Equity in Bankruptcy Courts: Public Priorities.

• Author: Westbrook, Jay Lawrence
• Position: Symposium on Equity in the Bankruptcy Court

For a lawyer, "equity" is an enormous word. Far beyond a technical reference to a group of courts in England, it evokes broad notions of fair consideration of all the values and circumstances that should be weighed in rendering a judicial decision. It is often used in contrast to strict legal rules, especially those in statutes. Its multiple appearances in the Bankruptcy Code, without any definition, suggest a Congressional realization that bankruptcy jurisdiction uniquely sweeps across nearly every part of our law and applies to a great variety of circumstances, defying adequate anticipation in the statute.

This paper discusses the aspects of equity in bankruptcy that relate to societal interests ("public interests" (1)) in the confirmation of plans and other decisions made in Chapter 11 cases. It corresponds to a concern I have long expressed about the lack of focus on public interests in bankruptcy courts and bankruptcy scholarship, together with the frequent assumption that Chapter 11 is entirely about negotiations among private commercial interests. (2)

Public interests should guide decisions in bankruptcy cases and often do. However, for various reasons, including the "plain meaning" approach to statutory interpretation, its impact is less than transparent. Instead, it is often equity that is invoked as a vehicle for decisions actually fashioned on a public interest. Whether we believe the impact of a particular public interest claim is legitimate or not, we should want it to be clearly revealed in court decisions. That goal could be greatly advanced if public interest provisions were inserted in the Bankruptcy Code, joining its numerous references to "equity" as an additional illumination of the complex interactions of conflicting interests in Chapter 11 proceedings.

To achieve results that reflect a transparent balancing of private interests and public interests, this paper suggests that Congress should enact:

1. Provisions that authorize the courts to consider specific noncommercial interests, like employment in the community; and

2. Provisions that empower the court in every Chapter 11 case to consider public interests not just by "doing equity" between interested parties, but by including equitable consideration of the interests of society as a whole when interpreting and applying the Bankruptcy Code (the "Code"). (3)

   Equity plays three roles in this discussion:

1. It has provided cover for public interest decisions under the Code; to that extent it defeats transparency.

2. Its frequent use in the Code reflects the fact that Congress understands that the very nature of Chapter 11 bankruptcy means that many different interests converge in complex and novel ways and the courts require a proportionate flexibility.

3. The fact that the flexibility of equity has not been abused should quiet fears that public interest provisions in the Code will result in judges pursuing unconstrained ideological agendas.

   1. BACKGROUND

      The phrase "doing equity" is used both specifically and generally. In its specific application, it is used to argue that the special circumstances of the case before the decision maker require exceptional treatment. That is not the sort of equity discussed here. By contrast, a general claim for equitable treatment frequently relies upon one or more interests of the public not legitimated by a specific reference in the relevant statute, including the examples discussed in this article.

      Equity is often thought of as granting discretion, but in the second sense it reflects the broad sweep of policies that arise in Chapter 11, a type of proceeding that compares to ordinary civil litigation as a city compares to a single street. As Professor Jacoby has it: "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." (4) I think it is realization of that fact that has led to equity's multiple appearances in the Code. Unfortunately, under that heading the public interests that influence decisions are too often unarticulated or vague, leaving a decision to be understood as an exercise of undefined discretion, "the equities of the case."

      The concern for public interests of various sorts is necessary to the correct interpretation and application of bankruptcy law. Modern reorganization law represents a singular challenge of reconciling a range of public interests of various sorts with important private interests. (5) The duty to engage in that balancing in turn relates to the tension between the impossibility of drafting legislation anticipating all the material elements of a future decision amid the complexities of a Chapter 11 proceeding and the need to take account of those elements that turn out to be relevant to that decision. For that reason, accountability requires that the necessary balancing of public and private interests should be a transparent element of any important decision.

      I propose that the statute should articulate the important place of multiple public interests, withdrawing them from their reliance on "equities" as a basis for application. (6) Such a provision would not dictate a result in a given case, but would require a decision maker concerned with a public interest to explain the relevance of that public interest to the outcome of the decision. By its explicit authorization of a public interest analysis, the statute would relieve the pressure applied by the "plain meaning" rule (7) to obscure a purposive reading of the statute based upon relevant public interests.

      This paper begins with a summary of conflicting frames for Chapter 11, from a view of bankruptcy law as having little substantive content and having as its overarching purpose the promotion of private bargaining, on the one hand, to a perspective that accounts for general public interests that may be undervalued and not necessarily represented by claims in the conventional sense, on the other.

      A general theme is that the "bargaining among interests" framing of Chapter 11 as an institution risks deflecting parties, as well as courts, from undervalued public interests. (8) Yet a substantial part of the justification for reorganization has been to serve public interests like preservation of jobs and economic stability. (9) Advancement of these and other public interests has had an important role in the support of Chapter 11 in Congress, but they are not specified in the statute and thus confront the plain-meaning dogma.

   2. PRIVATE AND PUBLIC INTERESTS

      1. THE DEBATE

         I start by describing the existing landscape. It is nicely introduced by the debate between Professors Elizabeth Warren and Douglas Baird in the late Eighties. (10) In general, it framed the divergence between a narrow view of Chapter 11 designed to provide a procedure for private bargaining and one that identified a host of relevant public policies 'policies that must be balanced against private interests and among themselves as well. (11)

         Baird put forward the idea that bankruptcy law should be regarded as a relatively narrow field. For him, the purpose of bankruptcy was limited to adjusting the preexisting entitlements created by other laws. (12) Bankruptcy should not create independent entitlements (13) but should provide procedures for allocating scarce resources according to preexisting rights in an orderly way. In a later work, he characterized himself and others who take this view as "proceduralists," because they regard bankruptcy as a purely procedural statute. (14) The approach is also a form of "rights talk" in commercial law because it assumes that bankruptcy is an allocation process based on preexisting rights.

         Warren, on the other hand, claimed that bankruptcy is a necessary occasion for applying a number of different public policies, including issues like the treatment of future mass tort claimants and toxic waste sites. (15) She did not regard federal bankruptcy law as bound in every instance to make the same distributional decisions that state law or federal law would apply outside of bankruptcy. (16) For her, once circumstances create a general default and there are too few resources to satisfy all concerned, the policy landscape may be fundamentally changed, and bankruptcy must reflect that change. (17) That modification process is a part of bankruptcy law and policy.

         Baird would regard these nonprocedural questions as properly governed by other laws and related policies, which the bankruptcy courts simply apply when appropriate. (18) If there is a decision to be made that involves those other policies, the bankruptcy courts should modify the nonbankruptcy results as little as possible. (19) Ideally, bankruptcy law should not matter except in a limited procedural way. (20) Combining this narrow view of bankruptcy policy with the plain meaning rule, which can be understood to imply that a policy or rule must be explicit in a statute, has the effect of greatly narrowing the number of public interests that can be recognized in bankruptcy.

      2. PRIVATE BARGAINING

         There is one bankruptcy policy that is universally agreed: the maximization of the debtor's value available for stakeholders. (21) Following the Baird approach, a number of scholars came to see that policy as being the central purpose of bankruptcy law, if not the only one. (22) Baird's approach fits nicely with Professor Jackson's seminal article (23) that hypothesized a bargain among creditors as the test for a good bankruptcy rule: would such an approach be agreed among creditors in advance as the best way to maximize value? However, that approach required a quasi-Rawlsian veil of ignorance, because each real creditor would prefer adoption of the bargain most beneficial to that creditor. That line of reasoning then led to the contractualist debate that lasted almost a decade.

         The contractualists, led by Dean Rasmussen, sought to make the Jacksonian...