some awkward questions about american bankruptcy law: an agenda for comparativists

Some Awkward Questions about American Bankruptcy Law: An Agenda for

Comparativists

John D. Ayer*

The contemporary boom in bankruptcy activity has seen a corresponding explosion in bankruptcy scholarship and analysis in the United States. Much attention has been turned to the task of defining and clarihing the important issues in bankruptcy law, and in this article the author canvasses a number of the key questions which provide an agenda for scholars around the world.

AU hats-Unis, la recrudescence de faiNites a parallilement engemire une multitude dktudes et d'anulyses sur l'insolvabilite'. Une attention toute particuliire a ktk pritke a la dkfinition et a la clarification des points principaux quant au droit de la faillite. D a m cet article, l'autuer aamine un certain nombre de questions-cles qui fournissent un programme d'e'tude aux chercheurs d a m le monde entier.

* Professor of Law, University of California at Davis. The author wrote this article while a visiting Professor of Law at Stanford Law School. Preparation of the article was supported by the Stanford Legal Research Fund, made possible by a bequest from the estate of Ira S. Lillick and other friends of the Stanford Law School.

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“Bankruptcy”, “banca rotta”, “banqueroute”l - under whatever name, the administration of insolvent estates remains one of the most complex and least understood of modem commercial law topics. But the situation is changing. Two decades ago, bankruptcy remained almost exclusively the province of specialists.2 Lately, forces in the economy and the legal profession have conjoined (one hesitates to say “conspired”) to push bankruptcy towards centre stage. In the United States, the Bankruptcy Reform Act of 1978 began an important new chapter in bankruptcy hist01-y.~ In Europe, forces have contended (though so far without success) for more than a decade to effect an EEC convention on bankruptcy law.4 The same currents have im- pelled the adoption of new insolvency legislation in countries as diverse as England5 and China.6

At the risk of seeming parochial, it seems proper to say that in all this activity, the experience of the United States has been on the cutting edge. This is at best an ambiguous honour - like Mark Twain recognizing the cemeteries as the pride of New or lean^.^ But there are consolations. One of the most obvious is that this new boom in bankruptcy activity has provoked a corresponding explosion in bankruptcy scholarship and analysis. A number of first-rate academic

This short list is, of course, no more than a rhetorical flourish. For an important practical effort to contend with the international language of bankruptcy, see the Protocol to the EEC Preliminary Draft Convention on Bankruptcy, Winding-Up, Arrangements, Compositions and Similar Proceedings, 2 Common Mkt. Rep. (CCH) 16111 (1981) (“Draft Convention”). A few scholars have, of course, long toiled in the vineyard, most notably a number of distinguished German-Americans, including Kurt Nadelmann, Max Radin and Stefan Riesenfeld. See, e.g., Nadelmann, “Discrimination in Foreign Bankruptcy Laws Against Non-Domestic Claims” (1973) 47 Am. Bankr. L.J. 147; Radin, ‘The Nature of Bankruptcy” (1940) 89 U. Pa. L. Rev. 1; and Riesenfeld, “The Evolution of Modem Bankruptcy Law” (1947) 31 Minn. L. Rev. 401. Pub. L. 95-598, 92 Stat. 2549 (1978). See also Ayer, “Secured Creditors and Insolvency in the United States of America” (1980) 44 Rabels Zeitschrift 649. Draft Convention, above, note 1. See also Gitlin & Flaschen, ‘The International Void in Multinational Bankruptcy” (1987) 42 Bus. Law. 307 at 31 1-313. Iruolvency Act of 1986. See, e.g., Woloniecki, “Co-operation Between National Courts in International Insolvencies: Recent United Kingdom Legislation” (1986) 35 Int’l & Comp. L.Q. 644. Boshkoff & Yongxin Song, “China’s New Bankruptcy Law: A Translation and Brief Introduction” (1987) 61 Am. Bankr. L.J. 287. Life on the Mississippi, c. 42.

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minds have turned their attention to the task of defining and clarifying the problems of bankruptcy law.

Defining and clarifying a problem are, of course, not the same as solving it. Indeed, the issues that emerge from this enterprise are often extremely awkward - awkward in the sense that they show just how little we have thought through or understood our problem. But the history of science suggests that awkward questions are the engine of growth. And if that is true, then the awkward questions that arise from the study of American bankruptcy law can help push us all for- ward as the inquiry continues into the next century. Here, then, are a few of these awkward questions that provide an agenda for scholars around the world.

(a) What Is Bankruptcy?

In one sense, of course, you can dismiss this question as a kind of vulgar Platonism: probably no one supposes that there is an “essence” of bankruptcy law, excluding all other possibilities. In the recent bankruptcy boom, we have seen bankruptcy law deployed in ways that necessarily call into question the nature of the institution. For example, the still-new 1978 Bankruptcy Code included some of the most extensive “consumer protection” measures ever propounded under the aegis of bankruptcy law. While Congress has backed away from the more extreme reaches of the 1978 Code, the question remains: how far is it sensible to subsume under the name of “bankruptcy” the more general enterprise of consumer protection?

At a different level, there have been a number of notorious recent cases where the courts have been called upon to exercise the bankruptcy power in arguably novel or unfamiliar cases. These include, for example, the famous “bankruptcy tort” cases, where the courts have utilized the bankruptcy mechanism to “orchestrate” the claims of persons injured by defective products. At another pole are the cases of enterprises with only one, or a few, creditors, who want to stave off collection efforts even though they are, in general, solvent. There are many of these, but the most obvious is the case of Texaco, where the debtor used bankruptcy as a strategic device in its battle against Pennzoil over a monster liability judgment. In other


cases, debtors have utilized bankruptcy as a device for articulating disputes over labour or pension claims. Among these examples, the “bankruptcy tort” cases are the most conventional, in that they pit creditor against creditor over the assets of truly insolvent debtors. On the other hand, the use of bankruptcy as a litigation tactic by the (in- disputably solvent) Texaco is probably the least conventional. The irony here is that it is the tort cases that have created a huge public outcj , while Texaco has gone relatively unnoticed outside the circle of specialists. Taking all these facts together, it is clear that we do not have any convincing notion of just what are the “logic and limits” of the bankruptcy power.8

(b) What Is a Reorganization?

If there is no consensus on the “core meaning” of bankruptcy law, then there is even less on the nature of “reorganization”. And this is hardly for lack of trying. The Bankruptcy Code distinguishes “liquidation” proceedings under Chapter 7 from “reorganization” cases under the now-notorious Chapter 11.9 But the Code does not define “reorganization”. And it is proving harder and harder to iden- tify a clear distinction in practice.

A hasty appraisal might suggest that both chapters address the fate of a “business enterprise”, and that Chapter 7 conceives of the enterprise being dismantled, while Chapter 11 provides that it will continue with a new capital structure. It is true that some cases fit this model. But it is far from necessary, and some anecdotal evidence suggests that it is not even common. Thus, Chapter 11 allows for the liquidation of the debtor where that is appropriate.1° By contrast, the Chapter 7 trustee may continue to operate the business.ll Indeed, it is fairly common for the enterprise to be “liquidated” by sale as a going

8 The phrase comes from the title of Dean Thomas H. Jackson’s influential new book, The Logic Md Limits of Bankruptcy Lau (Cambridge, Mass.: Harvard University Press, 1986). Chapters 1, 3, 5, and 15 of the Code are “general” provisions, applying to all proceedings. Chapter 9 is for municipalities and Chapter 13, for individuals with a regular income (subject to specified dollar limits). There are no even- numbered chapters except for Chapter 12, added in 1986, for family farmers. 11 U.S.C. s. 1123(b)(4) (1982). 11 U.S.C. s. 721 (1982).

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concern under Chapter 11, with the proceeds distributed to creditors.12

Moreover, many cases that pass under the mantle of “reorgan- izations” are, in fact, cases of individuals (i.e., not corporations or partnerships) with a single asset (typically a parcel of real estate) and few or no unsecured creditors. They are perhaps better understood as “moratorium” cases in the sense identified above. But they pass as “reorganization” cases - and may even make up the bulk of filings under Chapter 1 1.

(c) What Is the Point of Priority? An entirely different sort of embarrassment arises from the law

and practice of corporate finance. Thus, a typical business debtor will have at least two kinds of creditors - first, those who claim priority via consensual “security interests” (mortgages, conditional sales con- tracts, and so forth) in property of the debtor,13 and second, the so- called “general unsecured” or “trade” creditors who do not. From the standpoint of the individual creditor it is intuitively obvious that he would prefer to have a security interest than not - he is more likely to get paid with the security interest than without.

But lately, a number of scholars have begun to ask the awkward question of whether or not it makes sense from the standpoint of thefirm. The granting of a security interest is, in the nature of things, a kind of “compensation” to the secured creditor at the expense of

12 This sort of transaction occurs under Chapter 11 more often than it does under Chapter 7 for two reason. First, if the business is to be sold as a going concern it is often better to leave old management intact. Chapter 7 requires the appoint- ment of a trustee in every case; Chapter 11 does not. Compare 11 U.S.C. s. 701 with U.S.C. s. 1104 (1982). Second, while the business may be permitted to operate under Chapter 7. it requires court approval to do so, and trustees are not accustomed to seeking it. 11 U.S.C. s. 721 (1982). By contrast, no court approval is required for continued operation in Chapter 11; the trustee (or, more likely, the debtor-in-possession) may continue unless the court puts a stop to it. 11 U.S.C. s. 1108 (1982). Personal property security interests are governed by Article 9 of the Uniform Commercial Code. already influential in reforming the security law of a number of other countries. See, e.g., Goode, ‘The Modernisation of Personal Property Security Law” (1984) 100 L.Q. Rev. 234. Real property security law has not received the same kind of attention because it is fragmented, each state impos- ing its own system. But for present purposes. the issues are identical.

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other, competing, creditors. The problem is that the debtor, by giving the security interest to one creditor, may raise the cost at which he can get credit from other creditors - as the saying goes, “what you lose on the merry-go-round, you make up on the swings.,’ In its extreme form, this would suggest that it makes no diflerence whether the firm gives security or not - that its overall cost of credit will remain the same in any event.

Students of corporate finance will recognize a variant of the famous Modigliani-Miller hypothesis here.14 The argument seems by no means closed. Indeed, even the strongest supporters of the “indifference” approach seem to concede that there are some classes of creditors, notably personal-injury tort claimants, who cannot be said to “bargain” with the debtor over the level of risk they will run.15 But the general proposition seems to be gaining force in the literature.

(d) Why Link Priority to Property? A different kind of embarrassment lies immanent in modem

corporate finance studies, although it has not achieved a central place in the debate over bankruptcy policy. That is: how can one justify the quite peculiar treatment of “secured” debt, independent of other competing allocation schemes? “Security” is one kind of claim to favoured treatment in bankruptcy; “statutory priority” is another. Rights under an “executory contract” constitute a third. We are com-

14 Modigliani & Miller, ‘The Cost of Capital, Corporate Finance and the Theory of Investment” (1958) 48 Am. Econ. Rev. 261. The problem is surveyed in Buckley, “The Bankruptcy Priority Puzzle” (1986) 72 Va. L. Rev. 1393; Schwartz, ‘The Continuing Puzzle of Secured Debt” (1984) 37 Vand. L. Rev. 1051; Schwartz, “Security Interests and Bankruptcy Priorities: A Review of Current Theories” (1981) 10 J. Legal Stud. 1. Other contributions include Jackson & Kronman, “Secured Financing and Priorities Among Creditors” (1979) 88 Yale L.J. 1143; Levmore, “Monitors and Freeriders in Commercial and Corporate. Settings” (1982) 92 Yale L.J. 49; Scott, “A Relative Theory of Secured Financing” (1986) 86 Colum. L. Rev. 901; Scott, “Bankruptcy, Secured Debt, and Optimal Capital Stucture” (1977) 32 J. Fin. 1; Smith & Warner, “Bankruptcy, Secured Debt, and Optimal Capital Structure: Comment’’ (1979) 34 J. Fin. 247; Scott, “Bankruptcy, Secured Debt and Optimal Capital Structure: Reply” (1979) 34 J. Fin. 253. See also White, “Efficiency Justifications for Personal Property Security” (1984) 37 Vand. L. Rev. 473.

15 The tort liability of insolvent enterprises has turned into an analytical sub- speciality all on its own.


ing only slowly to realize that they are all instances of the “same” problem: i.e., how to allocate insufficient resources between the competing claimants.16

The problem is evident in the competition between the security interest, on the one hand, and the bankruptcy priority scheme, on the other.17 “Everyone” knows that the secured creditor comes first in bankruptcy. But the Code does not say so. This could represent a failure to restate the obvious. Or more likely, it could represent a failure to recognize that the secured creditor’s assertion of priority is analytically the same kind of claim as the claim set forth in the statutory priority ladder. The problem may be rooted in the fact that an earlier generation thought of the secured creditor’s right as a “property” right, beyond the reach of the bankruptcy law. But the generations have eroded that principle, and the doctrinal embarrassment remains.

(e) When Should a Creditor’s Priority Be Set Aside?

A “core purpose” of bankruptcy law is to provide for the or- chestration of creditors’ claims. Consistent with this principle, developed bankruptcy systems frequently upset schemes of priority that would obtain outside bankruptcy. The most obvious instance is the principle that bankruptcy will stop the non-bankruptcy “race” and put all unsecured creditors on an equal footing. Another variant is that the trustee may be able to “reach back” prior to bankruptcy and undo certain transactions that serve to undermine the bankruptcy dis- tributional scheme.18 Also, the trustee may be permitted to undo transactions, valid between the parties, that would be somehow in-

16 The argument set forth here mirrors the argument that led to the unification of “mortgage” security in the 1930s and the unification of personal property security in the Uniform Commercial Code. See Sturges & Clark, “Legal Theory and Real Property Mortgage” (1928) 37 Yale L.J. 691; G. Gilmore, Securify Interests in Personal Property, vol. 7 (1965). s. 9.1. One persistent question is why the analytical impulse to unification which flourished so vigorously in the 1930s and 1940s has so burnt itself out today, leaving the job only partly done. For the moment, it is convenient to ignore the additional problem, discussed above, created by non-bankruptcy priority schemes. In United States law, this is accomplished chiefly via the rules providing for the avoidance of “preferences”. 11 U.S.C. s. 547 (1982).

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valid as against creditors at state law. Powers in this last class cast the trustee in the role of successor to the state law creditors.

While there is a good deal of intuitive plausibility to this general principle of avoidance, it bristles with difficulties in applica- tion. These are of two kinds. First, bankruptcy law itself shows no internal consistency on the nature of this residual power. Second, it is clear that the non-bankruptcy law, to which the trustee succeeds, is itself in disarray.

As to the bankruptcy law itself, the most notorious theoretical difficulty is the so-called “rule of Moore v. Bay,” named after a famous U.S. Supreme Court case, supposed to have laid down the rule in the first instance.19 Here is a simple example. Suppose that the debtor makes a transfer to TE which has the effect of giving TE “first call” on $loo0 worth of the assets of the debtor.20 Suppose that the debtor later goes into bankruptcy, owing $lO,OOO, none of it to TE, and with assets of only $100. Suppose that under state law, one creditor, with a claim of $10, would have been able to “attack” the transferee - i.e., would have been empowered to recover up to $10 from TE, as necessary to satisfy his claim. The rule of Moore v. Bay provides that the trustee may “avoid” the transfer to TE in toto and not just pro tanto, as necessary to benefit the creditor body as a whole. In other words, as it is said, the trustee stands “not in the shoes of the creditor, but in his overshoes.” The effect skews the state law result in two ways. First, it provides that the general unsecured body will have funds available to them in bankruptcy that would not have been available at state law. Second, it means that the $10 creditor, since he will have to share with others, will in fact receive less than he would receive at state law. No one has ever been able to come up with an intelligible justification for this treatment. Yet it remains the law.

Another kind of problem arises from the variety of non-bankruptcy powers to which the trustee succeeds. The Bankruptcy Code provides that the trustee shall have the rights of a lien creditor at state

19 Moore v. Buy. 284 U.S. 4,52 S.Ct. 3.76 L.Ed. 133 (1931). 20 I use the unconventional phrase “first call” because the more obvious terms

(e.g., “priority”) carry a technical baggage of their own that I want to avoid.


law.21 But it is hard to find an intelligible theory underlying the treatment of lien creditors at state law. There are at least two principal difficulties.

First: the typical problem concerns the right of a lien creditor versus the right of a creditor with a security interest in personal property under Article 9 of the Uniform Commercial Code. Article 9 decides this conflict for most cases by asking when the secured creditor “filed” - i.e., when he put his security interest on record with the appropriate public office.22 If the security interest is completed, and is on file before the creditor obtains his lien, then the secured creditor wins. Otherwise, the lien creditor wins.23 This is thought to make creditor’s rights turn on a system of “ostensible ownership” - i.e., the principle that a competing creditor ought to be able to rely on appearances, and to have the right to take the property free of competing secured creditor claims unless he knows about them.24 For our purposes, there are two important oddities about this rule. First, the rule does not require that the creditor “checked” or in any way relied on the records before extending credit. Quite the contrary, it applies to creditors such as personal-injury tort creditors, who could not pos- sibly have checked the filing, just as it does to contract trade creditors. On the other hand, it appears that the prospective lien creditor wins even if he knows about the existence of the security

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11 U.S.C. s 544(a). This “lien creditor” power under s. 544(a) differs from the “avoidance” power under s. 544(b) in two related ways. First, the “avoidance” power depends on the finding of an actual creditor with an avoidance power, while the “lien creditor” power requires only that there mi@ be such a creditor. Second. the creditor’s claim under the “avoidance ” power may have arisen at any time, so long as it still exists at the time of bankruptcy filing. The import of the “lien creditor” power is determined by defining the rights of a (hypothetical) creditor who extends credit on the date of bankruptcy, and obtains a lien on that same clay. Even though the Code is “uniform”, the appropriate filing office will vary from state to state. See U.C.C. $9-401 (1987). U.C.C. $9-301(l)(b) (1987). Contrast the rather different “priority” rule for conflicts between competing secured creditors. U.C.C. $9-312, especially U.C.C. $9-312(5) (1987). Under U.C.C. $9-312, the prize will go to the creditor who files first, regardless of when he completes his agreement. No one has ever presented a satisfactory justification for the difference between U.C.C.

Jackson & Baird, “Possession and Ownership: An Examination of the Scope of Article 9” (1983) 35 Stan. L. Rev. 175.

$$9-301(1)(b) and 9-312(5) (1987).


interest, so long as he gets his lien before the security interest is put on file.

A second difficulty is that the law of secured credit under Article 9, while it is the most prominent body of priority law, cer- tainly does not exhaust the field. A prominent competitor is the law of personal property leasing, now governed by Article 2A of the Uniform Commercial c0de.25 If the lessor puts the lessee into possession under a “true” lease, it would seem he has created the safne sort of “ostensible ownership” problem as he would create if he were a seller retaining a security interest. Nonetheless, the secured party must “file” in order to prevail against competing creditors, while the lessor need not. There is no evident justification for this distinction.26

As explained above, the basic Article 9 “filing” rule protects any lien creditor who effects his lien before the security interest is perfected, regardless of when that lien creditor’s claim arose. This is most plausible for the creditor who checks the records for competing interests at the time that he first extends credit. It is less so for the creditor who cannot, or does not, check until later. For this reason, many real estate (as distinct from personal property) priority statutes offer narmwer protection to competing claimants. Typically, this takes the form of protecting only bonafide purchasers against competing secured creditors, rather then lien creditors as under the broader rule of the Uniform Commercial Code.

It is difficult to make a case in principle for treating priority questions differently in the arena of real estate than in personal property. This is not to say which rule is better. Rather, the point is that if the lien creditor rule makes sense for personal property, it probably makes sense for real estate as well - and likewise for the bona fide purchaser rule. The apparent inconsistency is probably best understood as a consequence of the historical and political accident that

25 Symposium: Article 2A of the Uniform Commercial Code (1988) 39 Ala. L. Rev. 559-1049. Arguing that the distinction between sale and lease is illusory and does not justify conceptually separate statutory treatment. see Ayer, “On the Vacuity of the Salebase Distinction” (1983) 68 Iowa L. Rev. 667, and Ayer. “Further Thoughts on Sale and Lease” (1983) Ariz. St. L.J. 341. For a response see Boss, “Leases and Sales: Ne’er or Where Shall the Twain Meet?” (1983) Ark. St. L.J. 357.

26 Jackson & Baird. above, note 24.


personal property security law is governed by a different body of law, with a different institutional framework. Nonetheless, bankruptcy law respects this inconsistency as it stands.27

(f) What Is the Function of the Discharge?

Foreign visitors like to remark on the fact that they have never seen anything like the American bankruptcy “discharge”, clucking with a hint of barely concealed amusement at the spectacle of the United States’s populist tolerance for people who do not pay their debts.28 Well enough. What they less often notice is that the discharge, whatever its merits, reposes on no coherent theory.

True, there are any number of stabs at a justification in the case law and elsewhere - frequent references, for example, to the role of the “honest but unfortunate debtor” and the need to restore him to his place.29 But the cases make little attempt to justify just why we choose this particular combination. Is it an act of grace on “our” part as society? Or an exercise in self-interest, in an effort to free up productive resources? Surely it would be necessary to understand the motivation for the discharge in order to understand how it should be im~lemen ted .~~

Moreover, the definition isn’t really accurate. Many debts are nondischargeable in bankruptcy, no matter how “honest” the debtor.31 On the other hand, the requisite “honesty” is not the kind expansively defined by the aggrieved creditor, but only the much narrower, tech-

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Specifically, the Bankruptcy Code provides that the trustee shall have, a s against real estate, the rights of a hypothetical bow fide purchaser. 11 U.S.C. s. 548(a)(3) (1982). Dean Jackson has criticized this rule, holding that bankruptcy is a proceeding for “creditors”, and that a bona fide purchaser is not a “creditor”. But this argument overlooks the fact that a bona fide purchaser whose seller is in defauft is a “creditor” of the seller to the extent of his harm. The discharge invites further comparative work. An important American contribution is Boshkoff, “Limited, Conditional, and Suspended Discharge in Anglo-American Bankruptcy Proceedings” (1982) 131 U. Pa. L. Rev. 69. Local Loan Co. v. Hunt. 292 U.S. 234 at 244. 54 S.Ct. 695, 78 L.Ed. 1230 (1934). See further Ayer, “How to Think About Bankruptcy Ethics” (1986) 60 Am. Bankr. L.J. 355 at 366-371. For example, see 11 U.S.C. s. 523(a)(5) (excluding child support) and 11 U.S.C. s. 523(a)( 1) (excluding tax debts).

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nical definition set forth in the bankruptcy statute.32 Moreover, the rhetoric of discharge obscures the fact that all

sorts of claims evade the discharge bamer by the magic of classifica- tion. The most obvious of these is the secured debt: if the creditor holds an interest in property of the debtor as security for his claim, then the debtor must lose the property or save the claim.33 Abundant evidence supports the intuition that secured debt bulks large in almost every bankruptcy estate.

(g) Is It Wrong Not to Pay One’s Debts?

Bankruptcy was once thought of as a form of moral wrong, or at least a scandal. In many parts of the world, it may be so still. But hardly in the United States. Starting with the end of World War 11, a variety of social forces have conspired to deprive bankruptcy of its moral “sting”, and to leave it in a condition where parties may use it, in effect, as a business planning technique.34 The trajectory has not been smooth, of course. Even in this late date, debate over bankruptcy policy still engenders controversy over “good faith’’.35 Nonetheless, it is clear that time and circumstances have revolution- ized our understanding of bankruptcy law and have raised grave questions as to when (if at all) it is “wrong” not to pay one’s debts.

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See, e.g., In re Roeder. 61 Bankr. Rep. 179 (Bankr. W.D. Ky. 1986); In re Hammill, 61 Bankr. Rep. 555 (Bankr. E.D. Pa. 1986); In re Hunt, 30 Bankr. Rep. 425 (D. Tenn. 1983). A similarly restrictive reading on the rules for willful and malicious injury to property derives from Davis v. Aetm Acceptance Co.,

One of the ironies of American bankruptcy law is that secured creditor’s super- priority status is so obvious that it isn’t even mentioned in the Bankruptcy Code. This oversight apparently goes back to a day when the secured creditor’s “property” right was so fundamental that he wasn’t regarded even as a guest at the bankruptcy table. On the modem treatment of secured debt, see particularly Coogan. ‘The New Bankruptcy Code: The Death of Security Interest?” (1980) 14 Ga. L. Rev. 153 (discussing the new Code and pointing out how the secured creditor is snarled up by it). Countryman, ‘The Bankruptcy Boom” (1964) 77 Ham. L. Rev. 1452. 11 U.S.C. ss. 1129(a)(3) and 1325(a)(3). In addition, courts have implicitly derived a good faith requirement for filing from 11 U.S.C. ss. 362(d)( 1) and 11 12(b). See Little Creek Development Co. v. Commonwealth Mortgage Co., 779 F.2d 1068 (5th Cir. 1986). See also Jones, “The ‘Good Faith’ Principle in Bankruptcy” (1988) Ann. Surv. Bankr. L. 45; Ordin, The Good Faith Principle in the Bankruptcy Code: A Case Study, 38 Bus. Law. 1795 (1983); Cohn. Good Faith and the Single-Asset Debtor, 62 Am. Bankr. L.J. 131 (1988).

293 U.S. 328.55 S.Ct. 151.79 L.Ed. 393 (1934).


As with a number of other important issues, this is one on which the bankruptcy question is part of a larger question. It raises issues of when, and how far, a “legal” rule imports a “moral” obliga- tion. The bankruptcy instance has the virtue of presenting the problem in relatively sharp relief.

(h) Can There Be a Theory of Bankruptcy Law?

This is a question36 that belongs properly, not to the study of bankruptcy, but to the study of “meta-bankruptcy” - it is an issue about theories as much as, or more than, it is an issue about bankruptcy itself. But theorizing cannot go on in the abstract, and if we are to understand the obstacles that inhibit our search for bankruptcy theory, then it is likely the only way we can do it is by encountering the experience of recent bankruptcy scholarship.

On this basis, a few tentative generalizations are in order. First, it is clear that this has been, and remains, an exciting time in which to be an analyst of bankruptcy law. New government initia- tives, together (unhappily) with new economic upheavals, have stimu- lated important insights into the nature and limits of the bankruptcy process. This has been most evident in works that find their provenance in the theory of corporate finance.

But the very success of the corporate finance work inspires doubt about the capacity of corporate finance analysis ever to provide a comprehensive or satisfactory account of bankruptcy behaviour. Bankruptcy as a social, rather than a logical, artifact resists purely abstract analysis. It is, and in the nature of things is likely to remain, as much accidental as formal, as much devised as planned, more refractory than coherent. Any model that requires the exclusion of accident, refraction and device is unlikely to catch its nature. Any effort to give an account of bankruptcy law must be willing to call on techniques that permit this kind of analysis.

36 For an uncommonly bitter exchange over the place of theory in bankruptcy law, see Kripke, “Law & Economics: Measuring the Economic Efficiency of Law in a Vacuum” (1985) 133 U. Pa. L. Rev. 929; and Jackson & Schwarti “Vacuum of Fact or Vacuous Theory: A Reply to Professor Kripke” (1985) 133 U. P a L. Rev. 987.

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But this need hardly offer discouragement. Quite the contrary: it can be seen as an invitation. It is a call for bankruptcy scholars to gather their energy, to renew their commitment, and (of greatest practical importance) to be willing to expand their techniques. This is precisely the kind of task to which comparative scholarship is equipped to make a contribution.

some awkward questions about american bankruptcy law: an agenda for comparativists

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