Recent Bankruptcy-Related Articles of Interest Available for Downloading from SSRN

The following bankruptcy-related scholarly papers, arranged by SSRN abstract ID number, can be downloaded from the Social Science Research Network website:

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Univ. of Texas Law School's Ronald J. Mann: "The Supreme Court, the Solicitor General, and Bankruptcy: BFP v. Resolution Trust Company." (Abstract ID: 931288)

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Vanderbilt University School of Law's Robert K. Rasmussen: "Creating a Calamity."  (Abstract ID: 930182)

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University of Arkansas School of Law's Susan A. Schneider: "Bankruptcy Reform and Family Farmers: Correcting the Disposable Income Problem."  (Abstract ID: 928255)

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University of Arkansas School of Law's Susan A. Schneider: "Who Gets the Check: Determining When Federal Farm Program Payments are Property of the Bankruptcy Estate."  (Abstract ID: 928254)

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Syracuse University College of Law's Gregory L. Germain: "Discharging Income Tax Liabilities in Bankruptcy: A Challenge to the New Theory of Strict Construction for Scriveners' Errors."  (Abstract ID: 925840)

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University of Wisconsin Law School's Bernard Trujillo: "Self-Organizing Legal Systems: Precedent and Variation in Bankruptcy."  (Abstract ID: 924673)

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Chapman University School of Law's Daniel B. Bogart: "Resisting the Expansion of Bankruptcy Court Power under Section 105 of the Bankruptcy Code: The All Writs Act and an Admonition from Chief Justice Marshall." (Abstract ID: 922108)

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Chicago-Kent College of Law's Evelyn Brody: "The Charity in Bankruptcy and Ghosts of Donors Past, Present, and Future." (Abstract ID: 918120)

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UCLA School of Law's Lynn M. LoPucki and Joseph W. Doherty: "Delaware Bankruptcy: Failure in the Ascendancy." (Abstract ID: 906834)

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Abstracts for each of these papers follows:

 

Richard J. Mann, "The Supreme Court, the Solicitor General, and Bankruptcy: BFP v. Resolution Trust Company." (Abstract ID: 931288):

This chapter tells the story behind BFP v. Resolution Trust Corporation. I see BFP as a case that pitted relatively plain statutory language supporting the debtor-in-possession against policy interests supporting a secured creditor. I argue that an important explanation for the Supreme Court's decision to favor policy over the language of the statute was its perception of a need to protect the availability of non-bankruptcy remedies for secured creditors. Accordingly, I situate my discussion of BFP in the context of the role that the federal government has played in the Supreme Court's cases interpreting the Bankruptcy Code. In general, I contend, the Supreme Court's decisions evince a general skepticism about broad application of the Bankruptcy Code, which often has led to surprisingly narrow interpretations of relatively clear language. That reading challenges the common understanding of bankruptcy law as a domain of the Court's plain-language interpretative practice.

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Robert K. Rasmussen,
"Creating a Calamity."  (Abstract ID: 930182):

This essay is part of a symposium where the contributors were asked to identify their "favorite" commercial calamity. It takes a lot to create a calamity in the commercial arena. Transactional attorneys spend a good deal of their time drafting around the calamities of the past. The Supreme Court's decision in Till v. SCS Credit Corp., 541 U.S. 465 (2004), nevertheless deserves the label. The issue before the Court was straight-forward - how should bankruptcy courts ascertain the appropriate interest rate in a Chapter 13 plan. At one level the case is a calamity in that the Court failed to produce a majority opinion. This issue simply called for a clear rule. While some rules may be better than others, the overriding concern should have been to provide definitive guidance on this oft recurring issue. Here, the Court simply failed.

Till bids for calamity status on a second score as well. The opinions show little regard for commercial law. To be sure, Justice Scalia's opinion demonstrates that he at least understood the basic functioning of bankruptcy law and credit practices. The same cannot be said for the remaining opinions. Justice Thomas, accusing all of textual infidelity, authored an opinion which adopted a measure that no court of appeals had endorsed. He argued that, though virtually unnoticed, the Bankruptcy Code mandated that Chapter 13 debtors pay the same rate of interest as the country's most solvent financial institutions. Justice Stevens did little better. His opinion suggests that, for those in Chapter 13 who are seeking to repay their secured debts over time, one should start with the prime rate, and then add 1% to 3%. To be sure, one could articulate a rational for this formula approach that comports with the dynamics of Chapter 13. (We need an easy-to-implement rule; we know that collateral tends to be valued too high, so a rule that sets interest too low may achieve a rough balance.) Unfortunately, this is not the tact that Justice Stevens took. His opinion rests on the assertion that Chapter 13 provides sufficient safeguards so that a modest increase in the prime rate represents the true risk to creditors. This reasoning cannot be squared with what we know about Chapter 13 practice. Moreover, by suggesting that courts can provide a more accurate assessment of default risk than markets, Justice Stevens's opinion creates the possibility for mischief across the Bankruptcy Code.

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Susan A. Schneider, "Bankruptcy Reform and Family Farmers: Correcting the Disposable Income Problem."  (Abstract ID: 928255):

When the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into law on April 20, 2005, it marked the conclusion of years of contentious debate. Much of the new law is directed toward consumer bankruptcy reform, and some of the most controversial aspects of it were debated at length by Congress and reported widely in the media. Buried within this massive law, however, are important changes that will significantly benefit family farmers who seek relief under Chapter 12 of the Bankruptcy Code. This article focuses on one of these changes — the prohibition on the retroactive assessment of disposable income. It is an amendment that has not been widely reported, yet it reverses over a decade of misinterpretation of the original Chapter 12 disposable income requirement. As is evidenced throughout the article, it is a significant change that promises to greatly enhance the likelihood of successful family farm reorganizations throughout the country.

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Susan A. Schneider, "Who Gets the Check: Determining When Federal Farm Program Payments are Property of the Bankruptcy Estate."  (Abstract ID: 928254):

This article discusses a unique area of law that is of great importance to rural America - agricultural payments made pursuant to the various federal farm programs. In recent years, these payments have grown to become a significant component of net farm income that is capitalized into the value of agricultural real estate, provided as collateral for agricultural loans, and justified as support to the overall rural economy. When an agricultural producer experiences financial distress and files for relief in bankruptcy, rights to these payments are often vigorously contested. In particular, the question of when the payments are property of the bankruptcy estate has been an issue of controversy. At what point in the complex process of federal farm program policy does a producer have a right to payment? What factors are significant - contract performance, contract formation, implementation of the program, or the statutory enactment of the program? How far back in time does the producer have a "right" to payment that will bring it into the bankruptcy estate? Does the character of the program matter? Unfortunately, the case law has been historically inconsistent and the courts' reasoning difficult to apply. The attached article examines this important issue, discusses several recent and significant appellate court decisions, and suggests guidance for future litigation.

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Gregory L. Germain, "Discharging Income Tax Liabilities in Bankruptcy: A Challenge to the New Theory of Strict Construction for Scriveners' Errors."  (Abstract ID: 925840):

The Supreme Court has been closely split on whether judges may consider legislative history in determining if a statute contains scriveners' errors. With the recent appointment of Justices Alito and Roberts, the Supreme Court's balance has likely shifted toward the strict constructionists' view. If strict constructionism becomes the law of the land, courts will be powerless to correct drafting errors that do not, on the face of the statute alone, give rise to absurd results.

In 2005, Congress passed and the president signed the most significant changes to the Bankruptcy Code in more than twenty five years, including some technical changes to the provisions protecting governmental income tax claims.  Before the 2005 amendments, it was clear that all income tax claims incurred in the three or four calendar years before bankruptcy were entitled to special priority in distribution from the bankruptcy estate, and could not be discharged. In addition, older income tax claims were also entitled to priority and excepted from discharge if either (1) they happened to be assessed within 240 days before bankruptcy, or (2) they were not assessed before bankruptcy but could be assessed under applicable non-bankruptcy law after bankruptcy.

The 2005 Act changed the structure of these rules. In general, if the debtors tax returns were timely filed, the change would turn the government's priority and non-dischargeable tax claims for the two, three and sometimes four calendar years before bankruptcy into non-priority claims that could be discharged. The change would significantly impair the government's ability to collect recent income taxes, and would encourage bankruptcy filings by debtors who have significant income tax liabilities.

The legislative history of the 2005 Act shows that the structural changes were simply a drafting error. Congress did not intend to change the structure of the statute. However, the statute on its face does not create an absurd result. The line between priority/non-dischargeable and non-priority/dischargeable taxes has always been discretionary. Congress could rationally have intended to move the line in either direction. Therefore, under the scriveners' error standard proposed by the strict constructionists, which forbids judges from consulting legislative history to determine if a drafting error was made, the statute should be enforced as drafted. This is the wrong result if the judiciary's primary goal is to carry out the intent of Congress. Even if the world view underlying the strict constructionists' theory is correct - that the statutory language should stand on its own because judges will improperly pick and choose from ambiguous legislative history to carry out their own views rather than the legislature's will - there is no need to prohibit the consideration of unambiguous legislative history. The article shows the need for strict constructionists to temper their rule when the legislative history is not ambiguous if the primacy of legislative intent is to be respected.

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Bernard Trujillo, "Self-Organizing Legal Systems: Precedent and Variation in Bankruptcy."  (Abstract ID: 924673):

Models of legal ordering are frequently hierarchical. These models do not explain two prominent realities: (1) variation in the content of a legal system, and (2) patterns of non-hierarchical ordering that we observe. As a supplement to hierarchical explanations of legal order, this Article draws on physical and social science research on complex systems to offer a self-organizing model. The self-organizing model focuses on variation in the content of legal systems and attempts to explain the relationship between that variation and patterns of ordering. The self-organizing model demonstrates that variation and ordering are not opposite categories, but rather constitute one continuous phenomenon.

Working with bankruptcy data and institutions, this Article describes self-organizing structures as overlapping networks of legal and extra-legal actors, and self-organizing dynamics as involving the twin processes of form innovation and norm emergence. This Article adduces empirical evidence (including a substantial case study and statistical analysis of a quantitative database) suggesting that bankruptcy is a self-organizing system. Finally, this Article suggests that self-organization may state a general theory of trial court behavior, and that the self-organizing model may illuminate legal research in areas such as discretion, doctrine, and legal change.

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Daniel B. Bogart, "Resisting the Expansion of Bankruptcy Court Power under Section 105 of the Bankruptcy Code: The All Writs Act and an Admonition from Chief Justice Marshall." (Abstract ID: 922108):

This article is divided into three main parts. In the first part, the article criticizes the expansive use of section 105 of the Bankruptcy Code by bankruptcy courts, and argues that this is an inappropriate extension of bankruptcy court power. It begins with a history of section 105 and argues that the drafter intended section 105 to be of limited scope. The drafter assumed that bankruptcy courts would rely on the All Writs Act, upon which the language of section 105 is based. This part then examines a number of typical scenarios in which courts have over reached in application of section 105. These include substantive consolidation of chapter 11 cases, partial discharge of student loans, non debtor protection (temporary and permanent stays for individuals who have not themselves filed bankruptcy petitions), and first day orders. The article describes the conflict among the courts in different jurisdictions when addressing each of these scenarios. The article also draws upon the scholarship of Judge Marcia Krieger and Professors David Epstein and Steve Nickels.

These scholars argue, respectively, that bankruptcy courts are not the general “courts of equity” they are typically assumed to be in case opinions applying section 105, and that broad application of section 105 constitutes an unconstitutional breach of the separation of powers. The second part of the article delves more intensely into a discussion of the All Writs Act. The article suggests that the drafter intended second 105 to be a gap filler provision to permit limited bankruptcy court powers not otherwise conferred by the All Writs Act. The article argues that BAFJA (1984) essentially raised the importance of section 105 and peeled away the All Writs Act from the domain of bankruptcy courts. Nevertheless, the language and purpose of section 105 are based on the All Writs Act. The All Writs Act should therefore form a theoretical limit on bankruptcy court power, and bankruptcy courts should look to the development of All Writs Act cases to discern the correct application of their own powers. The article therefore looks for scenarios analogous to substantive consolidation of cases and third party protection in bankruptcy in the case law of the All Writs Act. In doing so, the article argues that bankruptcy courts have gone too far and acted too broadly. Actions taken by federal courts under All Writs Act are always tightly connected to a preexisting federal scheme and even then employed only in “extraordinary circumstances.”

Courts further state that the All Writs Act may not be employed to defeat express legislation. The article argues that broad bankruptcy court application of section 105 often extends beyond this rubric. In the third and final part, the article compares the language and purpose of the Necessary and Proper Clause of the U.S. Constitution to section 105 of the Code. Although clearly not directly applicable for the purposes of rendering case opinions, the article argues that this is a useful exercise nonetheless. The Necessary and Proper clause reads in the conjunctive (“necessary and proper”), where section 105 does not (necessary or appropriate). But the article points out that constitutional law case opinions in fact treat the “and” as an “or,” and that this difference is not one of real consequence. The article draws on Justice Marshall's opinion in McCullouch v. Maryland, and jurisprudence that followed this case. Justice Marshall did read the Necessary and Proper clause broadly, a view that has been criticized much of late by some constitutional law scholars. Yet even Justice Marshall interpreted the limiting phrase (“proper for carrying into Execution the Foregoing Powers”) as a cap on the reach of the Necessary and Proper clause. In other words, in no event should the clause be used to back door some congressional action otherwise denied congress elsewhere in the Constitution.

Similarly, the Supreme Court opined in Ahlers that to the extent bankruptcy courts retain equitable powers under section 105, these powers must be limited to “the confines of the Bankruptcy Code.” Therefore, section 105 does not permit bankruptcy courts to take actions elsewhere denied them in the Code. Unfortunately, this seems to be a statement often observed in the breach. The article concludes by arguing that the real problem involving section 105 does not result from bankruptcy judges' “ambition or collective judicial ego.” It states that “bankruptcy courts are keenly focused on appropriate objectives.” According to the article, the problem instead stems from “the failure of the Code to address fact patterns that emerge regularly and demand resolution.”

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Evelyn Brody, "The Charity in Bankruptcy and Ghosts of Donors Past, Present, and Future." (Abstract ID: 918120):

The bankruptcy of a charity represents the clash of two policy regimes: charity law's willingness to preserve assets for the public purpose determined by the donor as against bankruptcy law's desire to maximize assets for distribution to creditors. As a general rule, assets will be distributed to creditors; as the courts say, 'a man must be just before he is generous.' However, when a charitable donee goes out of existence or otherwise becomes unable to perform a charitable trust or restricted gift, the courts will try to identify those charitable assets that are restricted in such a manner that they survive the bankruptcy proceeding. These assets excluded from the bankruptcy estate are instead subject to the venerable doctrine of cy pres, regardless of whether the charity is a charitable trust or a corporate charity. Charitable trusts and restricted gifts, if they can no longer be performed as originally specified, are modified for another use by the same charity or are transferred to another charity, subject to the same or modified purpose. It is common for the cy pres proceeding to occur in state court, rather than in the federal bankruptcy proceeding.

This approach views any particular charity holding a restricted gift as distinct from the contemplated beneficiaries of that gift. Despite its benefits to society, such a policy also carries negative implications for the governance of individual nonprofit organizations. Sympathy for charitable beneficiaries in bankruptcy can make it harder for all charities – including those not in financial distress – to obtain needed financing. Less obviously, but perhaps more seriously, over accommodating courts that wall off charity assets from bankruptcy creditors can further an already pervasive view that charitable property is 'public' to an inappropriate degree.

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Lynn M. LoPucki and Joseph W. Doherty, "Delaware Bankruptcy: Failure in the Ascendancy." (Abstract ID: 906834):

In 1990, the United States Bankruptcy Court for the District of Delaware - then a one-judge backwater - began competing for big bankruptcy cases. In six years, that court achieved a near monopoly. In 2000, LoPucki and Kalin discovered that 42% of the companies filing in Delaware during that six year period of ascendency refiled bankruptcy within five years of their emergence, as compared with only 6% of those filing in courts other than Delaware and New York. In a later study, we found the (1) the failure of the companies reorganized in Delaware during the period of ascendency was robust across several measures of failure and (2) the Delaware filers were not different from the other court filers in any way that might account for the higher refailure rates.

In a review of LoPucki’s book Courting Failure (University of Michigan Press 2005), An Efficiency-Based Explanation for Current Corporate Reorganization Practice, 73 University of Chicago Law Review 425 (2006), Professors Kenneth Ayotte and David A. Skeel, Jr. came to Delaware’s defense with an economic model and new empirical evidence. They argued, in essence, that companies with worse prospects for reorganization chose Delaware reorganization because it was cheaper. Because this group of companies was weaker, creditors put them “on a short[er] leash,” by saddling them with high debt levels. The higher rate of refiling that resulted was nevertheless efficient because refiling costs were low.

In this essay we respond that the Ayotte-Skeel model is based on the assumption of a selection effect for which there is neither a shred of empirical evidence nor even a variable proposed for measurement. We demonstrate that it is mathematically impossible for the cost savings from Delaware’s shorter bankruptcies to offset the cost of so many second bankruptcies. We also note that the Ayotte-Skeel model leads to several predictions in conflict with the empirical evidence.

We argue that refailure is costly and propose an empirical approach to quantify those costs. We praise Ayotte and Skeel’s discovery that the EBITDA of firms emerging from Delaware bankruptcy was not significantly different from the EBITDA of firms emerging from bankruptcy in other courts during the period of ascendency. We agree that their findings suggest leverage played a greater role in the failure of the Delaware companies than we had previously thought.

Lastly, we respond to Ayotte and Skeel’s argument that DIP lenders, other creditors, and bankruptcy courts can prevent the case placers from using their leverage over the bankruptcy courts to externalize costs. The DIP lenders will not prevent the externalization because they are themselves case placers. Other creditors cannot prevent the externalization because no procedural means exist by which they could do so. The bankruptcy courts cannot prevent the externalization because the case placers avoid courts that attempt to place limits on them.

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Anyone new to our system who clicks on the link to purchase the paper will be first asked to register their e-mail address on our system. This is something that is required before one can download. The registration is just a security feature and doesn't cost anything, nor will the e-mail address be used for any other purpose but for our system to be able to recognize the user in his use of our services.

Thanks also to our firm's crack part-time law clerk and full-time Northwestern U. student DeJohn Allen for assembling this post.

© Steve Jakubowski 2006