Narrowing Equity in Bankruptcy.

• Author: Coordes, Laura N.
• Position: Symposium on Equity in the Bankruptcy Court

INTRODUCTION

Bankruptcy law has a language problem. Words concerning bankruptcy "equity" and a bankruptcy court's "equitable powers" are tossed about, in pleadings, (1) court opinions, (2) and scholarly literature, (3) but no one agrees on what "equity" means in the bankruptcy context. (4) Is equity about filling gaps within the Bankruptcy Code? (5) Is it, instead, about working around the Code? (6) Is it about "promoting] justice?" (7) There is considerable room for disagreement and debate. Making matters more difficult is the inclusion of two other concepts commonly referenced in bankruptcy but little understood: the notion that a bankruptcy court is a "court of equity," (8) and the interchangeability of equity with "discretion." (9)

Disagreement over equity's meaning in bankruptcy can be traced to at least two sources. The first is academia: the legal scholarship has offered varying and sometimes inconsistent views of what it means for a bankruptcy court to have equitable powers, (10) what it means for a bankruptcy court to be a "court of equity," (11) and the relationship between equity and discretion. (12) Another source is rooted in practice: bankruptcy practitioners and judges have become used to resorting to equity as a stand-in for doing "justice." (13) At the same time, the Supreme Court's position on the equitable powers of the bankruptcy court has caused considerable confusion among the lower courts as to the extent and scope of those powers. (14)

Perhaps as a result of this confusion, in recent years, the Supreme Court, and some legal commentators, have increased their scrutiny of equity in bankruptcy and have sought to apply vigorous limitations to the bankruptcy courts' use of equitable powers. (15) Due to the problems stemming from a lack of a clear understanding of "equity" and similar terms, this trend is perhaps justified. Yet, this Article maintains that bankruptcy courts do have robust equitable powers--powers that are both granted and limited by the Bankruptcy Code.

This Article posits that in bankruptcy, equity has a narrower meaning than it perhaps has in other contexts. U.S. bankruptcy law is governed by a statute, the U.S. Bankruptcy Code, and bankruptcy equity, as granted by the Bankruptcy Code, is part and parcel of statutory interpretation. This is so for two reasons. First, statutes are not drafted in a vacuum; rather, Congress creates statutes against a backdrop of existing laws and legal frameworks. (16) This is particularly true in bankruptcy: several bankruptcy statutes preceded the current Bankruptcy Code, (17) and the bankruptcy courts can trace their roots--and equity powers--to the Court of Chancery in England. (18) Second, statutes by their very nature are limited; they cannot encompass every conceivable situation that may arise in practice. (19) Thus, entities, such as bankruptcy courts, tasked with interpreting and applying statutory language must have the flexibility to interpret the statute in a way that is consistent with the broader framework against which it was enacted and in a way that furthers the statutory purpose as the situation demands. Equity exists in bankruptcy to provide this flexibility.

The Bankruptcy Code supports this notion of bankruptcy equity. The Code is the source of the bankruptcy courts' equitable powers. (20) However, in its grant of equitable powers, the Code also confines the use of those powers to the service of the statute. (21) In this way, equity in bankruptcy is distinct from its broader cousin, discretion. Like equity, discretion has many possible meanings; (22) however, broadly speaking, it encompasses "the right to make a choice, based on judgment." (23) The Bankruptcy Code also grants bankruptcy courts discretion in certain instances; however, those grants of discretion do not have the restrictive language present in the Code's grant of equity. (24) Discretion, though cabined by an individual's sense of judgment, is untethered from a statute; equity, in bankruptcy at least, represents flexibility in service of the governing statute.

This conception of equity also illustrates why, in the bankruptcy context, equity is not about doing "justice." Rather, bankruptcy equity involves judges using knowledge and context to apply the Bankruptcy Code in such a way that Congress does not need to worry about drafting new legislation every time an unprecedented situation arises. When Congress drafted the Bankruptcy Code, it trusted bankruptcy courts to understand the purposes and aims of the statute, as well as how those purposes and aims ought to be carried out as called for by the situation at hand. (25) In this way, equity is distinct from the notion that a bankruptcy court is a "court of equity," either in the historical sense (26) or in the more practical, justice-oriented sense.

This Article lays out its vision of bankruptcy equity in four Parts. Part I introduces the problem: despite the critical role equity plays in bankruptcy, there is substantial disagreement and confusion over what equity means in theory and practice. Part II makes the case for why equity in bankruptcy is tethered to the practice of statutory interpretation. Part III examines the particular role equity plays in bankruptcy and uses the text of the Bankruptcy Code and the Supreme Court's bankruptcy jurisprudence to distinguish equity from discretion. Part III further distinguishes equity from the concept of a bankruptcy court as a "court of equity." Part IV concludes by explaining why understanding the role equity plays in bankruptcy is more critical today than ever before.

1. EQUITY CONFUSED

   There is great misunderstanding and confusion about equity in bankruptcy theory and practice. This Part explores how and why the term "equity" has become so difficult to understand in bankruptcy law. Disagreements in both scholarship and practice have contributed to the confusion. A lack of understanding of equity is problematic because, as this Article will show, (27) equity has a critical role to play in bankruptcy.

   1. DISAGREEMENT IN SCHOLARSHIP

      The legal scholarship discussing equity in bankruptcy evinces a clear lack of agreement on the scope, definition, and even existence of a bankruptcy court's equitable powers. (28)

      Some commentators have argued that broad equitable powers do exist in bankruptcy and that a bankruptcy court's use of these equitable powers is a necessary part of the way the system functions as a whole. For example, Brian Leepson says that equity power plays "an integral role in the resolution of [competing] interests" in a bankruptcy case. (29) He thus advocates for a "broad, yet careful" (30)reading of a bankruptcy court's equity powers because "the history and rationales of the [section] 105(a) grant of equity power and the Code generally[ ] demonstrate] the congressional intent that bankruptcy equity be broad." (31) Similarly, Harrison Thorne contends that "bankruptcy courts are courts of equity that arose to prevent unfair practices." (32) For Thorne, policy concerns, such as the promotion of justice and avoidance of harsh results, should permit the bankruptcy court to exercise a range of equitable powers. (33)

      Others have focused on the text of the Bankruptcy Code's grant of equitable powers, 11 U.S.C. [section] 105(a), to make the case for expansive equitable powers in the bankruptcy courts. Adam Lawton Alpert, Andrew T. Jenkins, and Jeffrey W. Warren argue that [section] 105(a) authorizes bankruptcy courts to enter all orders that are "appropriate" regardless of whether they are "necessary." (34) These authors reason that [section] 105(a)'s language thus allows bankruptcy courts to fashion even extraordinary relief if appropriate. (35) Kenneth N. Klee has observed that Congress intended [section] 105(a)'s grant of power to be equivalent to the All Writs Act, (36) a "broad" statute that operates as a gap' filler and allows courts to issue "necessary or appropriate" writs. (37) Finally, Matthew T. Gunlock has observed that [section] 105(a) is a "reminder that, ultimately, bankruptcy courts are equitable in nature and that all of the Code's provisions are subject to a balancing of the equities in any case" (emphasis in original). (38)

      But not everyone agrees that a bankruptcy court should have broad equitable powers--or even any equitable powers at all. For example, J. Maxwell Tucker has argued that [section] 105(a) should not be interpreted to create equitable remedies that lack a statutory basis and that did not exist prior to the enactment of the Judiciary Act in 1789. (39) He emphasizes that bankruptcy courts do not have "freewheeling 'equitable jurisdiction.'" (40) Peter C. Alexander argues that "equitable discretion" is available to bankruptcy courts only to the extent it is consistent with the Bankruptcy Code: "If a bankruptcy judge's use of [section] 105(a) conflicts with fundamental bankruptcy principles and departs from the express provisions of the Bankruptcy Code, the equitable power will be curtailed." (41) Daniel B. Bogart acknowledges that [section] 105(a) is modeled on the All Writs Act but suggests that bankruptcy courts in turn model their application of [section] 105(a) on the federal courts' "cautious use" of the All Writs Act. (42) And Manuel D. Leal has observed that bankruptcy judges' equitable powers have been "curtailed" over the years through the Bankruptcy Code, its amendments, and court decisions. (43)

      Still others contend that equity has no place in bankruptcy at all. Adam J. Levitin has characterized equity and statute as "fundamentally different legal systems." (44) He argues that "[t]he very nature of complex statutory structures is to create clear, one-size-fits-all rules that lack the fact-intensive flexibility and individualized justice of equitable discretion." (45) Levitin does not believe Congress authorized general equitable powers at all via [section] 105(a), (46) instead asserting that "there is no...