The Alteration of Ex Ante Agreements by the Bankruptcy Code.

AuthorGrohsgal, Bruce


This article proposes an analytic framework for deciding if a pre-bankruptcy (ex ante) agreement is unenforceable post-bankruptcy (ex post).

Ex ante contracts are at issue in nearly every bankruptcy case, and ex ante contracting in anticipation of bankruptcy is commonplace. Determining non-enforceability can be difficult, because while ex ante agreements arise and may be enforceable under state law, they are subject ex post to any contrary provision of bankruptcy law, under the rule of Butner v. U.S. (1)

Scholarship on this issue often starts with an enduring bankruptcy paradigm, the creditors' bargain theory. This supposition urges that bankruptcy fundamentally is a collective debt collection proceeding, by which creditors receive the value of their ex ante state law entitlements in accordance with the Bankruptcy Code's distributional priorities.

The creditors' bargain theory, though, plays down the substantial ex post changes made by bankruptcy law to ex ante agreements. This article considers the question of the non-enforceability of ex ante agreements within the structure of bankruptcy's comprehensive statutory regime. It puts forward that three kinds of ex ante agreements are not enforceable ex post: those which the Bankruptcy Code specifically alters; those which Congress, by expressly open-textured terms in the Code, has left to the development of bankruptcy case law to alter; and those which the Code by the implications of its encompassing structure alters.

This article concludes that a determination that bankruptcy law makes unenforceable an ex ante agreement on any of these three grounds properly construes the Code even when it alters the parties' ex ante entitlements.

Introduction I. The Erie Doctrine, the Butner Principle, and the Bankruptcy Clause A. Erie Railroad Co. v. Tompkins--Federalism and the Bankruptcy Clause B. Butner v. U.S II. Revisiting the Creditors' Bargain Theory and the Enforcement and Non-Enforcement of Ex Ante Agreements under the Bankruptcy Code III. Ex Ante Agreements Which the Bankruptcy Code Alters A. Ex Ante Agreements Which the Code Specifically Alters 1. Executory Contracts and Leases 2. Unperfected Liens 3. Other Specific Alterations of Ex Ante Agreements B. Ex Ante Agreements Which the Code's Open-Textured Terms Leave to Bankruptcy Case Law to Alter 1. "Equities of the Case" and Similar Authority 2. "Undefined Term" Authority 3. Other Open-Textured Alterations to Ex Ante Agreements C. Ex Ante Agreements Which the Code by the Implications of its Comprehensive Structure Alters or May Alter 1. Ex Ante Agreements Which the Code by Implication Alters 2. Ex Ante Agreements Which the Code by Implication May Alter Conclusion INTRODUCTION

This article considers when an ex ante agreement is not enforceable, or is otherwise altered, by bankruptcy law. The question has become more pressing with the increasing use of contracts made in anticipation of bankruptcy. The enforcement of these ex ante agreements can (and often is intended to) materially affect outcomes in a case. Examples of these ex ante agreements range from a party's agreeing not to file for bankruptcy, to a "bankruptcy remote" provision in a loan document that similarly precludes the voluntary filing of a bankruptcy case, to an ex ante waiver of the automatic stay, to a restructuring support agreement or similar contract entered into for the purpose of confirming a not yet filed prepackaged chapter 11 plan, to an agreement to submit to arbitration rather than to a judicial determination any disputes that might arise under a contract, to the waiver of a discharge.

Scholarship on the extent to which an ex ante agreement is (or should be) enforceable post-bankruptcy begins with the creditors' bargain theory, sometimes called the Butner Principle (for the Supreme Court's 1979 opinion in Butner v. U.S.). (2) This model, effectively advanced in the 1980s by Thomas Jackson and Douglas Baird among others, emphasized that bankruptcy ameliorates a common pool problem, by providing a collective forum for resolving claims, which protects against the destructive effects and inefficiencies of individual action. Bankruptcy, the theory goes, should vindicate, rather than alter, pre-bankruptcy entitlements that usually arise under state law, because the establishment of new entitlements under bankruptcy law increases conversion costs, diverges from the collectivization goal, and encourages forum shopping between state and federal debt collection regimes. (3) In theory bankruptcy values a debtor's assets and then distributes that value to creditors in accordance with the value of their ex ante entitlements, in the order prescribed by the bankruptcy statute, until the asset value of the bankruptcy estate is depleted. (4)

The creditors' bargain theory has been criticized. (5) Both proponents and detractors energetically and thoughtfully add to the literature on the theoretical underpinnings of bankruptcy. (6) Some scholarship has flatly said that bankruptcy does the opposite of what the Butner Principle instructs, and accomplishes its purposes by altering nonbankruptcy entitlements. (7) Others have trod a middle ground on the issue, stressing the advantages of enforcing ex ante agreements in bankruptcy, by applying contract law, while acknowledging that bankruptcy law is more skeptical and less accepting of ex ante than of ex post contracting. (8)

Foundationally, Butner never quite said what the advocates of the paradigm contend. Butner recognized that Congress's express constitutional authority to establish uniform laws on the subject of bankruptcies would "clearly encompass" a federal statute that altered the state law property right at issue in that case (which was whether a mortgagee had a right to rents from the mortgaged property after the mortgagor had filed a bankruptcy case). (9) Congress simply had "not chosen to exercise its power to fashion any such rule." (10)

The creditors' bargain theory undeniably finds its own vindication in many parts of the Bankruptcy Code. It reflects most accurately (although imperfectly) the treatment in bankruptcy of ex ante liens and other relatively static property rights, such as the one before the Court in Butner. (11) When it comes to ex ante executory contracts--which are subject to a more dynamic and varied treatment under the Code (12)-the theory's shortcomings are acknowledged, even by its advocates. (13)

The question remains: which kinds of ex ante agreements are not enforceable under the Bankruptcy Code? This article takes a more pedestrian path in considering this problem than does much of the scholarship on the creditors' bargain and other bankruptcy theory. It begins with a fundamental construct --which Butner and the Erie doctrine before it recognized--that Congress can alter state law and other nonbankruptcy entitlements under the authority of the Bankruptcy Clause of the U.S. Constitution. (14)

This article then examines the three statutory ways in which the current Bankruptcy Code makes unenforceable or otherwise alters ex ante agreements in a bankruptcy case: by specific Code provisions; by open-textured Code provisions; and by the implications of the Code's structure and purposes. (15)

Part I of this article revisits the Butner Principle, and also considers the Erie doctrine which the Supreme Court in Rodriguez v. Federal Deposit Insurance Corporation recently brought to bear on the issue of the enforcement of an ex ante contract in bankruptcy. Both Butner and the Erie doctrine recognized Congress's broad constitutional authority to alter ex ante agreements in a bankruptcy case. Both relied on still longer-established precedents to reach their conclusions.

Part II of this article recounts the creditors' bargain theory and considers some of the subsequent scholarship on the issue. It posits that, though the use of the creditors' bargain theory as an academic model of bankruptcy has informed an extensive and rigorous debate on bankruptcy for more than three decades, the model's resemblance to U.S. bankruptcy law as it is today and was previously is weak. The question of when a court should not enforce (or should enforce) an ex ante agreement ex post might be better answered by considering bankruptcy law itself.

Part III of this article then examines that law, and posits the three kinds of ex ante agreements which I assert bankruptcy law makes unenforceable or otherwise alters.

The threshold question in determining whether an ex ante agreement is or is not enforceable in a bankruptcy case is whether Congress exercised its constitutional power to alter state law, rather than whether state law provides an equally satisfactory (or even superior) rule of decision. Viewing the question from the three perspectives outlined in this paper does not intrude, beyond what the constitution and the federal statute provide, into ex ante rights created under the residual state law that applies where there is no federal alteration. Nor does it grant bankruptcy courts a roving commission to do equity. (16) It most closely comports, rather, with the congressional determination of which ex ante agreements are enforceable, and which are not, in bankruptcy.


    Most contracts at issue in a bankruptcy case are formed prior to the bankruptcy, under state law or other nonbankruptcy law. Such contracts, though, are subject to any countervailing provisions of federal bankruptcy law. (17)

    Two things can happen to such an ex ante agreement on the commencement of a bankruptcy case. The bankruptcy statute enacted by the Congress can leave that agreement unaltered ex post, or it can make the agreement unenforceable or otherwise alter the parties' rights under it. (18) Because Congress's constitutional authority on this issue is express and unquestioned, the determination of whether the bankruptcy statute has altered an ex...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT