“United States Bankruptcy Administration” — A 1970s Proposal With Scant Odds

By: Donald L Swanson

Imagine a federal bankruptcy agency—like the Securities and Exchange Commission—called the “United States Bankruptcy Administration.”

That’s exactly what was proposed by the report of the 1970s Bankruptcy Commission, which resulted in the Bankruptcy Code of 1978. The bankruptcy agency proposal was, in fact, “the most important innovation of the Commission’s report,” along with a set of bankruptcy judges to decide disputes [Fn. 1.]

Commission’s Explanation

The Commission explained it’s agency and bankruptcy judges proposals like this:

A “great part of the work of the bankruptcy system is administrative rather than judicial in character”; and

The creation of a bankruptcy agency and bankruptcy judges would:

(i) Separate “administrative functions from the more conventional dispute-resolution functions”;

(ii) Enhance “the efficiency” of the bankruptcy system “by limiting the tasks that the judges needed to perform”; and

(iii) Enhance “the objectivity” of the judges “by removing them from day-to-day administration).”

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A precarious position

Congress’s Response

But Congress rejected the “separate federal agency” approach and chose, instead, the “much less ambitious system of United States trustees” (the “predecessor of what is now the Office of the United States Trustee”).

“It well might be that the chances of Congress at that time creating any major new agency were scant.”  In fact, the agency proposal was in a precarious position from the beginning:

“The SEC (probably the closest parallel) was created almost a half-century earlier in response to a firestorm of outrage at harms the entire nation suffered that were attributable, to some degree, to ill-functioning securities markets”; but

“No such emergency faced the Congress that considered” the Commission’s report.”

Missed Opportunity?

Prof. Robert J. Mann [id.] argues that the agency approach would have been beneficial:

The “Bankruptcy Code is one of the few major federal civil statutory regimes administered almost exclusively through adjudication in the courts—not through a federal regulatory agency”;

The “result is to have the final decisions about the direction of the bankruptcy system made by the appellate federal judges—generalists—rather than by informed specialists in an agency”; and

The “rejection of the agency has pushed the system down an adversarial path that is much more expensive, especially in large business reorganizations, than the more ‘inquisitorial’ system that might have accompanied an expert agency.”

Imagine a Bankruptcy Agency

Imagine how an agency might handle a Chapter 7. An agency employee serves the role of today’s Chapter 7 trustee:

–looking for assets, gaining possession of assets and turning assets into cash (by self help and through litigation), filing avoidance actions, objecting to claims, and distributing assets.

That might be slick in Chapter 7!

But how would an agency handle Chapter 11? What about the debtor-in-possession exercising trustee powers?

It seems a little tricky in Chapter 11.

“Public Rights” Doctrine & Bankruptcy Agency

Somehow, following the 1978 enactment of the Bankruptcy Code, the U.S. Supreme Court decided to wedge bankruptcy jurisdiction issues into its “public rights” doctrine. That wedging created a tough slog for bankruptcy court jurisdiction ever since.

But, I suggest, the Commission’s bankruptcy agency recommendation provides an explanation for why that happened:

Notably, “public rights” doctrine justifies the exercise of judicial authority, by administrative agencies, over their areas of responsibility; and

Perhaps the Commission’s bankruptcy agency recommendation caused the plurality, in Northern Pipeline v. Marathon Pipe Line, to focus on “public rights” for bankruptcy courts jurisdiction—instead of the Constitution’s “Bankruptcies” clause itself?

Moreover, a lawsuit by the bankruptcy agency would be, in effect, a suit by the U.S. Government against a private party. In such a context, Justice Scalia’s insistence (from Granfinanciera in 1989 to Stern v. Marshall in 2011) makes sense:

–That “a matter of public rights . . . must at a minimum arise between the government and others.”

Under the Bankruptcy Code, however, no agency was created and few-if-any disputes are “between the government and others.”

Conclusion

The 1970s Bankruptcy Commission provided a foundation for the substance and details of the 1978 Bankruptcy Code.

The primary innovation in the Commission’s report (the proposal for a Bankruptcy Agency), however, was rejected by Congress.

What the effect of an agency approach might have been is interesting speculation. But its actual effect on the Supreme Court—and it’s use of “public rights” doctrine—has been significant.

Footnote 1:  I am indebted to Prof. Ronald J. Mann and his book, Bankruptcy and the U.S. Supreme Court (Cambridge University Press 2017), for the quotes and much of the information in this article.

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

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