The Examiners: Boost Bankruptcy Judges’ Powers

If you could make one change to the bankruptcy code, what would it be?

The question is a daunting one. It has been approximately 35 years since the effective date of the bankruptcy code. The world, and particularly the domains of finance and economics, has changed in a seismic sense since then.

Bankruptcy law must be attuned to the real world and be flexible enough to deal with changing circumstances as they occur. At the time of the enactment of the Bankruptcy Reform Act in 1978, it was universally agreed among all interested parties that a new, comprehensive bankruptcy law was necessary to protect the interests of the nation and to preserve the ability of distressed businesses to rehabilitate and reorganize themselves. Reorganization and rehabilitation were viewed as infinitely better than liquidation. At that time, it was a much simpler world. Financing of businesses was relatively uncomplicated. To a large extent, it was premised on unsecured credit. The bankruptcy code, as enacted, focused on resolution of unsecured credit as the primary source of distress for businesses and individuals. Since that time, the nature of financing has changed dramatically, as almost all credit extended in today’s economy is collaterally secured by liens and encumbrances against the borrower’s assets. The evolving economic changes—with the emergence of a new economy facilitated by a shadow banking system, hedge funds, distressed debt traders and activists—has caused major changes in the administration of bankruptcy cases and the reorganization paradigm. The application of the underlying principles and philosophy of the bankruptcy code has been left to the judgment and discretion of bankruptcy judges to construe provisions of an antiquated bankruptcy code to achieve effective results. This has led to non-uniform and sometimes inconsistent results.

Consequently, there is not any one change that would make the bankruptcy code more effective. Hopefully the work of the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11, if objective, may be instrumental in acting as a catalyst to deal with the need for a new bankruptcy law or substantial amendment of the current bankruptcy code. That remains to be seen. In the perspective of the question posited, however, the one essential change to make the bankruptcy system more effective would be to eradicate the continuing costly controversy of the jurisdiction of bankruptcy judges that was precipitated by the unfortunate decision of the U.S. Supreme Court in Stern v. Marshall in 2011. Although characterized by Chief Justice John Roberts as a very narrow decision that would not cause any material changes in the administration of bankruptcy law, it has generated hundreds of objections to bankruptcy-court jurisdiction and unnecessary litigation. Any remedial action to improve the bankruptcy law should make bankruptcy judges Article III judges endowed with the judicial power of the United States. I recognize that this is a challenge, but it is necessary to face this issue head on and deal with it for a more efficient and effective bankruptcy process.

Harvey Miller is a senior partner of Weil, Gotshal & Manges based in its New York office.