In Defense of Bankruptcy Courts (or, Is Bankruptcy Really That Excep...


Although not always acknowledged expressly, exceptionalism is pervasive in bankruptcy scholarship. Some work makes no attempt to contexualize bankruptcy within the federal courts, apparently assuming its unique qualities (for example, the disinterest in most bankruptcy venue scholarship about venue laws applicable to other multi-party federal litigation). But other projects are more deliberate in their exceptionalist pursuits.

Rafael Pardo and Kathryn Watts have a forthcoming article falling into the latter category. It is over 70 pages and even a long post can't describe it in full detail. The article calls bankruptcy highly anomalous because, they say, it is one of the few major civil statutory regimes administered almost entirely through court adjudication rather than a federal agency. In addition to raising structural and constitutional questions, they argue that, on balance, an agency would bring more "expertise, accountability, uniformity, accessibility, transparency, prospective clarity, and flexibility" to what they call "bankruptcy policymaking." One of their main examples of bankruptcy policymaking is setting the discount rate for repayment and restructuring plans. Another is the "undue hardship" standard for student loan dischargeability. But they also extend the concept to activities such as judicial case management. Their article ends with alternative suggestions for further exploration: Congress could substantially expand the rulemaking powers of the Executive Office for United States Trustees (and eliminate the Bankruptcy Administrators in North Carolina and Alabama). Alternatively, the article suggests eliminating the bankruptcy court system altogether and creating a bankruptcy agency with both rulemaking and adjudicative functions. As the article explains, the latter proposal emerges for bankruptcy with some frequency, especially for consumer bankruptcy. But as I understand this piece, it is referring to the whole system, chapter 11 and all.

The article did not persuade me of its arguments, but it helps open the door to a broader set of theories and ideas that might improve the bankruptcy system in more modest ways. As Bob Lawless noted in a 2005 American Bankruptcy Law Journal piece, bankruptcy scholarship can be somewhat insular. The Pardo and Watts article escapes the traditional box of debates even though it includes a proposal that has appeared many times before. It also is great to have an administrative law scholar looking closely at the bankruptcy system and, in particular, at the United States Trustee Program. 

My overarching question, though, is whether this piece ultimately trades one flavor of acontextuality for another.

To start, the article does not resolve what I see as a significant issue: the fact that its claims apply to nontrivial swaths of U.S. district court workload as well as to the bankruptcy court. Sure, the bankruptcy court system isn't a purely forensic adjudicative system; it probably isn't even dominantly so. It contends with forward-looking projections. But this is true in the district courts as well, and has been for decades (even centuries, some scholars would say). The introduction to the article recognizes - with what might be a whiff of disapproval - that district courts, like bankruptcy courts, fill statutory gaps and thus, engage in what the authors call policymaking. Then why send bankruptcy, and not those matters, to an agency? If Article III makes all the difference, might we revisit Article III status for bankruptcy judges? (I'm guessing the authors would agree that their proposals are, at this time, no more politically plausible than this one).

As a consequence, the article does not really address innovations in district courts (and suggestions from the academy) designed to address some of the institutional design concerns the authors raise. Institutional reform litigation, class actions, and other disputes thought to strain the traditional conception of a court have produced procedures and structures that could be quite useful in bankruptcy, including structured ways to draw more "experts" and stakeholders into the process outside of an adversarial framework. Given the controversy inherent in some of these examples, I'm not arguing that these cases all work perfectly - just that it is possible to preserve the benefits of courts while overcoming some of their limits without sacrificing legitimacy. As for ad hoc case management and pushing for settlement (which the article includes within policymaking), decades of federal courts scholarship have ruminated on the rise of managerial judging and its substantive impact, but many proposed improvements lie within the judiciary, and, in this context, more detailed Federal Rules of Bankruptcy Procedure. With respect to district courts, Judith Resnik, Robert Bone, and surely others have argued in favor of using the mechanisms of the Judicial Conference of the U.S. to achieve narrower case management discretion.

Flipping the problem around the other way, the article does explore some limits of agencies, but I read it as adopting a fairly rosy and traditional conception of top-down agency expertise and uniformity. Some prominent scholarship - particularly writings falling into the category of new governance - calls that model and its efficacy into question. That scholarship also is arguably more open to courts, and not just agencies, serving as problem-solving institutions. If I haven't already given it away, my current research on the bankruptcy system incorporates the insights of Susan Sturm and Charles Sabel and William Simon, so perhaps I should be relieved that Pardo and Watts did not go this direction.

So, to wrap this back into the broader frame with which I began, it is time to challenge many exceptionalist assumptions and beliefs about bankruptcy. This is not to say that bankruptcy is devoid of unique features. It has many. More could and should be done to alleviate burdens on bankruptcy judges (especially when instructed they have a duty to investigate in the absence of a dispute, as John Ayer flagged back in the 1980's) and to correct misperceptions about how the system operates. Indeed, to address some of Pardo's and Watts' more discrete concerns, perhaps Bankruptcy Code should delegate particular issues to various existing agencies (as the Code already does, for better or worse, with respect to the IRS and the means test for consumer debtors). 

In the quest to stake out an allegedly better bankruptcy system, though, we should not miss the many ways the bankruptcy system is surprisingly at home in the courts.