in Bankruptcy

Daniel J. Bussel

DOING EQUITY IN BANKRUPTCY

Daniel J. Bussel^*

Introduction...............................................................................................14

I. Equitable Relief under Nonbankruptcy Law...........................16

A. Contractual Rights ..................................................................... 16

1. Historical Preference for Damages...................................... 17
2. Inherently Discretionary Nature of Specific Relief............... 19
3. Modern Trend of More Liberal Use of Equitable Remedies ............................................................................... 22

a. Sale of Goods................................................................. 23
b. Caselaw Trend Toward General Balancing .................. 24

B. Statutory Rights .......................................................................... 25

1. Discretion in Affording Nonmonetary Relief under Statutes 27
2. Increasing Scope of Statutory Rights.................................... 29

C. Insolvency under Nonbankruptcy Law ....................................... 30

II. Bankruptcy Courts May Monetize Nonbankruptcy Entitlements to Equitable Relief................................................32

A. Bankruptcy and Nonbankruptcy Equities Must Be Balanced to Determine Whether a Nonbankruptcy Right to Specific Relief Is a Claim .......................................................................................... 32

1. Statutory Analysis ................................................................. 34
2. Policy Basis .......................................................................... 35
3. Supporting Caselaw .............................................................. 36

B. Role of Debtor Insolvency in Bankruptcy................................... 40
C. Critique of Alternative Approaches............................................ 41

1. Udell ..................................................................................... 41
2. "Always Monetize"............................................................... 43

III. Factors Informing Bankruptcy Court Discretion...................48

A. The Bankruptcy Policies............................................................. 48
B. Contractual Rights ...................................................................... 49
C. Coasean Bargaining .................................................................... 50

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D. Private Interests Only .................................................................. 51
E. Dischargeability .......................................................................... 51
F. Equitable Relief Linked to Insolvency .........................................52
G. Conveyancing .............................................................................. 52

Conclusion...................................................................................................53

INTRODUCTION

Bankruptcy law has long struggled with specific performance and other equitable remedies.¹ Confusion in the caselaw abounds.² Bankruptcy policies favoring equality of treatment, maximizing values, and reorganization all suggest that, in bankruptcy, the non-debtor party's right to specific relief, like money damage remedies, should be treated as "claims," monetized, given pro rata treatment (unless otherwise entitled to priority) and discharged.³ Notwithstanding those policies, and the text of the Bankruptcy Code (the Code),⁴ many courts, particularly Article III appellate courts, have concluded that an injunction or other equitable remedy is not a "claim" unless the court's decree can be satisfied by the payment of money under nonbankruptcy law.⁵

This Article argues that consistent with the Code's text and policy, injunctions or other forms of equitable relief should be presumptively treated as "claims," even if nonbankruptcy law does not permit the enjoined party to satisfy the injunction by the payment of money. This presumption, however, should be rebuttable. No categorical rule can determine when equitable remedies should be monetized and discharged. Consistent with a chancery tradition of flexibility and discretion in the employment of equitable remedies stretching back for

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centuries,⁶ however, a balancing approach can appropriately determine the availability of equitable relief.

The following circumstances all weigh in favor of Code-imposed monetization:

i. promotion of bankruptcy policies favoring collective value maximization, equality of treatment among similarly situated creditors, and rehabilitation of the debtor;
ii. the source of the equitable right is contractual;
iii. Coasean bargaining is otherwise feasible;
iv. only the private interests of the parties rather than third party or public interests support the issuance of injunctive relief;
v. if the debtor is an individual rather than an entity, a monetary claim based on the same breach of performance would be dischargeable;
vi. the availability of injunctive relief is tied to insolvency under the otherwise applicable nonbankruptcy law; and
vii. the injunction at issue is not a means for simply preserving from an avoidance a conveyance of property that otherwise would be a final non-avoidable transfer under bankruptcy law.

When these factors tilt against equitable relief then monetization and discharge is the correct result absent compelling countervailing nonbankruptcy policies.

The argument in support of this balancing approach is developed below. Part I discusses the availability of equitable relief under nonbankruptcy law, including the tradition of discretion that historically governs the availability of such relief. It also notes the increasing availability of such relief under both statute and common law in the past 30 years, a trend that only heightens the importance of getting the treatment in bankruptcy right. Part II critiques the confused state of the authorities regarding treatment of equitable remedies in bankruptcy and argues that the existing Code, properly construed, carries forward nonbankruptcy tradition by conferring discretion on bankruptcy judges to monetize nonbankruptcy entitlements to equitable relief by weighing bankruptcy as well as nonbankruptcy equities. Part III lays out special insolvency-related factors that should govern that exercise of discretion in bankruptcy. A short conclusion follows.

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I. EQUITABLE RELIEF UNDER NONBANKRUPTCY LAW

Equitable relief may be available to both private and governmental parties under contract law and a wide variety of statutes. Even if nonmonetary equitable relief is available, typically the injured party may elect monetary relief in lieu of, or in addition to, equitable relief. And even if equitable relief is the usual remedy for a particular contractual or statutory breach of duty, courts generally have discretion to deny equitable relief based on equitable or public policy considerations, even when the adequacy of monetary relief is doubtful.⁷ Bankruptcy equities or policies, however, are commonly ignored by nonbankruptcy courts faced with a question of whether to make equitable relief available. Indeed, perversely from the point of view of bankruptcy policy, nonbankruptcy courts sometimes view the obligee's insolvency as a relevant, or even sufficient, equitable basis to substitute specific relief for monetary relief that would otherwise be afforded.⁸

A. Contractual Rights

Contract law generally seeks to place an injured party in as good a position as it would have enjoyed had the breaching counterparty performed: the injured party's "expectancy" interest.⁹ Both specific and substitutionary "expectancy" remedies exist. Substitution will involve some effort to measure what was lost in money terms (subject to problems of proof and other limitations on contract recovery). Such damages compensate the injured party for the expected gain the promised performance would have generated.

A legal system that has only compensatory, substitutionary remedies does not regulate conduct directly.¹⁰ If circumstances render monetary relief inadequate, a second "expectancy" remedy, a court decree requiring the party in breach to perform its original obligations under the contract on pain of contempt,

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may be available.¹¹ Equitable remedies under nonbankruptcy law that may be invoked to remedy a breach of contract include specific performance,¹² injunction,¹³ accounting for profits,¹⁴ constructive trusts,¹⁵ equitable liens,¹⁶ subrogation,¹⁷ equitable rescission,¹⁸ quiet title,¹⁹ and reformation.²⁰

1. Historical Preference for Damages

Historically, money damages is the preferred mode of legal enforcement at common law. Equitable remedies are said to be available only when damages are "inadequate," and, moreover, remain subject to the court's consideration of the equities of the parties, third party interests, administrative burdens in framing and overseeing decrees, and public policy. Courts regularly invoke those limitations to resist deploying equitable remedies.²¹ Damages may be deemed inadequate if (1) damages are too speculative; (2) the injured party cannot obtain a substitute good or benefit; (3) money judgments cannot be collected against the breaching party; or (4) third party or public interests are implicated.²² Specific performance may also be preferred where money damages would fail

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to provide the injured party either the means to obtain a substitute performance in the market or the expected financial gains from the promised performance.²³

Precluding equitable relief if monetary remedies are adequate preserves the hierarchy between legal and equitable remedies. Equitable remedies accordingly remain "exceptional" and discretionary. This doctrine has been criticized by some scholars,²⁴ but remains standard fare in the courts and has also long been codified by many state and federal statutes, including the Judiciary...