Punishing Attorneys vs. Positive Incentives: Inducing Good Behavior in Bankruptcy

IMG_0206
Holding on to ancient ideas and ideals

By Donald L. Swanson

It’s a decade-or-more ago. I’m sitting in a continuing legal education seminar on bankruptcy law hoping to learn something new-and-useful for my day-to-day practice.

Threatening Bankruptcy Attorneys With Criminal Prosecution?!!

What we get, instead, is an hour-long warning from a representative of the U.S. Government on, (i) how attorneys in bankruptcy cases are now being heavily scrutinized for wrongdoing—much more than before, and (ii) how easy it is for a bankruptcy attorney to actually commit a bankruptcy crime—often unawares, it seems, from the descriptions provided of jail-able wrongs!

–This is new back then. In my prior decades of practice in the bankruptcy realm, I’d never before heard such a thing.

And I’m thinking, “Say what?!!!” Bankruptcy practice can be a tough way to make a living—in the best of circumstances. Risks of not getting paid, for example, are high when representing debtors and committees and trustees. All parties in a bankruptcy case tend to be “not happy.” And creditors, when losing money anyway, aren’t fond of paying high fees.

–And now the U.S. Government wants to put bankruptcy attorneys in jail? Seriously?!!!

Some branch of the U.S. Government had, obviously, decided that wrongdoings in bankruptcy could be reduced by threatening bankruptcy attorneys with criminal prosecution: kind of a scared-straight mentality and effort.

Punishment vs. Positive Incentives in Bankruptcy — Some History

The idea of using threat-of-severe-punishment to induce good behavior is of ancient origin in the world of bankruptcy.

–Information and quotes below are from Prof. Emily Kadens, in her article, “The Pitkin Affair: A Study of Fraud in Early English Bankruptcy,” 84 American Bankruptcy Law Journal 483 (2011).

England struggled with the punishment v. incentive idea, back in the late 1600s / early 1700s, and adopted two new bankruptcy features: (i) capital punishment for bankruptcy crimes, and (ii) bankruptcy discharge.

“[T]he basic problem that has from the first underlain the bankruptcy process” is this: “how to obtain the assistance of a debtor in his financial dismantling.”

–“[P]rior to 1706, the debtor had to participate in his complete financial and personal degradation without having the right to expect anything, except almost certain incarceration in debtors’ prison, in return.”

“The pivotal moment,” in the story of England’s struggle with the basic problem, “came in the years 1705 and 1706, when the English Parliament drafted a bill making the bankrupt’s refusal to cooperate with the commissioners running his bankruptcy a capital crime.”

–This capital crime “was statutorily defined as a debtor’s failure to cooperate fully with his creditors by appearing before the bankruptcy commissioners and disclosing all of his assets after becoming a bankrupt.”

“The one-sidedness of early English bankruptcy, exacerbated by the threat of punishment for refusing to cooperate, created the need for a mechanism like discharge that would offer the debtor a carrot to balance against the existing sticks.”

–Parliament introduced the discharge of debt, “Almost as an afterthought.”

“Incentivizing cooperation with discharge would have a fruitful future. Coercing the debtor to be honest, however, proved a failure.”

–“Fraud flourished, and few perpetrators were executed, in part because creditors and jurors found putting bankrupts to death a bit excessive.”

“And yet, despite the failure of the English experiment with harsh penalties, the desire to punish . . . has remained a part of the culture of bankruptcy to this day.”

Conclusion

It was a time-honored but ineffective idea by the U.S. Government, a decade-or-more ago: attempting to compel proper action in bankruptcy by threatening harsh penalties for attorneys.

Hopefully, that effort by the U.S. Government has gone the way of the no-longer-existing capital punishment, from the 1700s, for bankruptcy crimes.

**  If you find this article of value, please feel free to share.  If you’d like to discuss, let me know.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.

Up ↑