American Bankruptcy Institute
8 III. Background on the Commission and the Study Project
Congress historically has turned to U.S. bankruptcy laws to help stabilize the economy in times of crisis and, beginning in 1867, to provide both individuals and corporations a single forum to address multiple creditor claims.5 Although the law has evolved significantly since the late 1800s, the law remains focused on strengthening the economy and society more generally and, in the process, instilling confidence in businesses and markets. These objectives require a delicate balance that encourages appropriate growth and innovation in business, but provides sufficient protection and certainty to creditors.6 Chapter 11 of title 11 of the U.S. Code (the “Bankruptcy Code”) can achieve this balance for U.S. companies and markets. This section reviews the historical development of the Bankruptcy Code, explains why it is important and necessary to consider reforms to the Bankruptcy Code at this point in time, and details the Commission’s study process that generated this Report and Recommendations.
A. Brief history of u.s. Business reorganization laws
The United States has one of the strongest and most well developed business reorganization schemes in the world.7 This business reorganization scheme has a rich history, stemming in large part from the railroad failures of the late 19th century.8 The Bankruptcy Acts of 1867 and 1898 introduced the basic conceptual underpinnings of modern bankruptcy law, including business bankruptcy.9 These laws, particularly the 1898 Bankruptcy Act, were grounded in a “rescue and rehabilitate” policy intended to allow the honest but unfortunate debtor, including the business debtor, to obtain a fresh start and a second chance at becoming a productive, contributing member of society.10 As with all U.S. bankruptcy laws, the 1898 Bankruptcy Act sought to balance the need of the debtor
5 See, e.g., Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5, 18–23 (1995). 6 One commentator explained:
The current U.S. bankruptcy system grew directly out of the United States’ unique capitalist system, which rewards entrepreneurialism as well as extensive consumer spending. It makes sense that a society in which dollars rule would have a forgiving personal bankruptcy system in order to keep consumer spending high, and an equally forgiving business reorganization system to encourage risk taking and economic growth. Both systems are part of a larger scheme to keep economic players alive and active in the game of capitalism. U.S. bankruptcy systems are among the country’s few social programs and they address many of society’s ills. Thus, they are broad and form an integral part of the social system from which they sprung.
Nathalie Martin, The Role of History and Culture in Developing Bankruptcy and Insolvency Systems: The Perils of Legal Transplantation, 28 B.C. Int’l & Comp. L. Rev. 1, 3 (2005). See also Viral V. Acharya et al., Creditors Rights and Corporate Risk-Taking, 102 J. Fin. Econ. 150, 150–66 (Oct. 2011) (“In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions that are value-reducing, to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk. Also, corporate leverage declines when creditor rights are stronger.”). 7 See, e.g., Martin, supra note 6, at 4 (“[M]any countries have attempted to create a reorganization scheme for failing enterprises like Chapter 11 of the U.S. Bankruptcy Code (Chapter 11), in which existing management stays in place and manages the reorganizing company. These systems are perhaps the most common U.S. legal exports today.”) (citations omitted). 8 Harvey R. Miller & Shai Y. Waisman, Does Chapter 11 Reorganization Remain a Viable Option for Distress Businesses for the Twenty-First Century?, 78 Am. Bankr. L.J. 153, 160 (2004) (“The foundation of United States reorganization law is the equity receivership, also known as the federal consent receivership, that was fashioned in the late nineteenth century to resolve the financial distress and failures that permeated the railroad industry after the Civil War.”). 9 For general discussions of the historical development of federal bankruptcy law, see, e.g., David A. Skeel, Jr., Debt’s Dominion 56–60 (2001) (explaining equity receivership process); Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5, 21–23 (1995) (same). See also Charles Warren, Bankruptcy in United States History (1935); Donald R. Korobkin, Rehabilitating Values: A Jurisprudence of Bankruptcy, 91 Colum. L. Rev. 717, 747–49 (1991); Stephen J. Lubben, A New Understanding of the Bankruptcy Clause, 64 Case W. Res. L. Rev. 319 (2014). 10 See Jason J. Kilborn, Bankruptcy Law, in Governing America: Major Decisions of Federal, State, and Local Governments from 1789 to the Present 41–49 (Paul J. Quirk & William Cunion eds., 2011) (“With the rise of private business corporations in the mid- to late-1800s, the rescue- and rehabilitation-oriented bankruptcy policy was extended to the ‘big business’ context.”). The 1898 Bankruptcy Act initially permitted “[c]ompositions in lieu of liquidations,” and then subsequent amendments, described below, enlarged rehabilitation alternatives for businesses. See Tabb, supra note 9, at 26–30.