What's 43 Years Among Friends?

One of my recent blog posts took issue with the historical claims in a Supreme Court amicus brief filed by several eminent law professors in the Purdue Pharma appeal. One of the professors, Tony Casey at University of Chicago Law School, fired back with a comment, and I responded at length in the comments section, but I think the exchange is worth elevating to a stand-alone blog post. 

To recap, the good amici jumped all over my claim that the Framers could not have conceived of nonconsensual nondebtor releases as being within the scope of the Bankruptcy Power. To this end, they cited a couple of English cases from 1618-1620. My original post pointed out that these were not contemporaneously reported decisions; they remained unknown until 1932 when a modern scholar "reported" the cases from his own reassembly of various Chancery documents. Moreover, the decisions were not even bankruptcy decisions, but compositions, not operating under any bankruptcy statute. 

Professor Casey responded:  

I really don't understand the argument here. First, how can you say releases were "incomprehensible" to the framers given that Lord Bacon was granting them? Even if the opinion is unreported, I just can't see the leap to arguing that no one designing a judicial system could have thought of or comprehended this thing that the Lord Chancellor had done multiple times. Second, the point about these not being "bankruptcy" cases is semantic. These were part of compositions that look just like Chapter 11 cases today. Third, even if you are right about everything else, our main point was about your 1986 claim. You write this [in your blog post], "because there was no reported decision of these cases until 1932, they do not undercut the fact that Anglo-American bankruptcy law had no notion of nonconsenusal nondebtor releases in until 1986." How do you get from 1932 to 1986? Finally, we point out other historical pedigree including cases from the 1940s.

Okay. Let's try this again.

 

1. Nondebtor releases were incomprehensible to the Framers because no such creature existed in the law as they knew it in 1789. Bills of conformity had a short lived run in late Elizabeth and early Jacobean England, but were abolished by royal proclamation in 1621, with a follow-up statute, 21 Jac. I cap. 19 (1623) for good measure, a few years later. (See here for the back story.) After that, the composition procedure was forgotten until modern times. The Framers' knowledge of English law was mainly through secondary sources, like Blackstone, which did not cover bills of conformity; the Framers had no access (as a practical matter) to (literally) rat-eaten Chancery manuscripts (and even if they had been able to access them, they would have found the paleography near indecipherable. You can try to read these things yourself here.) Until modern historians unearthed the history of compositions, there was no meaningful awareness of them. That means that they were not within the contemplation of the bankruptcy power in 1789.
   
   
2. Not being "bankruptcy," isn't the key issue, but it isn't just semantic. Equity procedures might fall under Article III, but they don't fall into the scope of Article I, section 8, clause 4. If the Supreme Court's sometimes convoluted jurisprudence teaches us anything, it is that the court cares about the history of different provisions (say the 2nd vs. the 14th amendment) differently. In any case, the composition process was formally scrapped 168 years before the Constitution.
   
   
3. Regarding the references to more modern cases, Professor Casey is shifting the goal posts now that the 1618 and 1620 cases don't hold up. Now instead of (wrongly) taking me to task for being off by 367 years, the claim is that I'm off by a mere 43 years. Except once again, I'm not.  

(a) 1932. The fact that cases involving bills of conformity were first documented (as far as anyone can tell) in an obscure academic work in 1932 has no relevance to the constitutionality issue. That's a 1789 question. Nor does it have relevance to 20th century practice or the scope of the 1978 Code. For all of Congress's enlightenment, it cannot be held to extend to academic works on English legal history. The only relevance of 1932 is that it is the first time anyone in the modern Anglo-American could have been was aware of the composition decisions of Lord Bacon, but there is nothing in post-1932 bankruptcy practice claiming a pedigree going back to Lord Bacon. 

(b) 1940s. Contrary to what Professor Casey writes in his comment, his amicus brief does not point out "other historical pedigree including cases from the 1940s." (emphasis added). Instead, the brief points to a single case from the 1940s plus one from the 1970s.  The 1940s case, however, does not stand for the point Professor Casey claims (and the 1975 case doesn't exactly either).

(i) The 1940s case is In re Portland Electric Power Co., 97 F.Supp. 877, 880 (D. Or. 1943). First, the enjoined third-party is not a creditor. It is a regulator attempting to change the non-debtor subsidiary's rate schedule. Today that issue would be under 362(b)(4). Second, the court's analysis is based on the stock of the subsidiary being the estate's principal asset; that's a wholly different consideration than in the release of non-debtor owners like the Sacklers. And third, the decision is not a permanent injunction with a discharge-like effect. Instead, it leaves in place a TRO against a state public utility commissioner "only until the court can determine whether the utility should be restrained from consenting or acquiescing in certain orders which may be issued by the Commissioner."

(ii) The 1970s case is In re Equity Funding Corp. of America, 396 F. Supp. 1266, 1274 (C.D. Cal. 1975). Again this is a case dealing with an injunction to protect subsidiaries, the stock of which was the primary asset of the debtors, not the owners. The injunction was narrowly limited to a set of derivative claims against the subsidiaries, not a general release of third-party claims against them. And most importantly, the court proceeded on two theories, one of which was that the subsidiary was the alter ego of the parent, so there really wasn't a nondebtor release in that case. But even if none of this were true, its total purchase is a single district court decision from 1975.

It is a huge stretch to go from two obscure district court decisions to the claim that "More recent cases also demonstrate that, when the current Bankruptcy Code was enacted, third-party releases and injunctions were contemplated as a means of addressing the collective action problems that arise when debtors are in financial distress and facilitating a global settlement." If there were a reference to either of these cases in the legislative history of the Code, this would be a different conversation, but there isn't any such reference. The Framers didn't adopt the Bankruptcy Clause with an understanding that it encompassed the power for courts to issue nondebtor releases, and Congress didn't enact the 1978 Bankruptcy Code with such an understanding either.

Irrespective of what one believes about nondebtor releases as a policy matter, there's really no question that as a historical matter they were not part of the background of the Bankruptcy Clause in 1789 or the Bankruptcy Code in 1978.