07 August 2015

Donald Trump, Bankruptcy, and Morality

I missed last night's Republican candidate debate but according to Adam Levitin (here) several of the challengers implicitly chastised Donald Trump for the bankruptcies of corporations that bore his name. (For those who are interested, per the Wall Street Journal they were the Trump Taj Mahal in 1991, the Trump Plaza/Castle in 1992, Trump Hotels in 2004, Trump Entertainment in 2009 and 2014.)
Levitin makes the point that notwithstanding his overall boorishness, Trump is correct that corporate use of Chapter 11 does not reflect a moral failure:
Bankruptcy is a background term to every contract. It's an embedded option. Lenders price for it.  This is old news to bankruptcy scholars, even if it still shocks some people. ... Trump had every right to file his companies for bankruptcy, and no one should weep for his lenders having lost money. They were sophisticated parties ("sharks" he called them, but that's a bit harsh, I'd just say "consenting adults"), who presumably priced for Trump's bankruptcy risk and had diversified portfolios.
I agree but for slightly different reasons. Levitin seems to argue that there is no moral obligation to perform a contract. I have disagreed and you can read my posts here, here , and (for the philosophically-minded) here for my arguments in favor of the existence of moral obligations of corporate entities.

Yet, just as contract-party promisors, whether individual or corporate,  have moral obligations, so do creditor promisees. Creditors have a moral obligation to forgive as I have argued in a three-part series here, here, and here. In other words, both the Trump-named corporations and their professional creditors operated in a moral environment and it is unbalanced to assert that moral standards applied to only one side.

But what do moral obligations have to do with the legitimacy of corporate Chapter 11 bankruptcy? Very little. Here's where I agree with Levitin's conclusion. The lenders to the Trump entities did price the risk of bankruptcy into their loans and whatever shortfall they suffered was simply the realization of a risk they knowingly and willingly undertook. There's no crying in commercial lending.

For some insights on the history and morality of the discharge in personal bankruptcy download my article The Missing Piece of the Puzzle: Perspectives on the Wage Priority in Bankruptcy (here).

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