Whence Corporate Bankruptcy


A correspondent and I were discussing the changes wrought by the 1978 enactment of the current U.S. Bankruptcy Code. My correspondent noted that corporate bankruptcy became more salient after 1978 and linked this phenomenon to the 1978 law. My perception is the same: corporate bankruptcy became more salient after the 1978 enactment of the Bankruptcy Code, and my guess would be that many experts would have the same reaction. We all remember big cases like Johns-Manville, Drexel Burnham, most all of the airline cases (Pan-Am, Eastern, Braniff), and many others. These cases all tend to occur after 1978 suggesting that the 1978 law did lead to a boom in corporate bankruptcy filings. Then I wondered whether my perception was backed by empirical fact.

One possibility is some sort of selection effect. There were large corporate bankruptcies before 1978 – Penn Central comes to mind as an immediate example. The New York City financial crisis of 1975 was neither a bankruptcy nor corporate, but it would evoke the same issues as the discussions of today’s municipal financial woes. Maybe these cases are just older and do not come as easily to mind? Because it is increasingly less the case for historical events, I am happy to note that my professional career did not overlap with these cases. Maybe, my perceptions on this topic is just a personal artifact of when I came of age? Relatedly, maybe these older cases just did not command the media attention that modern corporate bankruptcies do?

Another possibility—and I tend to think this explanation is probably correct—is that corporate bankruptcies did become more salient after 1978, but it was primarily for reasons other than the 1978 law. In other words, the 1978 law did not play a causal role in making corporate bankruptcy more salient to the American public. Rather, it was things like the use of bankruptcy to get rid of mass-tort liability by companies such as Johns-Manville and A.H. Robins. Or, in a market with just a few dominant airlines, the bankruptcy of one national airline is headline news.

As you can see, I have more questions than answers on this topic. Despite what I just wrote, it could be that the 1978 law did play a causal role by enabling legal developments, albeit mainly unintentionally. The broadening of the scope of a permissible bankruptcy “claim” was important for the mass-tort bankruptcies. Still, when it comes to the causal role of law in social change, I think it usually is a good bet to think of the legal doctrine as the tail, and the rest of what is happening in society as the dog. If corporate bankruptcy did become more salient after 1978, my hunch would be that it would have happened regardless of whether the law had been changed. For example, the increased use leverage by large corporations surely contributed to the increase in bankruptcies in the 1980s and 1990s. My primary purpose in the post, however, is to get everyone else’s perspectives. I would be interested to learn what others have to say on this topic in the comments.