ABI Commission to Study the Reform of Chapter 11
III. Background on the Commission and the Study Project 9
to rehabilitate and the rights of creditors to recoveries. The basic notion that a business generally is more valuable to creditors and society as a whole if it rehabilitates rather than liquidates also emerged during this period.11
Bankruptcy law progressed in response to, among other things, the Great Depression of the 1930s,12 and a more formalized process evolved that allowed distressed companies to remain in business while restructuring their obligations.13 These developments produced Sections 77 and 77B of the Bankruptcy Act14 and then the Bankruptcy Code’s immediate predecessor, the Chandler Act,15 which added three new chapters for reorganizing ongoing businesses (Chapters X and XI concentrated on businesses, and Chapter XII addressed real estate organizations).16 Each iteration of the law focused on strengthening business reorganizations and seeking an appropriate balance between the rights and obligations of the debtor and its stakeholders.
Under Chapter X of the Chandler Act, a trustee was appointed to replace the debtor’s management, and the Securities and Exchange Commission had a formal oversight role in the reorganization process.17 The large public companies subject to Chapter X did not embrace these two requirements.18 They worked to avoid a bankruptcy filing — even when arguably necessary or prudent under the circumstances — or tried to come within the provisions of Chapter XI of the Chandler Act.19 Chapter XI was intended for smaller, nonpublic companies and only addressed unsecured debt in the debtor’s capital structure. Nevertheless, companies generally preferred this chapter because it
11 See, e.g., Charles J. Tabb, The Future of Chapter 11, 44 S.C. L. Rev. 791, 803 (1993) (“This idea that the preservation of a business as a going concern is better for everyone — creditors, stockholders, bondholders, employees, and the public generally — is not a new one. It has been around for at least a century, really ever since the Industrial Revolution reached full flower.”). James Madison was a proponent of early recognition of bankruptcy laws, “[t]he power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different states, that the expediency of it seems not likely to be drawn into question.” Miller & Waisman, Does Chapter 11 Reorganization Remain a Viable Option for Distress Businesses for the Twenty-First Century?, supra note 8, at 159 & n. 4 (quoting The Federalist No. 42, at 271 (James Madison) (Clinton Rossiter ed., 1961)). 12 See, e.g., Tabb, supra note 9, at 22. 13 “One of the primary purposes of the Bankruptcy Act is to ‘relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). See also David S. Kennedy & R. Spencer Clift III, An Historical Analysis of Insolvency Laws and Their Impact on the Role, Power, and Jurisdiction of Today’s United States Bankruptcy Court and Its Judicial Officers, 9 Norton J. Bankr. L. & Prac. 165, 176 (2000) (“The Chandler Act was the Congressional response to the depression and was modeled after the emergency legislation of the early 1930’s. Since 1938, there has existed in America a Congressional policy favoring reorganization over liquidation, where possible.”). 14 Sections 77 and 77B of the 1898 Bankruptcy Act adopted various features of the equity receivership model of reorganization historically used for railroads and applied those features to railroads and other business entities. See, e.g., Skeel, supra note 9, at 54, 106; Bussel, infra note 17, at 1555–56. 15 “[The Chandler Act] was far-reaching in its scope and purpose. The Act comprised 15 chapters; the first seven chapters dealt with the liquidation provisions substantially based upon the original 1898 Act while chapters eight through fifteen dealt primarily with the rehabilitation of various classes of debtors.” Kennedy & Clift, supra note 13, at 176. For a detailed history and analysis of the Chandler Act, see Vincent L. Leibell, Jr., The Chandler Act — Its Effect Upon the Law of Bankruptcy, 9 Fordham L. Rev. 380, 385–409 (1940). 16 See, e.g., Alexander L. Paskay & Frances Pilaro Wolstenholme, Chapter 11: A Growing Cash Cow Some Thoughts on How to Rein in the System, 1 Am. Bankr. Inst. L. Rev. 331, 331 nn. 3 & 4 (briefly explaining Chapters X, XI, and XII). 17 See, e.g., SEC v. Am. Trailer Rentals Co., 379 U.S. 594, 603–06 (1965) (explaining development of the Chandler Act); Daniel J. Bussel, Coalition-Building Through Bankruptcy Creditors’ Committees, 43 UCLA L. Rev. 1547, 1557–58 (1996) (explaining key elements of Chapter X). 18 See Skeel, supra note 9, at 123–27 (explaining the general negative corporate reaction to Chapter X and noting that “[t]he independent trustee requirement discouraged the managers of large firms from filing for bankruptcy if there was any way to avoid it”). 19 See id. at 125–27. See also A. Mechele Dickerson, Privatizing Ethics in Corporate Reorganizations, 93 Minn. L. Rev. 875, 890 (2009) (“The harsh treatment managers received in Chapter X discouraged managers from using that Chapter and ultimately caused Chapter XI to become the dominant reorganization vehicle for even large, publicly traded companies that ostensibly should have filed under the trustee-controlled Chapter X.”). See Harvey R. Miller, Bankruptcy and Reorganization Through the Looking Glass of 50 Years (1960–2010), 19 Norton J. Bankr. L. & Prac. 3 Art. 1 (1993) for a brief comparison about the treatment of debtors and their management under Chapter X versus Chapter XI). For example, one source suggests that only a minor portion of business bankruptcies were in fact commenced through Chapter X (e.g., 0.6 percent of total filings in 1971). David T. Stanley & Marjorie Girth, The Brookings Inst., Bankruptcy: Problems, Process, and Reform (1971).