Why Bankruptcy?

• Publication year: 2013

Why Bankruptcy?

Richard Levin

WHY BANKRUPTCY?

Richard Levin^*

Thank you for this impressive award, impressive because of the Bankruptcy Hall of Fame luminaries who have previously received it, people who have had a lasting impact on bankruptcy law and practice: Harvey Miller, Professor Frank Kennedy, Judge William Norton, Professor Kenneth Klee, Senator Dennis DeConcini, and Professor, now Senator, Elizabeth Warren, among others. I'm honored to be in their presence, let alone in their company.

It's a little disconcerting, however, to receive a "Lifetime Achievement" award, for at least two reasons. Time has gone so quickly since my first introduction to bankruptcy law just about 40 years ago, that it does not seem like a lifetime. As the old saying goes, "Choose a job you love, and you will never have to work a day in your life." I hope that each of you will be able to find that as well. Also, I think of a Lifetime Achievement award as coming at the end of a career. I don't think I'm anywhere near done. There are still many years ahead. Or are the editors trying to tell me something? I'm somewhat encouraged by some of the prior award recipients. I understand, for example, that Professor Warren was able to find something useful to do after she received the award. In any event, it's very gratifying to receive the award. I will cherish it.

In accepting this award, the question I pose for you tonight is, "Why Bankruptcy?" Sure. From a lawyer's perspective, practicing bankruptcy law can be challenging, demanding, intellectually stimulating and rewarding. Practicing business bankruptcy law combines law and finance and operations; practicing consumer bankruptcy law combines law and social work. It is a specialty practice focusing on creditors' rights, insolvency law, and bankruptcy law and a general practice, addressing all of a client's legal problems, whether they are property, commercial, banking and secured transaction, tax, intellectual property, consumer protection, family law and constitutional law, just to name a few. It is Code-based, and it is common law-based. It is a deal practice that requires all of a lawyer's negotiation and documentation skills.

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And it is a litigation practice that requires legal research and writing, discovery, and presentation of evidence and argument in court. It allows—indeed requires—the practitioner to be the "complete lawyer." And for the most part, the bankruptcy community is a wonderful community with deeply committed professionals who work together even while they're working against each other in particular cases. Given the nature of the problems their clients face, they struggle on with a shared sense of purpose and a shared sense of irony and humor to get them through the difficulties.

But from a larger perspective, why bankruptcy? The Framers did not write bankruptcy into the Constitution just to give all of us interesting careers. In fact, in most peoples' minds, bankruptcy is evil. It is vilified. Public opinion surveys suggest that bankruptcy is considered more shameful than divorce,¹ and the stigma associated with bankruptcy remains high.² Many believe that an individual who files bankruptcy has abused the financial system, if not the bankruptcy system, by taking on more obligations than he or she can meet and that it is morally, ethically and financially wrong for someone to walk away from their financial obligations. Many believe that businesses that reorganize through bankruptcy and survive treat their creditors unfairly,³ not realizing that typically the shareholders are wiped out, even though the corporate entity and the business survive.

And every creditor and shareholder will tell you why they or their situation is special and why either bankruptcy should not affect them or their claims should receive priority. In consumer bankruptcy, special treatment is given to

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first mortgage lenders,⁴ car lenders,⁵ student loan creditors,⁶ taxing agencies,⁷ former spouses and dependent children,⁸ drunk driving victims,⁹ and, not to be outdone, the FDIC.¹⁰ In business bankruptcy, there are trade suppliers;¹¹ shopping center landlords;¹² farmers and fishermen;¹³ union employees;¹⁴ retirees;¹⁵ buyers or sellers of commodities, from coal to grain to foreign currencies;¹⁶ regulated utilities;¹⁷ and transportation equipment lenders and lessors,¹⁸ to name just the more prominent ones. And, of course, there is the very special treatment given to secured debt.¹⁹

The provisions are designed to protect their beneficiaries from bankruptcy losses. But losses happen independent of bankruptcy. Blaming bankruptcy for losses is like blaming hospital emergency rooms for auto accidents.

There are clearly good justifications for each of these special provisions. Tax agencies are involuntary creditors—they do not choose their debtors and so should not be held to the same risks as voluntary lenders. Tort creditors are involuntary creditors too, but the Code does not provide special treatment, except for drunk driving victims, so their claims are made nondischargeable to discourage or punish drunk driving. Shopping center leases deserve special

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treatment because they are part of an integrated real estate development and cannot be evaluated separately from the entire center. Educational lenders cannot foreclose on the "asset" that they financed. Financial contract counterparties and financial regulatory agencies need protection because of the need to prevent disruptions to the financial system. Exceptions for first mortgages and transportation equipment financing are necessary to lower the cost of and make capital available to those important markets. And so on.

These are all good reasons, as are the reasons supporting the other bankruptcy exceptions. But there's a problem. When the Bankruptcy Code was enacted in 1978, there were seven exceptions to the automatic stay,²⁰ nine exceptions to discharge²¹ and six categories of unsecured claim priorities.²² Now there are 27, 19, and 10 respectively,²³ each to protect some group that has argued for special treatment. Every few years, a few more of these exceptions find their way into the bankruptcy law,²⁴ and there are often efforts to insert more.²⁵ If the trend continues, and all major creditor constituencies are protected from the effects of bankruptcy, the automatic stay and the discharge, then the only people or companies who will be able to get any benefit from using the bankruptcy laws are those who are already able to meet all their obligations. The bankruptcy laws will effectively have been repealed.

Our economy needs bankruptcy to function, just as a society dependent on the automobile needs emergency rooms. The astronaut Frank Borman, who later became a successful businessman, said, "Capitalism without bankruptcy is like Christianity without Hell."²⁶ But I think that misses the point. In some sense, bankruptcy can have the effect of punishment for failing. But that is not its primary purpose, at least not today. Bankruptcy is perhaps more like

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