Does the Bankruptcy Code Need to Be Modernized for Business Restructurings?

As reported in the American Bankruptcy Institute Journal in April 2012 (Vol. XXXI, No.3), the American Bankruptcy Institute (“ABI”) has appointed a Commission, composed of experienced insolvency professionals and public officials, that will collect and analyze data, case-law and commentary on the following 13 areas:

  • financing in chapter 11 cases;
  • governance and supervision of chapter 11 cases;
  • multiple enterprise cases and issues;
  • financial contacts, e.g., derivative and safe harbor contracts;
  • executory contracts and leases;
  • administrative claim expansion, critical vendors and other liquidity issues and/or preservation of reorganization capital;
  • labor and benefits issues;
  • avoidance powers;
  • sales of substantially all the debtor’s assets;
  • chapter 11 plan issues, including procedure and structure;
  • distribution issues under a chapter 11 plan;
  • bankruptcy remote entities, including bankruptcy proofing and public policy; and last, but not least,
  • the role of valuation in chapter 11 cases.

The Commission’s outreach method will include public hearings around the country and a website at  The Commission’s work is being funded by ABI’s Anthony H.N. Schnelling Endowment Fund and by ABI.  Professor Michelle M. Harner of the University of Maryland School of Law serves as the primary investigator.

The illustration for Chapter 11 of Fil and Fil...

To quote the ABI Journal, Chapter 11 of the Bankruptcy Code facilitates the resolution of financial distress primarily in the business context.  It emerged as a compromise to chapter X and chapter XI of the U.S. Bankruptcy Act of 1898 (including the Chandler Act of 1938), under which large, public business debtors were subject to a mandatory bankruptcy trustee and oversight by the Securities and Exchange Commission and smaller business debtors essentially negotiated a resolution with their creditors.  After almost 40 years of experience under former chapters X and XI, policymakers and practitioners agreed that reform was needed, resulting in one business bankruptcy chapter–chapter 11 of the Bankruptcy Code.

After more than 30 years of experience under chapter 11, policymakers and practitioners again agree that it is time for reform.  See, e.g., Stephen J. Lubben, “Some Realism and Reorganization Explaining the Failure of Chapter 11 Theory,” 106 Dick. L. Rev. 267 (2001); Douglas Baird and Robert Rasmussen, “Chapter 11 at Twilight,” 56 Stan. L. Rev. 673 (2003); Harvey R. Miller and Shai Y. Waisman, “Does Chapter 11 Reorganization Remain a Value Option for Distressed Businesses for the Twenty First Century?,” 78 Am Bankr. L. J. 153 (2004); Harvey R. Miller and Shai Y. Waisman, “Is Chapter 11 Bankrupt?” 47 B.C. L. Rev. 129 (2005); James H.M. Sprayregen, “Chapter 11: Not Perfect, but Better than the Alternative,” Am. Bankr. Inst. J. October 2005; Harvey R. Miller, “Chapter 11 in Transition–From Boom to Bust and Into the Future,” 81 Am. Bankr. L.J. 375 (2007).

The primary objectives of chapter 11 often are described as the rehabilitation of business debtors and the maximization of returns to creditors.  See Toibb v. Radloff, 501 U.S. 157, 163-63 (1991) (discussing the traditional goals of chapter 11).  Although commentators have debated the utility of these objectives and the two objectives certainly can create tension in any given case, chapter 11 of the Code has functioned well for over 30 years.  But, don’t be mistaken, the success of chapter 11 is attributable to several factors, not the least of which include:

  • the innovative “debtors in possession” structure;
  • the flexibility of the statutory provisions under chapter 11 of the Code; and
  • the judgment of bankruptcy courts enforcing the provisions of chapter 11.

Nonetheless, the economic and business environments and the statutory language itself have changed over time and have produced perceived imbalances and other challenging issues in the chapter 11 process.

The ABI Commission’s statement best expresses its goals:

In light of the expansion of the use of secured credit, the growth of distressed debt markets and other externalities that have affected the effectiveness of the current Bankruptcy Code, the Commission will study and propose reforms to Chapter 11 and related statutory provisions that will better the goals of effectuating the effective reorganization of business debtors–with the attendant preservation and expansion or jobs–and the maximization and realization of asset values for all creditors and stakeholders.


English: Part of Title 11 of the United States...

The ABI  Commission hopes to provide meaningful insight and analysis on issues at the core of the chapter 11 process and critical to the resolution of business financial distress.  The timing is right for this study, given the increasing concerns raised by parties involved in the chapter 11 practice and the economic environment in the United States.

A more efficient and effective process for addressing and resolving business financial distress can help rehabilitate businesses, preserve jobs, protect creditors’ rights and strengthen markets.

One often forgets that the bankruptcy laws, which originate in the Old Testament, and were refined by modern English law and adopted by the American states, were originally considered a creditor’s remedy.  An earlier submission to this blog summarizes the historical evolution of bankruptcy laws and principles.  Now, however, scholars and historians alike seem to favor laws that take into consideration a broader micro and macro-economic goals.  This is evolution at its best!