By G. Ray Warner (St. John’s University)
Sustainability is about consequences, and a sustainable approach to bankruptcy requires consideration of the interests of all, both present and future, who may be affected by the process. Bankruptcy theory has tilted strongly toward a single-stakeholder model in recent decades. The currently dominant “creditors’ bargain” theory of bankruptcy is a creditor primacy model that ignores the consequences imposed on others by the decisions made in a bankruptcy case.
Notwithstanding its creditor orientation, the U.S. bankruptcy process leaves ample room to adopt a sustainability approach. Sustainability imposes no metric on the outcome of the decision-making process and does not require subordination of the interests of financial stakeholders. It is a light-touch approach that merely requires that the interests of all affected parties be considered.
Adopting a sustainable approach will make no difference in the vast majority of bankruptcy cases because they affect only the debtor, its creditors, and its shareholders — interests already fully considered and addressed by the process. However, some bankruptcy cases impose significant costs on other constituencies or involve major issues of public interest that affect society as a whole. While few in number, bankruptcy cases raising serious sustainability concerns are of great importance.
My recent paper, Sustainable Bankruptcy, concludes that the U.S. bankruptcy process adopts a broad stakeholder view that facilitates a robust sustainability approach. The portal through which much of the sustainability analysis can be incorporated into bankruptcy is the business judgment rule, the standard used for most bankruptcy decisions. The bankruptcy version of the rule serves a very different function from its corporate cousin. Corporate decisions are made by directors, but most bankruptcy decisions are vested in the bankruptcy judge. Thus, rather than a shield protecting decisions from scrutiny, the bankruptcy variant of the rule determines how much deference the bankruptcy judge gives to the proposed decision of the bankruptcy manager, who usually is the debtor corporation acting as a debtor-in-possession. The test operates on a sliding scale, with judges giving almost complete deference to proposals involving ordinary business decisions and far less to those that affect important stakeholder interests.
In addition to imposing some measure of reasonableness, the bankruptcy decision-making process also provides meaningful opportunities for stakeholder involvement and permits stakeholders to add information and challenge proposed decisions before they are finalized. And, at least in chapter 11 reorganization cases, standing is extended to virtually all parties who might be affected by a decision, not just parties with a financial stake in the enterprise.
Bankruptcy is not simply a forum for effectuating a creditors’ bargain, or even a hypothetical creditors’ bargain. It is a coercive process that can impose significant costs on non-creditors and even on society as a whole. Sustainability should be part of that process, and the decisions made should balance the interests of all who are affected by them and not serve only the interests of a select few.
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