Kathleen G. Noonan (University of Pennsylvania), Jonathan C. Lipson (Temple University—Beasley School of Law), and William H. Simon (Columbia Law School)
Wags sometimes ask: What is chapter 11 good for?
In a new paper, we show that, among other things, it provides a template that both legitimates and explicates Public Law Litigation (PLL), civil class action suits against public agencies such as police departments and prison systems. These are among the most controversial disputes that courts face; often criticized, and widely misunderstood. Analogies to chapter 11 practice show how critics err, and how PLL works.
We make three basic points. First, we show that both bankruptcy and PLL, which share roots in the federal equity receivership, are judicial responses to collective action problems that other institutional mechanisms (e.g., markets or electoral politics) cannot or will not address.
Second, we show that courts in neither context “run” the organizations in question. In both types of case, management (of the debtor or agency) remains in possession and control, subject to judicial and stakeholder (e.g., creditor or plaintiff) oversight.
Third, chapter 11 and PLL both operate at the organizational level, through “restructuring.” For chapter 11, this will usually involve a plan of reorganization. The PLL analogue is a settlement agreement in a consent decree. Like plans, consent decrees typically reflect negotiated improvements in operations designed to increase the agency’s chances of success.
Critics of PLL sometimes claim that courts commandeer public instrumentalities, exceeding their expertise and authority. But this is no truer in PLL than it is in chapter 11 reorganization. Rather, judges in both spheres facilitate consensual resolutions that seek to balance stakeholder participation against managerial discretion.
This matters because the Trump Administration has vowed to “deconstruct the administrative state,” which implies a reduction in the amount and quality of public services. Increased PLL would be a plausible response.
If that happens, courts should focus not on whether they can supervise the restructuring of public agencies, but how to do so more effectively. We show that the chapter 11 system can provide helpful guidance.
The full article is available here.