Government Activism in Bankruptcy

• Publication year: 2021

Government Activism in Bankruptcy

Jared A. Ellias

George Triantis

GOVERNMENT ACTIVISM IN BANKRUPTCY

JaredA. Ellias^* George Triantis^**

Abstract

It is widely recognized that bankruptcy law can stymie regulatory enforcement and present challenges for governments when regulated businesses file for Chapter 11. It is less-widely understood that bankruptcy law can present governments with opportunities to advance policy goals if they are willing to adopt tactics traditionally associated with activist investors, a strategy we call "government bankruptcy activism." The bankruptcy filings by Chrysler and General Motors in 2009 are a famous example: the government of the United States used the bankruptcy process to help both auto manufacturers resolve their financial distress while promoting the policy objectives of protecting union workers and addressing climate change. A decade later, the government of California applied its bargaining power in the Pacific Gas & Electric Company's Chapter 11 case to protect climate policies and the victims of wildfires. These examples illustrate that, by tapping into the bankruptcy system, governments gain access to the exceptional powers that a debtor enjoys under bankruptcy law, which can complement the traditional tools of appropriations and regulation to facilitate and accelerate policy outcomes. This strategy is especially useful in times of urgency and policy paralysis, when government bankruptcy activism can provide a pathway past veto players in the political system. However, making policy through the bankruptcy system presents potential downsides as well, as it may also allow governments to evade democratic accountability and obscure the financial losses that stakeholders are forced to absorb to help fund those policy outcomes.

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Introduction.............................................................................................511

I. Defensive Government Action in Bankruptcy........................514

II. Goals and Methods of Government Bankruptcy Activism ..517

III. Government Activism in Chrysler and PG&E.........................522

A. Chrysler.................................................................................... 523

1. Chrysler's Distress and Bankruptcy Proceeding................ 523
2. The Obama Administration's Policy Objectives.................. 525
3. How Government Used Its Leverage in Bankruptcy........... 527
4. Who Bore the Cost of Policy Goals?................................... 528

B. Pacific Gas & Electric .............................................................. 530

1. The State's Policy Goals with PG&E.................................. 531
2. Background to the Bankruptcy Filing................................. 533
3. The Chapter 11 Petition ...................................................... 535
4. AB1054: The State Charts the Path PG&E Would Walk Through Chapter 11 ............................................................ 537
5. Amid a Hedge Fund Brawl, the State Takes Control of the Bankruptcy Process............................................................. 540
6. Bankruptcy Law as a Force Multiplier for State Policy Goals ................................................................................... 543

C. The Potential Hazards of Government Activism in Bankruptcy ................................................................................ 545

Conclusion.................................................................................................550

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Introduction

In the United States, governments—federal, state, and local—engage in an unending dance with businesses. Governments aim to implement policy goals and shape corporate conduct through legislation and regulation, and they give their dictates teeth by enforcing rules with the threat of criminal and civil liability. Governments also promote policy goals by spending, including through procurement, subsidies, and tax policy. For their part, business entities lobby against adverse proposed regulation and maneuver to avoid the costs of enacted mandates.¹ Businesses can also take refuge from governments in federal bankruptcy courts, where they are shielded temporarily by bankruptcy law's automatic stay of regulatory enforcement. But bankruptcy law offers more than a temporary refuge: businesses can unravel regulatory schemes that depend on deterrence by seeking to discharge fines for past violations² and can reorganize their business in ways that thwart regulatory designs.³ In response, many governmental agencies contest the ability of bankruptcy judges to stay their enforcement efforts or issue orders, but they are often unsuccessful.

In this Article, we argue that the bankruptcy system offers more than challenges to regulatory authority: it presents opportunities for governments to advance policy agendas that go beyond what a government can achieve outside of bankruptcy. The basic thrust of our argument is that governments can engage in what we refer to "government bankruptcy activism," where they seek to influence the outcome of the restructuring process to promote their policy goals. It is well-established that activist investors like hedge funds can gain influence over Chapter 11 firms, chiefly by providing the debtors with post-petition financing conditioned on advancing the investors' goals or by litigating to acquire favorable judicial orders and negotiating settlements in the shadow of

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that litigation.⁴ Governments can adopt these hedge fund tactics and enjoy added leverage from their authority as regulators, such as when a firm's continuation depends on regulatory reforms or permits that cannot be implemented by bankruptcy court order alone. In short, the bankruptcy of an important corporation can present governments with long-term opportunities that outweigh the short-term challenges of the bankruptcy stay and discharge.

Through government bankruptcy activism, the bankruptcy system can be a force multiplier for government policymaking. By influencing a bankruptcy proceeding, a government can benefit from the same bankruptcy powers that otherwise bedevil regulatory enforcement—such as the powers to stay creditor enforcement, reject contracts, shed assets and modify obligations—and to do in a matter of weeks what could take years outside of bankruptcy. To be sure, the Bankruptcy Code contains safeguards against third party abuse of Chapter 11, but governments can harness the bankruptcy system to advance the interests of politically important groups and policies, as well as to impose on debtors governance structures and business plans that they would not have agreed to outside of bankruptcy, at least not without new regulation or public spending. This opportunity is particularly valuable when governments face log jams, vetoes, and policy gridlock in enacting the enabling legislation or regulation. Even with highly regulated firms, government agencies each have narrowly defined jurisdiction over parts of a firm's activities. Bankruptcy law, on the other hand, assumes jurisdiction over the entire firm, giving governmental entities the ability to promote more comprehensive adjustments and to influence aspects of a firm's business that otherwise might have been otherwise out of reach. Moreover, the bankruptcy system is populated by expert lawyers and financial advisors who may lack domain knowledge but have deep expertise in resolving disputes by trading off concessions across the debtor firm and forcing changes on reluctant stakeholders.

We conclude by discussing ways in which this policymaking strategy in bankruptcy can be problematic. The accountability and transparency that are essential to a democratic system can sometimes be enhanced and at other time impaired in the bankruptcy system. For example, if the government intends to provide a company with an ad hoc bailout loan, doing so through the bankruptcy process could make the loan process more transparent than if the oversight was provided by a legislature or an administrative agency. Bankruptcy law requires

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disclosure of the terms of the loan in the motion for judicial approval.⁵ But advancing, for example, climate policy through the bankruptcy system may result in less transparency than would be the case if the climate policy was enacted through normal legislative and regulatory pathways. By proceeding through bankruptcy activism, a partisan government may be able to enact policies that would have been blocked otherwise. Whether one sees this as a societal advantage—for overcoming gridlock—or an undesirable end-run around democratic processes, might well depend on one's perspective on the policy in question.

We begin in Part I by reviewing how governments usually play defense in Chapter 11. In Part II, we then describe the goals and methods of government activism in bankruptcy. Instead of resisting the incursion of bankruptcy on regulatory efforts, governments have begun to more aggressively harness the process to promote and amplify the execution of policy goals—in other words, to "play offense." In Part III, we describe two prominent examples of government policy execution through the bankruptcy system. In Section IV.A, we highlight the Obama Administration's 2009 decision to use the bankruptcy system to implement climate-change and worker-protection policies while financing the restructurings and recoveries of Chrysler and General Motors. We then discuss in Section IV.B California Governor Newsom's activist strategy a decade later to use the 2020 bankruptcy of California's giant utility, the Pacific Gas & Electric Company, to promote the State's ongoing shift to clean energy, as well as its interests in promoting the safe operation of its power grid and the compensation of wildfire victims. In both sets of cases, governments convened a group of bankruptcy and policy experts to implement strategies that allowed them to achieve policy "wins" in the...