Law Review: Mary J. (Newborn) Wiggins, The New Rawlsian Theory of Bankruptcy Ethics, 16 CARDOZO L. REV. 111 (1994)

Available at:    https://larc.cardozo.yu.edu/clr/vol16/iss1/5

Abstract:

Bankruptcy law was once considered a rather insular subspecialty of commercial and debtor-creditor law. Bankruptcy scholars of an earlier time devoted their main energies to drafting bankruptcy legislation for Congress, mastering the particulars of that legislation, and systematizing the case law. When these scholars attempted to local larger themes in bankruptcy, they labored with great deference to positive expressions of bankruptcy’s purpose. Bankruptcy law’s relative insularity began to fade with the innovative work of Professor Thomas Jackson, who developed what he argued was a comprehensive theoretical explanation for bankruptcy’s existence. His explanation was based on a contractual paradigm called “the creditor’s bargain.” Several bankruptcy scholars, most prominently Elizabeth Warren and David Gray Carlson, have challenged the creditor’s bargain model on several fronts, but a direct theoretical assault was slow to emerge until Professor Donald Korobkin presented a nascent theory based upon what he called a “values-based account” of bankruptcy. Professor Korobkin then buttressed the values-based account with a contractarian model of his own called “the bankruptcy choice model.” In this Article, Professor Newborn explores Professor Korobkin’s theoretical model, distinguishes his model from the creditor’s bargain model, and identifies the significant descriptive and analytical insights Professor Korobkin’s bankruptcy choice model generates. At the same time, Professor Newborn identifies several controversial assumptions that seriously undermine the theory’s explanatory and normative force. Professor Newborn concludes with thoughts on her Article’s implications for the role of highly theoretical claims in bankruptcy scholarship.

Commentary:

I generally  stick to just blogging about recent cases and law review articles,  but I tend to nerd out about papers that look at the philosophy undergirding bankruptcy and when I stumbled on this about John Rawls and Bankruptcy Ethics,  even though 30 years old,  I couldn't help but share it.

Building on even earlier work by  Donald R. Korobkin, including Rehabilitating Values: A Jurisprudence of Bankruptcy, 91 COLUM. L. REV. 717, 721 (1991),  this paper posits two Rawlsian two principles to govern relationships in financial distress: 

• The Principle of Inclusion"  through which each party- creditors and debtors- affected by financial distress should have the threshold eligibility to press his or her demands in that context; and 
• The Principle of Rational Planning which
  • First seeks to maximize (i.e., promote most fully and effectively) those diverse demands   by using a rational plan. 
  • Second,  mandates that when it is impossible to promote one aim without frustrating another, protects  those in the worst-off positions in the context of financial distress  over those occupying the better-off positions.

Unlike the principle of creditor wealth maximization, promoted by Douglas Baird and Thomas Jackson elsewhere as an ethical or philosophical basis for bankruptcy, the principle of rational planning does not filter all decisions 'through a prism of creditor prosperity.

For something more recent about John Rawls' theory of justice (including a little bit about bankruptcy),  I also highly recommend Free and Equal: A Manifesto for a Just Society  by Daniel Chandler.