Law Commons^™

The Purloined Debtor: Edgar Allan Poe’S Bankruptcy In Law And Letters, Erin L. Sheley, Zvi Rosen

Faculty Scholarship

This Article represents the first interdisciplinary case study of Edgar Allan Poe’s bankruptcy as an inflection point in the legal and cultural history of debt. Although Poe hardly leaps to mind for portrayals of legal procedure, much of his oeuvre reveals a terror of legal process as an interstitial principle. The anxiety around identity in Poe’s work reveals an ongoing struggle between an individual subject and two opposing yet equally degenerate legal statuses: possession and indebtedness. This opposition renders a distinct form of legal process legible in these texts: the then emerging law of bankruptcy. Poe declared bankruptcy at a …

Against Bankruptcy Exceptionalism, Jonathan M. Seymour

Faculty Scholarship

Bankruptcy courts conceive of their mission differently than other courts do. For the Supreme Court, bankruptcy cases are ordinary statutory cases to be resolved “clearly and predictably using well established principles of statutory interpretation.” Many bankruptcy judges, though, believe that bankruptcy courts serve a distinctive mission for which ordinary adjudicative methods do not suffice. Often, that mission is characterized using the language of equity. Judges and commentators alike have observed that among the most spoken words in the bankruptcy courts are: “the bankruptcy court is a court of equity.” Others have contended that bankruptcy necessitates “creativity and flexibility,” pursuant to …

Financing Failure: Bankruptcy Lending, Credit Market Conditions, And The Financial Crisis, Frederick Tung

Faculty Scholarship

When contemplating Chapter 11, firms often need to seek financing for their continuing operations in bankruptcy. Because such financing would otherwise be hard to find, the Bankruptcy Code authorizes debtors to offer sweeteners to debtor-in-possession (DIP) lenders. These inducements can be effective in attracting financing, but because they are thought to come at the expense of other stakeholders, the Code permits these inducements only if no less generous a package would have been sufficient to obtain the loan.

Anecdotal evidence suggests that the use of certain controversial inducements — I focus on roll-ups and milestones — skyrocketed in recent years, …

The Limited Lifespan Of The Bankruptcy Estate: Managing Consumer And Small Business Reorganizations, Jonathan M. Seymour

Faculty Scholarship

Congress has a great affinity for debt adjustment bankruptcies. These are bankruptcies in which a debtor keeps rather than liquidates her assets and instead repays creditors out of future income. Chapter 13, which allows individual consumer debtors to reorganize in this way, was supplemented in 1986 by chapter 12 for farm bankruptcies. In 2019, in the largest expansion of debt adjustment bankruptcies since the Bankruptcy Code was enacted, Congress made debt adjustment bankruptcy available to small businesses.

The reality is, however, that most debt adjustment bankruptcies fail. For that reason, the relative rights of debtors and creditors when tensions arise …

Bankruptcy’S Role In The Covid-19 Crisis, Edward R. Morrison, Andrea C. Saavedra

Faculty Scholarship

Policymakers have minimized the role of bankruptcy law in mitigating the financial fallout from COVID-19. Scholars too are unsure about the merits of bankruptcy, especially Chapter 11, in resolving business distress. We argue that Chapter 11 complements current stimulus policies for large corporations, such as the airlines, and that Treasury should consider making it a precondition for receiving government-backed financing. Chapter 11 offers a flexible, speedy, and crisis-tested tool for preserving businesses, financing them with government funds (if necessary), and ensuring that the costs of distress are borne primarily by investors, not taxpayers. Chapter 11 saves businesses and employment, not …

Race And Bankruptcy: Explaining Racial Disparities In Consumer Bankruptcy, Edward R. Morrison, Belisa Pang, Antoine Uettwiller

Faculty Scholarship

African American bankruptcy filers select Chapter 13 far more often than other debtors, who opt instead for Chapter 7, which has higher success rates and lower attorneys’ fees. Prior scholarship blames racial discrimination by attorneys. We propose an alternative explanation: Chapter 13 offers benefits, including retention of cars and driver’s licenses, that are more valuable to African American debtors because of relatively long commutes. We study a 2011 policy change in Chicago, which seized cars and suspended licenses of consumers with large traffic-related debts. The policy produced a large increase in Chapter 13 filings, especially by African Americans. Two mechanisms …

Restructuring Vs. Bankruptcy, Jason Roderick Donaldson, Edward R. Morrison, Giorgia Piacentino, Xiaobo Yu

Faculty Scholarship

We develop a model of a firm in financial distress. Distress can be mitigated by filing for bankruptcy, which is costly, or preempted by restructuring, which is impeded by a collective action problem. We find that bankruptcy and restructuring are complements, not substitutes: Reducing bankruptcy costs facilitates restructuring, rather than crowding it out. And so does making bankruptcy more debtor-friendly, under a condition that seems likely to hold now in the United States. The model gives new perspectives on current relief policies (e.g., subsidized loans to firms in bankruptcy) and on long-standing legal debates (e.g., the efficiency of the absolute …

America Is Selling Its Seniors Short, Constantine N. Katsoris

Faculty Scholarship

No abstract provided.

Manipulating Random Assignment: Evidence From Consumer Bankruptcies In The Nation's Largest Cities, Edward R. Morrison, Belisa Pang, Jonathon Zytnick

Faculty Scholarship

Random case assignment is thought to be an important feature of decision-making in federal courts because it helps guard against favoritism (actual or perceived) toward particular parties or types of cases. In bankruptcy courts, cases are randomly assigned to both judges and trustees. In Chapter 7 cases, for example, the trustee is a quasi-judicial actor, typically a private-sector lawyer, who has been selected to audit the debtor's finances, find and liquidate assets, and police compliance with the law. We study three major bankruptcy jurisdictions (covering Chicago, Los Angeles, and parts of New York) and find that the random-assignment process for …

Bankruptcy Law—Rethinking The Discharge Of Late Filed Taxes In Consumer Bankruptcy, Justin H. Dion, Barbara Curatolo

Faculty Scholarship

The 2005 amendments to the Bankruptcy Code, Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted in order to improve bankruptcy law. However, BAPCPA has made the issue of whether late-filed taxes are dischargeable even murkier than before the amendments. After BAPCPA, some courts continued to analyze claims as they had before the amendment. Others used a “one-day-late rule” that prevented late-filed taxes from being dischargeable—even if the taxes were filed only one day late. This Article suggests a different approach. It argues that the legislature intended tax debt associated with late-filed income tax returns be dischargeable if the …

Valuation Disputes In Corporate Bankruptcy, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

Prior scholarship points to disagreements about valuation and judicial valuation error as key drivers of Chapter 11 outcomes. Avoiding valuation disputes and valuation errors is also the underlying driver of most proposed reforms, from Baird’s auctions to Bebchuk’s options. In this paper, we undertake a detailed examination of bankruptcy court opinions involving valuation disputes. Our paper has two goals. The first is to understand how parties and their expert witnesses justify their opposing views to the judge, and how judges decide between them. The second is to provide practical guidance to judges in resolving valuation disputes. We document surprisingly pervasive …

The Bankruptcy Of Refusing To Hire Persons Who Have Filed Bankruptcy, Terrence Cain

Faculty Scholarship

In 1978, Congress made it illegal for government employers to deny employment to, terminate the employment of, or discriminate with respect to employment against a person who has filed bankruptcy. In 1984, Congress extended this prohibition to private employers by making it illegal for such employers to terminate the employment of, or discriminate with respect to employment against a person who has filed bankruptcy. Under the law as it currently exists, private employers can refuse to hire a person who has filed bankruptcy solely because that person has filed for bankruptcy. Meanwhile, employers have substantially increased their use of credit …

Do Economic Conditions Drive Dip Lending?: Evidence From The Financial Crisis, Frederick Tung

Faculty Scholarship

When contemplating Chapter 11, the first step for many firms is to seek financing for their continuing operations in bankruptcy. Because such financing would otherwise be hard to find, the Bankruptcy Code authorizes debtors to offer sweeteners to debtor-in-possession (DIP) lenders. These inducements can be highly effective in attracting financing. But because these sweeteners are thought to come at the expense of other stakeholders, the Code permits these inducements only if the judge determines that no less generous a package would have been sufficient to obtain the loan.

Anecdotal evidence suggests that the use of certain controversial inducements—I focus on …

Cracking The Code: An Empirical Analysis Of Consumer Bankruptcy Outcomes, Sara Sternberg Greene, Parina Patel, Katherine M. Porter

Faculty Scholarship

Chapter 13 is a cornerstone of the bankruptcy system. Its legal requirements strike a balance between the rehabilitation of debtors through keeping assets and reducing debt, and the repayment of creditors over a period of years. Despite the accolades from policymakers, the hard truth is that the majority of the half-million families each year that seek refuge in chapter 13 bankruptcy will not achieve the debt relief of a discharge. Prior research found that those who drop out of bankruptcy quickly endure the serious financial struggles that they had before bankruptcy—now even worse off for having spent thousands of dollars …

Puerto Rico And The Netherworld Of Sovereign Debt Restructuring, Mitu Gulati, Robert K. Rasmussen

Faculty Scholarship

Puerto Rico has incurred debt well beyond its ability to repay. It attempted to address its fiscal woes through legislation allowing the restructuring of some its debt. The Supreme Court put a stop to this effort, holding that Congress in the Bankruptcy Code barred the Commonwealth from enacting its own restructuring regime. Yet all agreed that the Bankruptcy Code did not provide anything in its place. While Congress quickly enacted PROMESA in an attempt to address the Puerto Rico’s fiscal ills, we explore in this paper whether Congress has the power to bar Puerto Rico from enacting a restructuring mechanism …

The Privacy Policymaking Of State Attorneys General, Danielle K. Citron

Faculty Scholarship

Accounts of privacy law have focused on legislation, federal agencies, and the self-regulation of privacy professionals. Crucial agents of regulatory change, however, have been ignored: the state attorneys general. This article is the first in-depth study of the privacy norm entrepreneurship of state attorneys general. Because so little has been written about this phenomenon, I engaged with primary sources — first interviewing state attorneys general and current and former career staff, and then examining documentary evidence received through FOIA requests submitted to AG offices around the country.

Much as Justice Louis Brandeis imagined states as laboratories of the law, offices …

Regulating Public Offerings Of Truly New Securities: First Principles, Merritt B. Fox

Faculty Scholarship

The public offering of truly new securities involves purchases by investors in sufficient number and in small enough blocks that each purchaser’s shares can reasonably be expected to be freely tradable in a secondary market that did not exist before the offering. Increasing the ability of small and medium-sized enterprises (SMEs) to make such offerings has been the subject of much recent discussion.

At the time that a firm initially contemplates such an offering, unusually large information asymmetries exist between its insiders and potential investors. These can lead to severe adverse-selection problems that prevent a substantial portion of worthy offerings …

Beyond Options, Edward R. Morrison, Anthony J. Casey

Faculty Scholarship

Scholars and policymakers now debate reforms that would prevent a bankruptcy filing from being a moment that forces valuation of the firm, crystallization of claims against it, and elimination of junior stakeholders’ interest in future appreciation in firm value. These reforms have many names, ranging from Relative Priority to Redemption Option Value. Much of the debate centers on the extent to which reform would protect the non-bankruptcy options of junior stakeholders, or harm the non-bankruptcy options of senior lenders. We argue that this focus on options misplaced. Protecting options is neither necessary nor sufficient for advancing the goal of a …

Reforming The Law Of Reputation, Frank A. Pasquale

Faculty Scholarship

Unfair and deceptive practices of controllers and processors of data have adversely affected many citizens. New threats to individuals’ reputations have seriously undermined the efficacy of extant regulation concerning health privacy, credit reporting, and expungement. The common thread is automated, algorithmic arrangements of information, which could render data properly removed or obscured in one records system, nevertheless highly visible or dominant in other, more important ones.

As policymakers reform the law of reputation, they should closely consult European approaches to what is now called the “right to be forgotten.” Health privacy law, credit reporting, and criminal conviction expungement need to …

The Failed Reform: Congressional Crackdown On Repeat Chapter 13 Bankruptcy Filers, Sara Sternberg Greene

Faculty Scholarship

After decades of lobbying to “get tough” on bankruptcy repeat filers, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The Bankruptcy Code now requires that the automatic stay, which prevents creditors from pursuing the property of bankruptcy debtors, expires after thirty days for petitioners who file for bankruptcy within one year of a previously failed petition. Debtors can file a motion to extend the stay, but there is a presumption of a bad faith filing, only overcome if a debtor can show there has been a “substantial change in his or her financial or personal …

Derivatives And Collateral: Balancing Remedies And Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This Article examines whether exempting those transactions from bankruptcy’s automatic stay, including the stay of foreclosure actions against collateral, is necessary or appropriate in order to minimize systemic risk.

Debt-Buyer Lawsuits And Inaccurate Data, Peter A. Holland

Faculty Scholarship

Pursuant to secret purchase and sale agreements (also known as forward flow agreements), the accounts that banks sell to debt buyers are often sold “as is,” with explicit and emphatic disclaimers that the debts may not be owed, the amounts claimed may not be accurate, and documentation may be missing. Despite their full knowledge that the accuracy and completeness of the data has been specifically disclaimed by the bank, when they sue consumers, debt buyers tell courts that the information obtained from the bank is inherently reliable and accurate. In order to avoid a fraud on the courts, the contents …

A People’S History Of Collective Action Clauses, Mark C. Weidemaier, Mitu Gulati

Faculty Scholarship

For two decades, collective action clauses (CACs) have been part of the official-sector response to sovereign debt crisis, justified by claims that these clauses can help prevent bailouts and shift the burden of restructuring onto the private sector. Reform efforts in the 1990s and 2000s focused on CACs. So do efforts in the Eurozone today. CACs have even been suggested as the cure for the US municipal bond market. But bonds without CACs are still issued in major markets, so reformers feel obliged to explain why they know better. Over time, a narrative has emerged to justify pro-CAC reforms. It …

Swords, Shields, And Shackles: Human And Corporate "Persons" Under The Bankruptcy Abuse Prevention And Consumer Protection Act Of 2005, Linda E. Coco

Faculty Scholarship

No abstract provided.

Clearinghouses As Liquidity Partitioning, Richard Squire

Faculty Scholarship

To reduce the risk of another financial crisis, the Dodd-Frank Act requires that trading in certain derivatives be backed by clearinghouses. Critics mount two main objections: a clearinghouse shifts risk instead of reducing it; and a clearinghouse could fail, requiring a bailout. This Article’s observation that clearinghouses engage in liquidity partitioning answers both. Liquidity partitioning means that when one of its member firms becomes bankrupt, a clearinghouse keeps a portion of the firm’s most liquid assets, and a matching portion of its short-term debt, out of the bankruptcy estate. The clearinghouse then applies the first toward immediate repayment of the …

Rollover Risk: Ideating A U.S. Debt Default, Steven L. Schwarcz

Faculty Scholarship

This article examines how a U.S. debt default might occur, how it could be avoided, its potential consequences if not avoided, and how those consequences could be mitigated. To that end, the article differentiates defaults caused by insolvency from defaults caused by illiquidity. The latter, which are potentiated by rollover risk (the risk that the government will be temporarily unable to borrow sufficient funds to repay its maturing debt), are not only plausible but have occurred in the past. Moreover, the ongoing controversy over the federal debt ceiling and the rise of the shadow-banking system make these types of defaults …

The Bankruptcy-Law Safe Harbor For Derivatives: A Path-Dependence Analysis, Steven L. Schwarcz, Ori Sharon

Faculty Scholarship

U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This article argues that these rights and immunities result from a form of path dependence, a sequence of industry-lobbied legislative steps, each incremental and in turn serving as apparent justification for the next step, without a rigorous and systematic vetting of the consequences. Because the resulting “safe harbor” has not been fully vetted, its significance and utility should not be taken for granted; and thus regulators, legislators, and other policymakers—whether in the United States or abroad—should not automatically assume, based on its …

Derivatives And Collateral: Balancing Remedies And Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Extraterritorial Avoidance Actions: Lessons From Madoff, Edward R. Morrison

Faculty Scholarship

The Madoff case continues to provide fertile ground for testing boundaries of the U.S. Bankruptcy Code (Code). In July 2014, Judge Rakoff issued an important decision regarding the extraterritorial scope of the Code’s avoidance rules. The Trustee for the Madoff Estate, Irving Picard, sought to recover cash withdrawn by “feeder funds.” These funds pooled customer assets, invested them in Bernard L. Madoff Investment Securities (Madoff Securities), withdrew proceeds from the investment prior to Madoff’s SIPA filing, and distributed the proceeds to customers before the funds themselves collapsed. The funds are located abroad: one, Fairfield Sentry, is a British Virgin Islands …

Rolling Back The Repo Safe Harbors, Edward R. Morrison, Mark J. Roe, Christopher S. Sontchi

Faculty Scholarship

Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code's normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could …