American Bankruptcy Law Journal

The American Bankruptcy Law Journal (“ABLJ”) is proud to release the second issue of volume 99, which features five outstanding articles. The first two articles examine current chapter 11 practice. The first article suggests that it may be time to rethink chapter 11, perhaps returning to a system like chapter X of the Bankruptcy Act for some business debtors and providing alternative tools for others. The second article evaluates chapter 11 under a shareholder primacy model, modified for insolvency, and proposes a viability test for chapter 11 debtors. The third article focuses on voidable transfer challenges to leveraged buyouts and the treatment of those challenges in bankruptcy cases under the Supreme Court’s decision in Merit Management Group and the applicable Code sections (in particular, section 546(e)). The fourth article analyzes Supreme Court decisions in the consumer bankruptcy space, specifically those addressing a debtor’s discharge and the nondischargeability of certain debt. The final article discusses the potential use of special masters in bankruptcy cases, which is currently precluded by Bankruptcy Rule 9031.

We hope you enjoy each of these articles and come away with at least one new or different perspective on current bankruptcy practice. The ABLJ strives to inform, inspire, and enhance the work of those in the bankruptcy and commercial law fields.

Honorable Michelle M. Harner
United States Bankruptcy Judge, District of Maryland
Editor in Chief

IN THIS ISSUE

Have time, combative Chapter 11 dynamics, contemporary capital structures, and the weight of large corporate reorganizations spelled the necessity of revisiting Chapter X, with its oversight of a neutral party? Professor Lubben examines Chapter X’s roots, and challenges the premise that all businesses reorganize under a single Chapter of the Bankruptcy Code.

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Is the pro-debtor bias of U.S. bankruptcy law defensible from first principles or merely an accident of history reinforced by lobbyists? Does chapter 11 create real value for all parties or at best create a zero-sum game in which creditors yield value to other parties? Empirical limitations obfuscate a precise answer, and confounding variables limit comparisons to foreign insolvency systems with more creditor-friendly architectures. In his article, Bankruptcy’s Redistributive Policies: Net Value or a “Zero-Sum Game”?, Prof. Steven L Schwarcz (Duke University School of Law, with the assistance of Jack Tiedemann, Duke University School of Law Class of 2026) identify a second-best methodology for assessing value generation under chapter 11 grounded in the shareholder primacy model, modified in the context of insolvency. The article proceeds from this methodology to recommend a threshold viability test that would require debtors that are unlikely to successfully reorganize to be liquidated at the outset of a chapter 11 case, thereby saving considerable expense and increasing creditor recovery without jeopardizing shareholder return. The article challenges the pro-debtor nature of chapter 11 compared to many other foreign insolvency laws, which arguably more fairly balance the interests of shareholders and creditors.

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While many in the bankruptcy community may have thought that the Supreme Court ended any further inquiry into a financial institution’s ability to “launder” a payout for no reasonably equivalent value through a leveraged buyout (LBO) in Merit Management Group, LP v. FTI Consulting, Inc., Professor Carlson thinks otherwise. Professor Carlson argues that there is a disconnect between § 546(e) and § 548(a)(1) because § 546(e) only references fraudulent transfers, while § (548(a)(1) references fraudulent transfers and obligations. As such, Professor Carlson posits that § 546(e) as written fails to accomplish its goal of protecting institutions that regularly participate in the securities clearance system where a trustee seeks to avoid an obligation. Professor Carlson concludes that courts should abandon the plain meaning of § 546(e) and adopt the policy behind § 546(e) which is to protect the securities clearance system through its safe-harbor, but not that of an LBO lender or selling shareholder.

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The article examines the U.S. Supreme Court’s eleven decisions on the exceptions to discharge under Bankruptcy Code section 523(a). This jurisprudence is predictable in its focus on statutory text and at the same time remarkable for its almost complete aversion to bankruptcy policy. The limits of a bankruptcy jurisprudence without bankruptcy policy are clearly exposed in the Court’s most recent decision on the exceptions to discharge, Bartenwerfer v. Buckley, where the Court ignored the fundamental bankruptcy policy of granting a discharge to honest but unfortunate debtors, holding that an innocent debtor could not discharge a fraud debt for which she was vicariously liable under state law.

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Bankruptcy Rule 9031 precludes the use of Special Masters in bankruptcy cases regardless of whether the court exercising bankruptcy jurisdiction is an Article I or an Article III court. This article considers the arguments for and against removing that preclusion—an issue that has been and currently is being considered again by the Committee on Bankruptcy Rules—including a discussion of the types of roles performed by Special Masters that are not already being performed by others in bankruptcy cases. We conclude that (a) Federal Rule of Civil Procedure 53 should be adopted in place of Bankruptcy Rule 9031, after conforming it to the bankruptcy context, for use with respect to mass torts in bankruptcy cases, and (b) courts in bankruptcy cases should have discretion otherwise to appoint special masters but under greater constraints than those set forth in Federal Rule of Civil Procedure 53.

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IN THIS ISSUE

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