In yesterday’s post, we published a speech in which Harvey Miller discussed how he got started practicing bankruptcy law.  Today, we are publishing the text of a speech that Harvey gave in March of 2014 on the 40th anniversary of the Southeastern Bankruptcy Law Institute, at which Harvey was a frequent speaker.  In this speech, Harvey looked back at the evolution of bankruptcy law over the past 50 years.

Introduction

The charge I was given is a truly modest one:  The evolution of bankruptcy reorganization law over the last 50 years in 40 minutes or less – the equivalent of 80 seconds per year – a truly daunting task.  I recall that forty years ago the presentations made at the Institute covered Chapters X and XI of the old Bankruptcy Act and the benefits and negatives of each of those Chapters, as well as the status of the bankruptcy reform efforts that had been energized by the National Bankruptcy Review Commission of 1970 and its report and proposed statute titled the “Bankruptcy Act of 1973.”  All interested parties agreed that the Bankruptcy Act of 1898, as substantively amended by the Chandler Act of 1938, was inadequate to address an expanding national economy fueled by the democratization of credit and its effects on American businesses and yet serve the three basic principles of bankruptcy philosophy:

  1. A fresh start for debtors;
  2. Equality of distribution among claimants of the same class; and
  3. Economy of administration.

Today it appears that we may be at a similar crossroad.  Indeed, some might even say we are right back where we started.  The 1978 Bankruptcy Code, as amended, has been accused of being inadequate to address the global economy, the reorganization of distressed businesses, and serve the public interests.  We are confronted by financial institutions that may be too big to fail; a smaller world with a more integrated, interconnected global economy that has changed the way business is conducted; the emergence of secured lenders as the dominant creditor group in restructurings; and the dire distress of many of the nation’s cities.

The question often arises as to whether the tensions between creditors, debtors, distressed debt traders and investors, and the public interest are out of whack.  Are the 1978 objectives of rehabilitation and reorganization of distressed businesses out of date?  Has the drive for maximization of creditor recoveries, particularly those of secured lenders, subsumed all other purposes of business bankruptcies?  These are difficult and challenging questions.  To attempt to answer these questions, we have to consider what has occurred over the past 50 years in the bankruptcy reorganization sector.

As I pondered presenting the subject to this sophisticated and experienced audience, I thought of Elizabeth Taylor’s seventh husband on the first night of their marriage, who thought to himself, “I know what I have to do, but can I make it interesting?”

To make it more difficult, I recalled that in 1935 Professor Charles Warren of the Harvard Law School published a book entitled Bankruptcy in United States History, in which he observed that “[b]ankruptcy is a gloomy and depressing subject … a dry and discouraging topic.”

I will not start with the Bankruptcy Act of 1898, but, rather, talk about the expansion of bankruptcy use during the past 50 years as a vehicle to deal with distressed businesses and their reorganizations.

Bankruptcy is a substantive and procedural process intended to resolve claims to the assets of a debtor that is unable to satisfy its obligations.  From this basic premise, bankruptcy expanded in scope and size to include the concept of bankruptcy reorganization as a collective process.  Different objectives are pursued by different parties, fueled by hopes of financial gains and, perhaps, rehabilitation.

A corporate reorganization was described by Thurman Arnold, a onetime Assistant Attorney General, in 1937 as a

combination of municipal election, a historical pageant, an anti-vice crusade, a graduate school seminar, a judicial proceeding and a series of horse trades, all rolled into one thoroughly buttered with learning and frosted with distinguished names. Here the union of law and economics is celebrated by one of the wildest orgies in intellectual history. Men work all night preparing endless documents in answer to other endless documents, which other men read in order to make solemn arguments.

The bankruptcy reorganization arena has been and is an ever-changing process propelled by economic cycles and tempered by political and socio-economic objectives.  In some respects, it feeds off the theme of the “Wolf of Wall Street” that there are no limitations on greed.

In a retrospective review of the past 50 years; there are cycles favoring debtors, other times creditors, either secured or unsecured, and sometimes in favor of debt traders, acquirers and other speculators and, finally, to further governmental objectives.

It might be fair to say that modern bankruptcy practice began in the 1960s.  It was an age defined by an expanding U.S. economy, strong labor organizations, civil rights struggles, and the expansion of individual rights.  It was also defined by a democratization of credit, a change in living standards with the migration of large segments of the population to the suburbs.  It was the age of the automobile and the demise of downtown Main Street and its businesses.

It also was a much simpler world.  Most businesses were privately owned.  They operated on the foundation of long-term relationships, customer and vendor loyalty and prudence.  In most situations, you could actually determine the value of a business by reviewing its financial statements.  [EBITDA, EBITDAR or EBBS were not yet terms of everyday usage.]  Wall Street was laboring under the post-Depression protective statutes such as the Securities Act of 1933 and other related legislation.  The SEC and various national securities exchanges actively regulated the financial markets.  Highly esoteric and opaque securities such as derivatives, CDOs, CLOs, RMBSs, and other securitizations had not yet been developed.  Financial statement engineering was in its infancy.  Steve Jobs and Bill Gates were in their early childhoods and had not yet conceived of the personal computer.  Apple, Microsoft, E-Harmony and Match.com were a long way off.

Bankruptcy was considered a sub-strata of commercial law, a small, arcane, undesirable practice area inhabited by, allegedly, somewhat shady groups accused of being the bankruptcy ring.  Most elite law schools did not offer a bankruptcy course.  Major law and accounting firms shunned the bankruptcy arena.  Individuals and businesses, public and private, strived to avoid the stigma of bankruptcy.  The fear of bankruptcy by business leaders was rampant.  Col. Frank Borman, the CEO of Eastern Airlines, once stated that “capitalism without bankruptcy is like Christianity without hell!”

Federal courts in the 1950s were considered too formalistic to assist in distressed debtor situations.  Debtor/creditor issues were resolved through enforcement of contractual rights and general state commercial laws.  Notwithstanding the enactment of the 1938 Chandler Act, federal bankruptcy cases, generally, were limited to liquidations or initiated to provide access to the avoidance powers of the Bankruptcy Act to pursue litigation objectives.

Bankruptcy professionals represented a small, parochial group of attorneys and accountants.  There were no recognizable turnaround experts, distressed debt traders, hedge funds, restructuring officers, specialized bankruptcy financial advisors or the like.  Defaulting debtors were considered unredeemable failures.  Contractual rights of secured creditors were immutable!

The bankruptcy court, in particular, was a strange place.  There were no judges.  Bankruptcy cases were filed in the United States District Court and referred to and administered by referees in bankruptcy.  Referees in bankruptcy were support personnel for the District Court.  They did not have law clerks and very little in the way of facilities.  In some districts, there were part-time referees who presided over bankruptcy cases two or three days a week and practiced privately the remainder of their time.  There were no comprehensive bankruptcy law reports.  The referees in bankruptcy relied on two treatises: Remington on Bankruptcy, which has since faded, and Collier on Bankruptcy.  Commerce Clearing House published abbreviated reports of selected cases.  In addition, despite its stigma, professionals’ participation in bankruptcy cases was considered something akin to public service with an embedded spirit of economy. Professionals and, indeed, management of a debtor were to be compensated at rates less than those prevailing in the private sector.  As a result, bankruptcy was not considered to be a very desirable practice area.

But, as the 1960s progressed, something was happening in the United States.  Economic change was in the air.  Wall Street was shaking off the shackles of the Depression and the World War II related constraints.  The “go-go” years were beginning.  “Going public” caught the imagination of investors and managers.  To accommodate the expanding economy, financial markets began to grow.  The public once again was getting interested in investing in equities.  Volume on the NYSE had at last exceeded five million shares a day.  [Think about that – today over 1.4 billion shares trade each day on the NYSE].

Access to credit expanded.  The use of leverage became seductive.  Businesses and the economy became more credit-intensive.  In 1954, only 41 banks in the United States offered customers credit cards.  Less than 500,000 consumers used credit cards.  In contrast, 30 years later, over half of the families in the country – including 42 million households – would have at least one credit card.  Over 3,000 institutions would offer credit cards to the public, and over 2 million businesses worldwide would accept them.  Today, the credit card market is even more vibrant.  Thus, the recent computer hacking at Target may have affected 70 million or more credit accounts.

As might have been expected, financial discipline did not grow at the same pace.  The expanding economy led to overleveraging and inevitable failures.  That reality spurred the thinking that there had to be ways to constructively deal with business failures.

Professionals began to investigate the options and possibilities of alleviating the consequences of failure.  The Chandler Act had codified debtor relief provisions derived from railroad equity receiverships and characterized as the reorganization paradigm – preservation of going concern value over liquidations, as Chapters X and XI.  Chapter X provided a very detailed, comprehensive scheme for voluntarily or involuntarily reorganizing public corporations.  It was largely drafted by the SEC.  It mandated the appointment of one or more trustees and strict imposition of the “Absolute Priority” or “Fair and Equitable Rule.”  Chapter X proceedings were presided over by a United States district court judge.  The SEC was a designated critical party to a Chapter X case.

The problem was that Chapter X was not an attractive option for distressed debtors and their governing bodies.  No board of directors or management was keen on giving up control of the debtor’s governance and affairs.  Consequently, the volume of Chapter X cases from 1938 to 1979 was never very high.

In contrast, Chapter XI, as enacted, was limited to voluntary cases and intended for small mom & pop type businesses that needed to effectuate arrangements with their unsecured creditors to continue a business.  Of critical importance was that by the 1960s, Chapter XI no longer required application of the Absolute Priority Rule and did not mandate the appointment of a disinterested fiduciary.  Chapter XI allowed a debtor to continue to operate and manage its business and affairs as a debtor in possession – a then novel concept.  Although the recognition of the debtor in possession concept was not uniform in the United States, it became the norm for Chapter XI cases filed in the Southern District of New York, a venue that had a high volume of Chapter XI cases.  In addition, and very importantly, a Chapter XI debtor had the exclusive right to file a plan of arrangement for so long as the Chapter XI case was pending.  This power represented a tactical weapon of significant potential, as the alternative to a plan of arrangement would be liquidation and the loss of the going concern value of the assets to the detriment of creditors.  These features, plus a growing appreciation by professionals that bankruptcy courts in Chapter XI cases might liberally construe the bankruptcy law beyond its original intent and (a) enjoin secured creditors from exercising remedial rights for extended periods of time; (b) enjoin all unsecured creditors and others from taking any actions against the debtor and its property (both of which led to the automatic stay); (c) construe rejection and assumption of executory contracts, including collective bargaining agreements and unexpired leases to favor debtors in possession or trustees, and (d) allow dilution of equity interests as part of a Chapter XI plan, were very attractive.

As the 1960s proceeded, the popularity of Chapter XI continued to increase.  In 1960, there were 715 reorganization and arrangement cases filed in the United States.  In 1970, there were 1,422 such cases filed.  In 1975, W.T. Grant Company, a public company, once considered the Tiffany of mass retailing, filed the first ever billion dollar case under Chapter XI.  Over $600 million (in 1975 dollars) was owed to a consortium of 35 banks and over $400+ million to trade creditors, landlords, and others.  The big time had arrived for debtors!  The commencement of such a large Chapter XI case concurrently with other large cases in an environment in which bankruptcy reform was being contemplated emphasized the need for a comprehensive business reorganization statute. [In 1980, 6,348 chapter 11 cases filed; in 1990, 20,783 chapter 11 cases.]

The Legislative Process to Enact a New Bankruptcy Law

The Bankruptcy Reform Act of 1978 was signed into law by President Jimmy Carter on November 6, 1978 and took effect on October 1, 1979.  The 1978 Act was the first bankruptcy legislation not enacted on the heels of domestic economic turmoil.  It resulted in comprehensive changes to the reorganization process.  Notwithstanding the fact that the 1978 Act was considered to be in large measure a response to an increase in consumer bankruptcies during the 1960s, it resulted in a new phase in corporate and business restructurings.

The 1978 Act was a decade in the making, and the final version was the culmination of separate drafting efforts by many groups, including Congress, the National Association of Bankruptcy Judges and other professional and academic groups.  It followed the report of the 1970 National Bankruptcy Review Commission.  That Commission, which included two senators, two representatives, academics and a circuit court judge, had also submitted as part of its report a proposed statute entitled, “The Bankruptcy Act of 1973.”  It formed the basis for many of the legislative proposals that followed.  Unfortunately, there was substantial opposition to making bankruptcy judges Article III judges.  Those that claimed that such elevation would degrade the district court judges prevailed and appear to continue to prevail.

The bankruptcy judges drafted a competing bill to that proposed by the Commission.  While the two bills were similar, they had important differences.  Ultimately, the 1978 Reform Act was an amalgamation of the ideas proposed by the National Commission, the bankruptcy judges and other organizations.  The 1978 Reform Act essentially fused Chapters X and XI into the Bankruptcy Code’s reorganization chapter: the new chapter 11.  Its enactment was actively and unanimously supported by all major constituents, including the financial community, unsecured creditor associations, stockholders’ organizations, academia, the judiciary and the bankruptcy judges.

The 1980s through 2000 – The Age of the Debtors

Chapter 11 reaffirmed the principle that reorganization was a virtue, infinitely preferable to liquidation because it preserved going-concern value, protected industries and jobs and, generally resulted in greater recoveries for the debtor’s stakeholders.  The intended goal of a chapter 11 restructuring is to achieve a consensual plan of reorganization.  Under chapter 11, a plan of reorganization could affect all creditors, secured and unsecured, as well as equity interest holders and it allowed for the relaxation of the Absolute Priority Rule.  The Bankruptcy Code was intended to provide a level playing field for debtors and creditors by balancing the needs of all stakeholders in the interests of rehabilitation and reorganization of distressed businesses.  Perhaps most significantly, chapter 11 allowed a debtor’s management to remain in control during the restructuring process as a debtor-in-possession.  Philosophically, chapter 11 contemplated that a debtor would have a reasonable period of time to pursue reorganization.

Chapter 11 reorganizations under the Reform Act entered the mainstream of commercial life in the United States.  Overleveraging, excessive real property financings and other over-zealous investments, as well as the onset of a global economy with competitive disadvantages began to take hold, and fraud and other causes resulted in a sharp increase in the volume and size of the assets and liabilities of the cases that were initiated under chapter 11.  Not to be forgotten was the elimination of the spirit of economy in the face of the expanded demand for professionals and the projected increase in potential fees and expenses.

The leveraged buyout mania of the 1980s led to chapter 11 cases filed by Federated Department Stores, R.H. Macy & Co., Trans World Airlines, Southland Corp., 7-11 Stores, Global Marine, National Gypsum Corp., and, in part, Drexel Burnham and Olympia & York.  Massive toxic tort litigation precipitated chapter 11 cases by the Johns-Manville enterprise, the pharmaceutical giant A.H. Robins, and a host of major American businesses that were tainted by some connection to asbestos.  Pension and labor issues, and, sometimes, environmental issues, caused the demise of LTV, Bethlehem Steel Corporation, as well as a number of airlines including Braniff, Continental, Pan American, Eastern, and, subsequently, during the 20th and 21st Century, reorganizations of United, Delta, Continental, Northwest, U.S. Air and American.  Some of the airline cases went on to become classic chapter 22s and in the case of TWA, a final chapter 33, as recidivism began to plague chapter 11 reorganizations.  A massive state court judgment ($11+ billion) caused Texaco Inc., one of the four largest U.S. commercial enterprises, in 1987 to commence the then largest chapter 11 case in history.

It was the apex of the age of the debtor.  The consensus was that chapter 11 actually worked, despite the wailing cries and criticism coming from certain academics and special interests.  The size and scope of cases filed under chapter 11 continued to increase.  As the 20th Century drew to a close, the financial and credit markets continued to expand.  Leverage became even more seductive.  The lessons of the past were ignored or, perhaps more appropriately, it became evident that there was no institutional memory.

The 21st Century began with a series of major cases precipitated by fraud and other misdeeds.  These cases included Enron, Global Crossing and WorldCom.  The first decade of the 21st Century ended with even larger, more complex, difficult and novel cases initiated under chapter 11, such as Lehman Brothers, the largest chapter 11 cases ever commenced with estimated petition-date liabilities of more than $600 billion in 2008 dollars with over $1.3 trillion of filed claims.  Indeed, we even witnessed the federal government becoming a major player in the bankruptcy reorganization arena, as it endorsed and financed the use of chapter 11 to resolve the distress of General Motors, Chrysler, the auto industry, and injected trillions of dollars into various entities to stave off bankruptcy of major financial institutions and thereby stabilize financial markets.

The Changing Environment That Altered the Reorganization Process

It all reflected that, during the 1980s and 90s and into the 21st Century, the financial environment was changing in a manner that would dramatically alter the world of restructuring and bankruptcy reorganization.  For the past 15 or more years, there has rarely been a session of Congress in which there hasn’t been some attempt, in some way, shape or form, to amend the Bankruptcy Code, primarily to further spread interest legislation and contract debtor protections.  There have been four amendments to the 1978 Bankruptcy Code starting in 1984 as a result of the Supreme Court’s decision in the Northern Pipeline case holding that the jurisdiction granted to bankruptcy judges under the Reform Act was unconstitutional – a problem that continues to exist as a result of the Supreme Court’s decision in Stern v. Marshall in 2010.  It continues to plague the administration of bankruptcy cases.  Each of the amendments through 2005 has tilted the proverbial level playing field in favor of creditor interests through special interest legislation.

Each clawback amendment, and particularly the 2005 amendments, the “Bankruptcy Abuse Prevention and Consumer Protection Act” (“BAPCPA”), contracted debtor protections both for individuals and businesses, and enlarged safe harbor provisions.  The amendments reduced the efficacy of the Bankruptcy Code and court as a vehicle that could facilitate the rehabilitation of businesses, preserve jobs, serve the public good and provide a fresh start to debtors.  For example, the significant changes of the 2005 Amendments included the shortening of the exclusivity period for debtors to file chapter 11 plans to no more than 18 months; limiting the assumption or rejection of unexpired non-residential real property leases to a maximum of 210 days; and a major expansion of safe harbor provisions for securities-related transactions such as swaps, derivatives and the like.  As a result, we have seen fewer reorganizations as compared to cases of early asset sales and liquidations.  In fewer and more traditional cases, competing plans are often filed, complicating and, in many cases, delaying the reorganization.  Three competing plans were filed in the chapter 11 cases of Lehman Brothers, and five plans in the chapter 11 cases of Asarco Corporation.  Four plans were filed in the Chicago Tribune cases and at one point, four plans had been filed in the chapter 11 cases of LightSquared, Inc.

Defining Events

There have been a number of key defining events over the past 50 years that have been seminal in the evolution of bankruptcy reorganization and practice:

  1. The worlds of finance and business have changed and with it the resurgence that bankruptcy reorganization is the last possible option
  2. Globalization with interconnected financial institutions and businesses
  3. Technology – providing greater access to information and ability to accelerate events
  4. The trading of claims – debt as a commodity accentuating the principle of maximization of recoveries
  5. The enhancement and elevation of the bankruptcy court, now largely negated by strict constructionists such as Justice Scalia and decisions such as 203 N. LaSalle St; Lew v. Siegel; and Bank of Marin v. England.
  6. Debtor in possession financing and emergence of secured creditors as the dominant creditor constituency – marginalization of the debtor – merely a conduit and the rise of CROs, financial advisors, etc. “[N]eutrality is a necessary concept in any system for managing a general default in which the policymaker provides for multiple beneficiaries and charges the manager with maximizing value for all of them. A dominant secured party cannot be a neutral manager, and its management creates a serious potential of loss for other beneficiaries.
  7. Special interest legislation – safe harbors
  8. The emergence of the section 363 sale option with follow on plans of liquidation and the creation of liquidating and litigation trusts
  9. Prepackaged and prearranged chapter 11 reorganization cases emphasizing balance sheet reorganizations without fixing the core business issues. Result – chapter 22s –Exide – Sbarro
  10. Sections 1113 and 1114 and the role of organized labor
  11. Stern v. Marshall
  12. Increased litigation to coerce settlements, e.g. ResCap.

The Outlook

The chapter 11 scenario that evolved during the last 50 years is materially different from that which was contemplated in the mid-1960s and by the Bankruptcy Reform Act of 1978.  Any yearning for the “good old times” is misplaced and doomed.  We have to deal with the changes that have occurred in the world and which will continue to occur as needs and technology change.  Change is inevitable.  There have been some remarkable achievements under the Bankruptcy Code, including the preservation of the United States auto industry through skillful and innovative use of chapter 11.  But in today’s world, a debtor essentially is a captive of its secured creditors, the designated CRO, and the trading market.  Secured creditors have become de facto creditors in possession, generally causing the appointment of the CRO.  This is aggravated by the fact that the creditor constituencies often change on a daily basis as claims are freely traded.  If collateral security is reasonably liquid, a quick sale may be the result and the consequence of pre-bankruptcy planning.  The role of the debtor has retreated to something akin to that of the 1950s.

The objective of rehabilitation to resuscitate a distressed business to protect jobs and community interests is now more than tempered by the demands of secured creditors, distressed debt traders and investors to maximize and expedite recoveries.  Recently at a distressed investing conference, a panel of hedge fund representatives concluded that bankruptcy is too expensive and people are finding more and more ways to avoid it by sophisticated creditors coming up with solutions for distressed entities.  In terms of the dislike for bankruptcy, one hedge fund representative said:

“We generally don’t like bankruptcy.  Bankruptcy is very visible, it’s very expensive and it takes too long and it allows other people to catch up.  As long as judges continue to push for open, transparent and lengthy cases and reject protections to stalking horse bidders, bankruptcy as a restructuring tool will continue to diminish.”

A clearer statement against the cardinal principle of bankruptcy administration – transparency – could not be imagined.  The statement of that hedge fund representative is symbolic of the theme that permeates the shadow banking system and the distressed debt trading markets.

The Bankruptcy Code has been, and continues to be, subject to criticism as being too debtor protective and invasive of contractual rights.  Some believe that the reorganization paradigm is dead and that bankruptcy reorganizations are no longer needed to preserve going concern values.  They argue that going concern values have been achieved through bankruptcy sales such as those under section 363.  These contentions have been made in the context of the robust economy and easy credit of 2003-2007 and the Federal Reserve-supported economy of 2009-2013. We do not know if it will continue, as the Fed implements its tapering off program.

Nonetheless, it appears that bankruptcy is a pervasive part of our economy.  Its growth has attracted all manner of entities, businesses, governments and others.  While bankruptcy may be here to stay, it is not the same bankruptcy reorganization process that flourished in the 1980s, 1990s, and early 2000s.  The question is whether that is all bad?  Is it wrong to have a secured creditor oriented process and defer to contractual rights?  Is chapter 11 serving a useful purpose?  Have the volume and efficacy of section 363 sales demonstrated that the objective of bankruptcy should be a prompt disposition of viable assets and businesses that might be continued by a purchaser with the balance of the bankruptcy case devoted to the pursuit of winding up and liquidating the affairs of a particular debtor?  Has the debtor in possession concept outlived its need?  It is interesting to note that the rest of the world appears to have adopted the reorganization paradigm.  Spain last week adopted a decree to facilitate restructurings.  Banks will receive incentives to accept debt forgiveness, extend maturities, and swap debt for capital in cash-strapped entities.  A creditor that refuses to exchange debt for equity without “reasonable cause” may be held liable if that decision causes the bankruptcy of the debtor.

There is an abundance of workout specialists, turnaround managers, valuation experts, compensation experts, and other business specialists and professionals that have been rooted in the fertility of the bankruptcy law.  It has made many of us more than comfortable.  For better or worse, bankruptcy is a part of the credit-intensive economy and public consciousness.  It has graduated from being an aberrational possibility to a reality.  The question is whether the reality should be continued – deference to secured creditors and debt traders or a real opportunity to rehabilitate a distressed business.

Fortunately, we have the ABI Commission’s dedicated efforts to determine the needs that have to be served by bankruptcy reorganization laws and, therefore, the reforms to be considered.  Hopefully, the Commission and others will determine what are the uses and objectives of bankruptcy in today’s world.  Is bankruptcy a means to deal with “too big to fail” entities?  Former Chairman Bernanke of the Federal Reserve System wrote to Congress that on the basis of the Lehman cases, the Bankruptcy Code was inadequate to deal with the failure of large financial institutions.  The Orderly Liquidation Authority created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, supposedly will enable the FDIC to quickly resolve the affairs of failed systemically important financial institutions. The underlying premise is that you can rely upon and trust the government to handle such situations and institutions and do the right thing.  A somewhat interesting concept!!!

The world that existed in 1978 is long gone.  We face a global, interconnected economy with a different dynamic and vastly different financing techniques and pressures, economic policies, as well as ubiquitous political issues.

With the onset of the age of well-supported political influences and special interest groups armed with expensive and extremely efficient lobbyists, the proposal and enactment of bankruptcy legislation is very different from what occurred in the 1970s.  In pursuing financial reform after the 2008 financial debacle, Representative Barney Frank stated that remedial legislation is difficult in the context of the Washington political environment because, most often, Congress usually responds only to money … money to finance campaigns for reelection and, ultimately, money upon leaving legislative service.  The result is often twisted legislation.  Mr. Frank went on to say that it is only in response to an exogenous event such as an earthquake, a war, or a financial debacle that there exists the possibility to enact balanced legislation that serves the overall public interest. The financial debacle of 2008 presented a window of opportunity for financial reform and consumer protection.

The result, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is not the most glowing example of broad-based remedial legislation that is intended to serve the public interest.  A statute of over 820 printed pages, requiring almost 500 regulations to be written, presents many, many problems that ultimately help to dismantle the objectives of the statute and bury them in a morass of bureaucratic inefficiencies.  This is also illustrated by the approval of the Volcker Rule by the governing five regulatory agencies.  The Rule itself is reported to be approximately 830 to 935 pages, depending on your count.  The application of the Rule will require regulators with outstanding analytical skills to penetrate the vexing, difficult and pervasive language employed.  There will surely be many interpretive issues and ultimately litigation over the meaning and requirements of the Rule.  The principles of simplicity have been ignored.

In that context, I greatly fear the attempts at bankruptcy reform that are currently underway.  While I applaud the efforts of the ABI Reform Commission, as long as the Congress is essentially dysfunctional and so willingly subjected to the influence of well-financed lobbyists, it is extremely unlikely that there will be effective reform. If there is a reform act, it will be something akin to Dodd-Frank … a horse created by a committee that results in the camel. It will be subject to varying and different constructions; and highly likely not to achieve whatever may be the original intention of the proponents.  That raises the question – are we better off staying with what we have, the ’78 Code, as amended, and use our best efforts to tweak that Code and rely upon the ingenuity and innovation of bankruptcy judges to achieve the purposes that underlie the bankruptcy law?  The answer is not clear.

I encourage all of you to help achieve a feasible and effective bankruptcy law that will serve the objectives of fairly dealing with economic distress and failure and assist in the appropriate deployment of assets of a failed business.  A comment on the state of our world – a father sitting down with his teenage son tried to explain money doesn’t grow on trees. The son replies, “Okay, let’s rip them out and plant a row of hedge funds.”

However, thinking about the environment of restructuring and reorganizations reminds me of a transcript I read of a radio communications of a U.S. Naval ship with Maritime authorities off the coast of Washington State in October, 1995.  It went like this:

U.S. Navy to Maritime: “Please divert your course 15 degrees to the North to avoid a collision.”

Maritime to U.S. Navy: “Recommend you divert YOUR course 15 degrees to the South to avoid a collision.”

U.S. Navy: “This is the captain of a U.S. Navy ship. I say again, divert YOUR course.”

Maritime: “No, I say again, you divert YOUR course.”

U.S. Navy: “THIS IS THE AIRCRAFT CARRIER USS ABRAHAM LINCOLN, THE SECOND LARGEST SHIP IN THE UNITED STATES’ PACIFIC FLEET. WE ARE ACCOMPANIED BY THREE DESTROYERS, THREE CRUISERS AND NUMEROUS SUPPORT VESSELS.  I DEMAND THAT YOU CHANGE YOUR COURSE 15 DEGREES NORTH.  THAT’S ONE-FIVE DEGREES NORTH, OR COUNTER MEASURES WILL BE UNDERTAKEN TO ENSURE THE SAFETY OF THIS SHIP.”

Maritime: “This is the Puget Sound lighthouse.  Your choice.”

Thank you for your attention.