01 December 2014

Some Malingering Bankruptcy Law Issues

Go here to read a short piece by Seton Hall law professor Stephen Lubben about what he perceives as several lacunae in the current U.S. bankruptcy law. Several of his observations might be counted as problems but like Lubben I don't foresee Congressional action.

In any event, and of more importance, is the question of whether secured creditors should be surcharged for using Chapter 11 to effect a quicker liquidation of their collateral than they could have achieved outside bankruptcy. Much to the surprise of most folks I'm sure is the positive value of bankruptcy to secured creditors.

Once upon a time, it was corporate debtors, their general creditors, and employees for whom bankruptcy reorganization functioned as a means of preserving a business's value as a going concern. The business's secured creditors got the value of their collateral but the surplus went to others. Today, because of more highly-refined means of obtaining a security interest in every scrap of a corporation's assets, there is no surplus. (If you want to know how to do this, take my course in Secured Transactions.)

The absence of any surplus for run-of-the-mill general creditors, employees, etc. is a function of state law. Federal bankruptcy law remains important, however, because the powerful secured creditors can get the corporate debtor to do their bidding (or, more precisely, they can permit the corporate officers to get paid to do their bidding) and sell off their collateral in a trice.

The bankruptcy system isn't free; we taxpayers subsidize it. Which raises the question of whether we should continue to do so if, on the corporate side, it functions to serve the private good of a small set of creditors at the expense of the common good of the taxpaying public.

No comments:

Post a Comment