Available at: https://harvardlawreview.org/print/vol-138/whos-afraid-of-bankruptcy/
Abstract:
Book Review: UNJUST DEBTS: HOW OUR BANKRUPTCY SYSTEM MAKES AMERICA MORE UNEQUAL. By Melissa B. Jacoby. New York, N.Y.: New Press. 2024.
Introduction:
Who’s afraid of a bankruptcy filing? Perhaps we all should be given the increasingly outsized role that bankruptcy law plays in our market society. Handling more cases per year than any other category of federal court, bankruptcy courts attend to the disposition of debts related to both mundane contractual relationships and pressing social issues. That is to say, beyond its niche façade and dry reputation, bankruptcy law plays a significant role in the resolution of important public and private concerns.
For example, bankruptcy law has resolved mass tort liability stemming from decades of widespread asbestos poisoning and from rampant child abuse within some of the most trusted social organizations like the Boy Scouts of America and the Catholic Church (pp. 166, 193–95). Moreover, bankruptcy law seems likely to become the primary locus for resolving mass tort liability stemming from the ongoing opioid crisis (pp. 155–56). Similarly, bankruptcy also indirectly resolves equally important, yet more quotidian social issues like the increasing economic vulnerability of the American family and economic inequality engendered by historical and ongoing racism and sexism in American consumer markets. In other words, debts related to issues that threaten to erode the fabric of our democracy are common in bankruptcy.
Bankruptcy’s prominent role exists at the confluence of two policy choices. First, legislatures and courts have long prescribed money as an appropriate substitute for the value of public and private obligations. Second, Congress has broadly defined the scope of justiciable claims in bankruptcy to encompass any obligation that can be reduced to money. Thus, in a world in which liability of all sorts — voluntary or involuntary, contractual, tort-based, criminal, civil, constitutional, and so forth — is regularly expressed in and satisfied by dollars and cents, bankruptcy lingers in the background, ready to redistribute loss when a debtor cannot satisfy their obligation.
In this regard, our federal bankruptcy law, the Bankruptcy Code, authorizes a system of “distribution and redistribution” of loss, and as then-Professor Elizabeth Warren once observed, “the distributional issues arising in bankruptcy involve costs to some and benefits to others.” A bankruptcy filing first halts any underlying adjudication or collection of the debtor’s financial obligations up to the time of filing, then the bankruptcy process considers when and how to redistribute the burden of satisfaction of those obligations. Most obviously, those burdens are likely borne by the debtor’s creditors who, once in bankruptcy, are generally no longer entitled to be repaid as required under nonbankruptcy law. Bankruptcy sometimes decides, however, that the debtor deserves no relief and must instead continue to bear the weight of their obligations. In addition, third-party stakeholders may also bear some burden attendant to this redistribution of obligation (p. 5). Bankruptcy law then glazes this redistribution in a finality that forever ends the debtor’s liability for any past, present, or future claims regarding liabilities accrued prior to bankruptcy, regardless of underlying law. In other words, bankruptcy law is extraordinary; it is a “superpower” (p. 15).
In Unjust Debts: How Our Bankruptcy System Makes America More Unequal, Professor Melissa Jacoby shares her unique experiences embedded in the saga that is bankruptcy law’s evolution over the last thirty years. Jacoby has borne witness to its transition from an emergency toolkit for “the honest but unfortunate debtor” into an unduly biased institution that protects and indulges nonhuman entities, like corporations and municipalities, even as it directs its strongest disapprobation and illiberality toward individual filers. For these and other reasons, Jacoby begins her excellent book by noting that for her, it “is a story of falling out of love” with bankruptcy law (p. 1).
She chronicles its descent into unjustified and sometimes cruel suspicion of individual filers (pp. 20–21). She explains how it makes the pain of financial distress worse by treating individuals as if their financial distress is their own fault rather than symptomatic of broad financial vulnerability in the American middle class (pp. 22–23). Moreover, she shows how bankruptcy’s apparent antipathy for the plight of individuals in financial distress further exacerbates the economic inequality that plagues our market society (pp. 49–50).
Jacoby then describes how bankruptcy law accords significant latitude to nonhuman filers as compared to individual filers. She documents how some nonhuman filers, through their sophisticated lawyers and C-suite denizens, have begun to exploit this leeway by invoking bankruptcy law’s “power tools” (p. 199) to manage with greater convenience “thorn[y] . . . legal problems that are not fundamentally about money” nor accompanied by true financial distress (p. 200). Moreover, in using bankruptcy like “a legal Swiss Army knife” to satisfy their instant needs (pp. 152–53), nonhuman filers have molded bankruptcy laws in ways that predictably seem to undermine the interests of individuals, whether as debtors or as creditors (pp. 8–10).
In juxtaposing this disparate treatment of individual and nonhuman filers, Jacoby exposes bankruptcy law’s current normative vulnerabilities. While there may be some reasonable basis for treating individual filers differently from nonhuman filers, there is no current reasonable basis for treating individual filers worse than nonhuman filers. This leaves bankruptcy law susceptible to the idea that its evolution might be positively described as evidence of its effective capture by powerful and innovative legal actors and stakeholders who have become de facto bankruptcy policymakers (p. 245).
Having witnessed firsthand bankruptcy law’s evolution and expansion over the course of her career, Jacoby has come to believe that bankruptcy should play a more limited role in the resolution of obligation in our market society than it currently does. Marshaling her deep and broad expertise and experience with bankruptcy law, she concludes that bankruptcy’s “expansion in usage” has carried it “into policy problems for which it has little training or preparation” (p. 153). Rather, bankruptcy’s current availability as a forum of first choice in the resolution of debt that implicates public issues, like mass tort liability, undermines the “foundational legal principles, including separation of powers and federalism,” that are meant to shore up our democracy (p. 11). Meanwhile, bankruptcy law has largely failed in its prime objective to “provide[] robust cancellation of obligations the average person recognizes as debts” (p. 11).
Consequently, Jacoby argues that it is time for bankruptcy law to retract its current overextended arms and return to its first principles. She states that if her “book has a policy prescription, it is to reduce the footprint of the bankruptcy system” so that it “focus[es] on just debts,” where “just debts” has a dual meaning (pp. 10–11). First, bankruptcy should concern itself with only those debts that stem from traditional contractual relationships rather than taking up any obligation that can be expressed in monetary terms (p. 11). Second, bankruptcy should eschew attempts to harness its tremendous power to work around principles of fairness and justice (p. 11).
Jacoby’s conclusion starkly contrasts with the expansiveness of the current bankruptcy system, and it invokes the current debate about bankruptcy’s role in the resolution of the opioid crisis and other current mass tort controversies, like talc-based illness. Clearly Jacoby’s proposal is rooted in her deep sense of justice and fairness, and the ways in which current bankruptcy policy and practice, in the context of mass tort liability, threaten to subordinate overall fairness in the name of resolution and finality (pp. 233–34). Yet, the reality is that money is ubiquitous as an expression of all obligation, both voluntary and involuntary (p. 6). Consequently, if only as a practical matter, to shrink bankruptcy in the ways that Jacoby and other bankruptcy minimalists suggest would inadvertently justify bankruptcy’s present shrunken approach to the most vulnerable individual debtors. From that perspective, an overinclusive bankruptcy law, with judicial safeguards, that is as generous to individuals as it currently is to nonhuman debtors might be preferable to an underinclusive bankruptcy system that is reduced in scope as to all filers.
This Review proceeds as follows. Part I describes Jacoby’s observation that modern bankruptcy law unjustifiably treats individual filers worse than nonhuman filers. Jacoby explains how bankruptcy law generally treats individual filers, whom Jacoby refers to as “real pe[ople]” (p. 15), as presumptively abusive and profligate debtors from whom creditors and society should be protected (p. 21). She then explains how this approach exacerbates inequality among the most vulnerable debtors. Meanwhile, bankruptcy simultaneously treats nonhuman filers, whom Jacoby descriptively rather than pejoratively refers to as “fake people,” generally as in need of protection from overzealous creditors and other stakeholders (p. 64). Consequently, while severely restricting individual access to a maximal discharge of debt, current bankruptcy law has simultaneously expanded to permit nonhuman filers to take full advantage of its “extraordinary powers . . . to stay [all] parallel litigation” and “to finally resolve all pending claims and bar future claims against the debtor.”
Part II posits that one way to reconcile this difference in treatment is to understand bankruptcy law positively as merely part of “the code of capital,” as termed by Professor Katharina Pistor, in which powerful interests and the legal professionals who represent them have guided bankruptcy law away from the plight of ordinary, over indebted Americans, and molded it into an institution that prioritizes their clients’ ends. Indeed, Pistor’s insight maps onto Jacoby’s explication of the general subordination of individual interests in bankruptcy law, whether as bankruptcy filers or as creditors in a nonhuman bankruptcy filing, in favor of more powerful institutional interests. Moreover, this perversion of bankruptcy law has caused Jacoby to take a minimalist stance on bankruptcy’s proper normative orientation (pp. 5–7, 11).
Part III considers Jacoby’s minimalist stance on what role bankruptcy should play for individual filers and for nonhuman filers going forward. Her views align with bankruptcy minimalists who argue that bankruptcy’s penchant for quick-and-rough justice and its limited opportunities for appellate review — together with its tremendous power to mandate “a final and centralized end to litigation in the past, present, and future” — mean that bankruptcy’s applicability to the resolution of “social debt” should be limited. These arguments have developed in the context of bankruptcy’s current primacy in the resolution of mass tort liability, where minimalists have argued that bankruptcy law can conflict with core democratic features of our system of judicial federalism. Consequently, arguing against bankruptcy maximalists who favor function over form by understanding bankruptcy as an appropriate forum for the efficient resolution of aggregate claims, bankruptcy minimalists argue that bankruptcy is best suited to address the plight of companies in true financial distress, whose liability has ideally already been adjudicated in applicable state and federal courts.
These minimalist arguments have crystallized in the context of bad-acting nonhuman filers who openly invoke a combination of limited liability and the Bankruptcy Code to escape from liability relatively unscathed. For example, it is intolerable to think that an alleged mass tortfeasor, like Johnson & Johnson, which has been accused of knowingly selling carcinogenic talc-based hygiene products for decades, could dance its way to financial exculpation merely by cleaving itself into two; saddling the resulting “bad company” with all its talc-based liability (in the case of Johnson & Johnson), while enriching the resulting “good company” with the profitable aspects of its business; then putting its “bad company” in bankruptcy in order to pay cents on the dollar to potentially thousands of its former customers (or their grieving families) presenting with, or who may in the future present with, ovarian cancer or other serious illnesses. This apparent abuse of bankruptcy law is so objectionable that it has even inspired a rare bipartisan effort in Congress to limit this so-called “Texas two-step” maneuver.
Yet, as ever, bad facts threaten to make bad law. Although a minimalist approach to bankruptcy is intuitive in the present context, bankruptcy minimalism has hurt individual filers, particularly the most vulnerable individual filers. Thus, while bankruptcy’s current expansive approach to nonhuman filers has emboldened certain debtors to abuse the bankruptcy power to satisfy their own ends, a minimalist solution that is predicated on preconceived notions of financial distress or categorical limits on discharge threatens to throw the proverbial baby out with the dirty bathwater. Specifically, arguments in favor of further minimizing bankruptcy’s reach across the board neglect a harsh practical reality: As long as money damages are the principal expression of all obligations, bankruptcy is an important, if imperfect, backstop. While a robust bankruptcy law with judicial discretion to weed out true opportunism on a case-by-case basis would undoubtedly be over inclusive, it may also better serve the needs of individual filers whose financial distress stems from underlying criminal, contract, tort, familial, or other indebtedness that defies mechanical adjudication in bankruptcy.
Commentary:
It does verge a bit on parody about how self-consuming the world of bankruptcy commentary is that I'm blogging about a review of Melissa Jacoby's Unjust Debts: How Our Bankruptcy System Makes America More Unequal, which I already wrote about directly when it was first released. (Albeit in a less prestigious forum.)
That aside, Prof. Atkinson's review does make a more cogent argument against bankruptcy minimalism than my snarky suggestions that consumers flood the bankruptcy courts of Delaware with their own Chapter 11 cases. While Professor Melissa Jacoby (and others) argue for shrinking the footprint of bankruptcy — limiting it mostly to contractual debts and curtailing its use in areas like mass torts — the article points out that this approach risks worsening outcomes for vulnerable individual debtors, since
- Bankruptcy already disproportionately excludes or burdens individual debtors, especially marginalized groups, by:
- Imposing mechanical means tests (e.g., under BAPCPA)
- Keeping nondischargeable categories (like student loans, penal debt, domestic support obligations)
- Forcing Chapter 13 filers through intense, long-term surveillance before they get a discharge (unlike corporate Chapter 11 filers)
- Further shrinking bankruptcy (for example, by saying only “contract debts” should qualify) could cement or even worsen these exclusions, disproportionately hurting people who already lack wealth and are often carrying involuntary or unavoidable debts (e.g., criminal fines, child support, medical bills, tort damages).
While certain that Congress is not likely to increase bankruptcy protections and relief for individuals, it is similarly unlikely that it would restrict corporations in bankruptcy without similarly imposing the same (or worse) on real people. One clear example would be a restriction on corporate venue (particularly using the Texas Two-Step), often sought by academics, which would certainly increase the burdens and risks on individual consumers filing bankruptcy in the convenient forum for them.
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