Governmental Concessions in Corporate Bankruptcy Proceedings: A New Approach

• Published date: 01 June 2013
• Date: 01 June 2013
• DOI: http://doi.org/10.1111/ablj.12011

Governmental Concessions in

Corporate Bankruptcy Proceedings:

A New Approach

Yaad Rotem*

[If] the [Public Utilities Commission] has the last say about everything, we may

as well close up our tents and send it over to the [Public Utilities Commission],

let them reorganize the company and when they have approved it, send it over

and I’ll sign it. Come to think of it, that’s not the worse option in the world but

some people may think that’s a horror.1

INTRODUCTION

The government’s immense involvement in our lives does not skip events

of corporate financial distress. The financial collapse of a corporate debtor2

is a private event. Nonetheless, as the government regulates3various

private activities, it also regulates the efforts by the debtor and its claimants

*Visiting Scholar, Center for the Study of Law & Society, University of California, Berkeley

School of Law; Assistant Professor, Center of Law & Business, Ramat-Gan, Israel.

For helpful discussions, I thank Eric Talley and Ken Bamberger.I also thank the anonymous

referees and Robert Emerson for their excellent comments. All errors are mine.

1Pub. Serv. Co. of N.H. v. New Hampshire (In re Pub. Serv. Co. of N.H.), 108 B.R. 854, 887

(Bankr. D.N.H. 1989).

2This article focuses on corporate, rather than personal, bankruptcy proceedings only.

However, the argument in this article may certainly be adjusted to apply to personal bank-

ruptcy proceedings as well.

3Regulation means publicly overseeing private activities. Others have defined regulation as

“sustained and focused control exercised by a public agency, on the basis of a legislative

mandate, over activities that are valued by the society.”Philip Selznick, Focusing Organizational

Research on Regulation,in REGULATORY POLICY AND THE SOCIAL SCIENCES 363, 363–64 (Roger G.

Noll ed., 1985). For the need of regulation in a modern state, see CASS R. SUNSTEIN,AFTERTHE

RIGHTS REVOLUTION:RECONCEIVING THE REGULATORY STATE 47–71 (1990). Fora detailed descrip-

tion of American regulation of businesses, and the criticism it draws, see Thomas M. Arnold

& Jerry L. Stevens, Mixed Agendas and Government Regulation of Business: Can We Clean Up the

Mess?,45U.R

ICH.L.REV. 1059 (2011).

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American Business Law Journal

Volume 50, Issue 2, 337–411, Summer 2013

© 2013 The Author

American Business Law Journal © 2013 Academy of Legal Studies in Business

337

to salvage their property. The government generally regulates financial

distress to tackle market failures created by the impending insolvency of

the debtor4and to assist claimants and interest groups, such as unsecured

creditors and employees, whose fates have become entangled with that of

the debtor.5The actual regulator in this context is the bankruptcy court,

which performs its regulatory role with the help of others such as the state

trustee, creditors’ committee, or a court-appointed trustee.6The regula-

tion takes place within the framework of a collective judicial process of

Chapter 11 reorganization7or Chapter 7 liquidation.8

But what happens if the regulation of a debtor’s financial distress

conflicts with the regulation of other areas?9Such a conflict can occur if a

debtor asks the bankruptcy court to relieve it of an obligation toward a

4At least three market failures can be described. First, as soon as the debtor becomes financially

distressed, unsecured creditors are caught in a destructive race to its assets. See Douglas G.

Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership

Interests: A Comment on Adequate Protectionof Secured Creditors in Bankruptcy,51U.C

HI.L.REV. 97,

100–01 (1984). Second, a free rider problem, exacerbated by the principle of equality among

unsecured creditors, undermines efforts of those creditors to collect their debts. See Michelle J.

White, The Corporate Bankruptcy Decision,in CORPORATE BANKRUPTCY:ECONOMIC AND LEGAL

PERSPECTIVES 207, 216–17 ( Jagdeep S. Bhandari & Lawrence A. Weiss eds., 1996). Third,

conflicts of interests between creditors of various ranks—particularly between the secured

creditor and unsecured creditors—might impair cooperation among all creditors in debt

collections, thereby threatening successful contracting with problems of holdout. See Mark J.

Roe, The VotingProhibition in Bond Workouts,97Y

ALE L.J. 232, 236–39 (1987).

5See, e.g., Elizabeth Warren, Bankruptcy Policy,54U.CHI.L.REV. 775 (1987) (arguing in favor

of a redistributive approach to bankruptcy, which calls for protecting not only creditors).

6It is a regulatory process that could be executed by an administrative agency rather than by

a court of law. See Theodore Eisenberg, Bankruptcy in the Administrative State,L.&C

ONTEMP.

PROBS., Spring 1987, at 3, 5 n.11; Ronald J. Mann, Bankruptcy and the Entitlements of the

Government: Whose Money Is It Anyway?, 70 N.Y.U. L. REV. 993, 1054 (1995).

711 U.S.C. §§ 1101–1174 (2006).

8Id. §§ 701–784 (2006).

9For a conflict of another type—which will not be discussed in this article—between bank-

ruptcy and private ordering regulation, see Richard E. Mendales, Intensive Care for the Public

Corporation: Securities Law, Corporate Governance, and the Reorganization Process,91M

ARQ.L.REV.

979 (2008) (explaining the ways in which bankruptcy and the securities laws do, and should,

interact in the reorganization context so as to further the underlying purposes of both

corporate bankruptcy reorganization and the securities laws). See also Sparkle L. Alexander,

The Rule 2019 Battle: When Hedge FundsCollide with the Bankruptcy Code,73B

ROOK.L.REV.1411

(2008) (discussing the collision between bankruptcy’s need of transparency and the interest in

securities laws to defend the privacy of private investment funds).

338 Vol. 50 / American Business Law Journal

governmental unit.10 Of course, abundant examples exist of financially

distressed debtors requesting concessions from governmental units in non-

bankruptcy contexts.11 For example, a financially distressed corporation

may request that the Environmental Protection Agency (EPA) excuse it

from its duty to clean contaminated land.12 A publicly traded corporation

in financial distress may ask the Securities and Exchange Commission

(SEC) to allow postponement of financial filings or to concede to a non-

compliant reporting procedure.13 A corporation may also petition the

Federal Trade Commission (F TC) or the Department of Justice (DOJ) to

permit participation in an anticompetitive merger.14 A corporation holding

10The term “governmental unit” is defined by the Bankruptcy Code to mean “United States;

State; Commonwealth; District; Territory;municipality; foreign state; department, agency, or

instrumentality of the United States (but not a United States trustee while serving as a trustee

in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or

a foreign state; or other foreign or domestic government.” 11 U.S.C. § 101(27) (2006).

11This article does not aim to address the context of bailouts, which can contain many forms

of government intervention. See Gregory F. Udell, Are Bank Bailouts Un-American?,53B

US.

HORIZONS 463 (2010). A typical bailout scenario relevant to this article would be one in which

the debtor is a nongovernment instrumentality that petitions the government, not to be

relieved from its obligation due to the government, but for direct monetary assistance. The

problems associated with a bailout are therefore slightly different. For example, in a typical

bailout, the government can be characterized as having no special powers and is only a source

of funds. See Antonio E. Bernardo et al., A Model of Optimal Corporate Bailouts,S

OCIAL SCIENCE

RESEARCH NETWORK (May 10, 2011), available at http://ssrn.com/abstract=1830583. In the

context of governmental concessions, the government will be assumed to be the only one able

to tell the true cost of extending the concession. See infra Part III. To better understand

bailouts, see also Kenneth Ayotte & David A. Skeel, Jr., Bankruptcy or Bailouts?,35J.C

ORP.L.

469 (2010) (comparing bankruptcy to bailouts); Carol J. Perry, Rethinking Fannie and Freddie’s

New Insolvency Regime, 109 COLUM.L.REV. 1752 (2009) (describing insolvency regimes of

various government instrumentalities). This article also does not concern non–financial-

distress contexts in which the government extends benefits to a private party. See, e.g., John

Martinez, Getting Back the Public’s Money: The Anti-FavoritismNorm in American Property L aw,58

BUFF.L.REV. 619 (2010) (discussing various such contexts).

12See, e.g., U.S. ENVTL.PROT.AGENCY,MEMORANDUM:GENERAL POLICY ON SUPERFUND ABILITY TO

PAY DETERMINATIONS (1998) (explaining what is necessary for an acceptable ability to pay

settlement in superfund cases); U.S. ENVTL.PROT.AGENCY,MEMORANDUM:GUIDANCE ON DETER-

MINING A VIOLATOR’SABILITY TO PAY A CIVIL PENALTY (1986) (explaining “how to adjust a penalty

target figure when a violator claims paying a civil penalty could cause extreme financial

hardship”).

13See, e.g., Weirton Steel Corp., SEC No-Action Letter, 2004 WL 691776 (Mar. 23, 2004).

14See, e.g., Amanda L. Wait, Surviving the Shipwreck: A Proposal to Revive the Failing Division

Defense,45W

M.&MARY L. REV. 429 (2003).

2013 / GovernmentalConcessions in Corporate Bankruptcy Proceedings 339