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Deflate Gate and Bankruptcy Reform

posted by Michelle Harner

Shutterstock_246224011People (and institutions) like rules that give them a competitive edge. You need only to look at the recent headlines and the media coverage of “Deflate Gate” to understand this basic concept. Reportedly, Tom Brady, Peyton Manning, and other quarterbacks lobbied the NFL to allow each team to supply its own set of footballs for use by that team’s quarterback during games. Note—I am not suggesting ill motive on the part of either Brady or Manning (or the others).  Although I never played quarterback, I can understand a quarterback’s desire to select personally his own game-day equipment. 

How does any of this relate to chapter 11 reform? To answer that question, ask yourself a different one: Do you like how chapter 11 currently resolves your client’s key issues in most instances? If you answered “yes,” you likely see no reason for reform. If you answered “no,” you likely would favor reform, but perhaps only those aspects of reform beneficial to your client. Therein lies the ever-present dilemma for policymakers:  implementing the best policy for the overall federal bankruptcy system in the midst of so much noise.

Admittedly, the ABI Commissioners are practitioners, judges, and academics with personal perspectives and client (or issue) biases. Each Commissioner was asked at the outset, however, to check his or her advocacy hat at the door and to approach the reform study from an “integrity of the system” perspective. Having participated in almost every Commission telephone conference and meeting for almost three years, I firmly believe that the Commissioners upheld their end of the bargain. As I shared with one conference group recently, I frequently would have to look up at meetings to double-check the identity of the speaker because the statement was so “unlike” that person.  

So how did the Commission approach reform? It started with “first principles” of federal business bankruptcy law: rehabilitate companies when viable (thereby preserving jobs and value), mitigate value-destructive or value-depressing behaviors, respect parties’ nonbankruptcy rights to the greatest extent possible, and maximize creditor recoveries. (The nonbankruptcy rights factor required extensive analysis of the Supreme Court’s guidance in Butner, including the opening qualifier to the frequently cited quote: “Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding” (emphasis added).) The Commission filtered each issue and all of the related research, data, and proposals through these principles. 

As a result, I would not label the Commission’s Report pro-debtor or pro-creditor; rather, I would call it “pro-restructuring.” Having called out other people’s biases, I of course must recognize my own. I did devote three years of my life to working on this project, and I have come to know well not only the 22 Commissioners, but also most of the 150 individuals who served on the Commission’s advisory committees. I have tremendous resect for all of them. Despite these ties, I have tried to remain an objective academic throughout the process. I believe that I have succeeded and that my descriptions of the Report are fair and accurate, but you should read the Report yourself and make your own assessment.

*Note: The views expressed in this post are those of the author and are intended to spark a meaningful dialogue about chapter 11 reform. They are not attributable to the American Bankruptcy Institute or the ABI Commission to Study the Reform of Chapter 11.

Deflated football image from Shutterstock.

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