By Jessica Graham (Harvard Law School)
Injustice does not exist only in matters of civil rights, human dignity, and economic development. Rather, the grains of inequity can be found in all of our institutions, and each must be critically examined to determine the cause of systemic injustice and how it may be rectified for the betterment of the whole. The same is true for the U.S. bankruptcy system and Bankruptcy Code (“the Code”). Looking from the outside, the bankruptcy system appears designed to protect crucial stakeholders in the economy, particularly because the Code is the most “debtor-friendly” in the world. However, upon closer view, the deep institutional capture of the system becomes clear. Through a series of exemptions, promises of regulation, and broad drafting, the bankruptcy system has been reduced to nearly a puppet show, orchestrated by powerful corporations and financial institutions. The inequity has become vast, leaving unprotected stakeholder-creditors with little refuge.
The Code, as it stands now, was drafted in 1978 (though there have been amendments since). It comes as no surprise, given the academic discourse during the 1970s, that the Code is corporate-friendly as opposed to debtor-friendly. The previous version of the Code was drafted 40 years prior, demonstrating that, if the pattern holds, we may have reached a point on the timeline for a new analysis. The American Bankruptcy Institute shares this view, creating a commission in 2012 to study Chapter 11 reform. The commission then presented a 400-page report to Congress in 2014, outlining changes thought to “better balance the goals of rehabilitating companies, preserve jobs, and provide value to creditors.” Even so, we have yet to see significant change in the Code. Though not an easy undertaking, a new Bankruptcy Act would serve to better protect stakeholders and vulnerable debtors than does the current Code.
As evidenced by several features of the Code, including the automatic stay, third-party releases, and safe harbors, it is clear that the purported goal of the bankruptcy system has been warped to protect its strongest players rather than its weakest. Each of these topics could constitute a paper of their own, but each also serves a crucial role in the systemic analysis of the fallacies of the bankruptcy system, which serves as the starting point of the paper. The paper then turns to the increased role (and success) of government intervention in bankruptcy, primarily analyzing the politics of the Chrysler reorganization in the 2000s. Lastly, the paper suggests three major changes to the Code intended to protect the equity and promise of the bankruptcy system.
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