Happy Birthday, BAPCPA? Thoughts on Some of BAPCPA's "Conventional Wisdoms"
Today, glasses in some halls of Congress are probably clinking in honor of BAPCPA's first birthday. But is America really better off? Are creditors really getting paid more because fewer consumers file for bankruptcy? The one major advantage to a bankruptcy case is that it’s a collective proceeding that minimizes the “agency” or collection costs that few unsecured (or deficiency) creditors would reasonably be willing to bear alone. At least in theory, therefore, bankruptcy provided enhanced recoveries for unsecured creditors by minimizing "collective action problems." Such rational thinking was a prime impetus behind passage of the Bankruptcy Code in 1978, and most practitioners, Judges, and academics would tell you that this reasoning remains valid to this day. As neatly summed up by Professor Doug Baird in a great article entitled "A World Without Bankruptcy" (published at 50 Law and Contemporary Problems 173 (1987) (We$tlaw Link)):
We may not desire a world without bankruptcy because the self-interest of creditors leads to a collective action problem, and a legal mechanism is needed to ensure that the self-interest of individuals does not run counter to the interests of the group.
In passing BAPCPA, about three-quarters of the members of Congress, fueled by their lobbying pals, disagreed with such rational thinking. Apparently, however, they didn’t really care what practitioners, academics, or Judges thought, observed, or studied (at least that's what many who tried to have their voices heard say). Instead, to these Congressional leaders, bankruptcy had become a den of thieves, and it was time to shut the system down. In large measure, they succeeded, at least in the short-term. Recently, however, academic scholars are questioning the "conventional wisdom" that the long-term impact of the present law will be dramatically fewer filings, notwithstanding the significantly higher costs to file.
But, does the reduced number of bankruptcy filings really prove that BAPCPA has succeeded, as Senator Grassley likes to gloat? Isn’t the ultimate measure of success determined by aggregate unsecured creditor recoveries? And, has the lot of unsecured creditors as a whole really been improved as a result of BAPCPA? While some individual creditors may benefit in particular cases by winning a "race to the courthouse," Professor Baird's analysis of the "collective action" problem suggests that unsecured creditors as a whole may in fact be worse off in BAPCPA's Hobbesian "world without bankruptcy" where each creditor selfishly pursues its own parochial interests at the expense of the whole.
So today, as we pause to reflect upon BAPCPA's first birthday (which one former judge added in a comment was the “worst single piece of legislation since the Fugitive Slave Law or the Alien and Sedition laws”) our thoughts are drawn to "conventional wisdoms" concerning BAPCPA. In a prior post, I noted how DSI’s BAPCPA guru, Cathy Vance, exposed the fallacies of "conventional wisdom" regarding interpretations of BAPCPA’s new Section 1102(b)(3) (dealing with a Creditors’ Committee's’ obligation to share information with other non-Committee creditors). In this recent piece in Preference Quarterly, she and Nelson Mullins’ Byron Starcher challenge the "conventional wisdom" (pp.10-11) that BAPCPA effected a dramatic change to the law regarding the venue of preference actions. In fact, they conclude, the enacted language effected no change at all, and may have made things even worse! In sum, BAPCPA doesn't always mean what it says or say what it means. But, as one Chicago judge said, "it does provide good opportunities for some real creative lawyering" (of course, the client who has to pay for such creativity will be none too thrilled).
In the end, I suspect that unsecured creditors as a whole will suffer from BAPCPA's restoration of "collective action problems." Time (and some very much needed academic research) will tell. In the meantime, we’ll instead send our happy birthday wishes to Chicago's own Mae Jemison, who turns 50 today. As a member of the space shuttle Endeavour's crew in 1992, Dr. Mae was the first African-American woman to become an astronaut. Now there's a birthday worth toasting!
© Steve Jakubowski 2006