The Three Faces of Bankruptcy Law

Abstract

Bankruptcy law is an ancient, peculiar feature of our legal landscape. Historically, it has existed from time to time as a collection of extraordinary remedies assembled to address three basic questions: (1) what is to be done with the person of an insolvent debtor, (2) what is to be done with the insolvent debtor’s property, and (3) what is to be done with the insolvent debtor’s liabilities? It is peculiar for several reasons. First, the need for a special collection of bankruptcy procedures is not so obvious. Non-bankruptcy law already provides vast mechanisms for collecting debts, distributing property, and sorting the rights of competing claimants against a common obligor. One might well ask: why have yet another mechanism for doing so simply because one of the parties in interest—the debtor—has become insolvent? For much of United States history, the nation had no formal bankruptcy law, and thus one potential answer to this question (albeit an incorrect one) is that there is no particular need for a distinct bankruptcy regime. Second, few areas of the law have been the subject of such rancorous experimentation. In both England and the United States, bankruptcy law evolved in fits and starts, sparking controversy at every turn. As Justice Cardozo aptly remarked in his dissent in Ashton v. Cameron County Water District, the history is one “of an expanding concept . . . that has had to fight its way. Almost every change has been hotly denounced in its beginnings as a usurpation of power.” Although the details of these controversies have evolved over time, bankruptcy law remains a hotly polarizing topic. Third, few areas of the law are so poorly understood and theorized, and the relevant deficiencies include (1) the absence of a satisfactory account of the need for a distinct body of bankruptcy remedies, and (2) the lack of an adequate theory explaining how bankruptcy law ought to respond to that need. The first deficiency is foundational, the second is ordinal, and they should be addressed in the order stated. From a normative perspective, if there is no particular reason for having a bankruptcy law, then there is no particular reason to consider how it should be arranged. Conversely, until the reasons for having a bankruptcy law are fully understood, discussions of its normative content are likely simply to “float . . . in the air.”