Enactment of the Bankruptcy Code in 1978: A Short History

img_1012By: Donald L. Swanson

Congress must be allowed “to fashion a modern bankruptcy system which places the basic rudiments of the bankruptcy process in the hands of an expert equitable tribunal.”

–Justice Blackmun, dissenting in Granfinanciera v. Nordberg, 492 U.S. 33 (1989).

Forty years ago — back in 1978 — Congress enacted the current Bankruptcy Code. Enactment did not occur hastily, nor was it a reaction to an immediate crisis. Instead, the Bankruptcy Code’s enactment resulted from an extended effort to study and address existing needs. [Fn. 1]

I’ve always been amazed, since my earliest days as a rookie lawyer, at the structure and coherence of the Bankruptcy Code. It’s a lengthy and detailed set of statutes, dealing with complexities of both our business world and our world of consumer credit. Yet, it all fits together and provides for competing interests of fresh start for debtors and protections for creditors.

Enactment Process

Enactment of the 1978 Bankruptcy Code was, actually, “the end point of a decade of attention.” The process began in 1968 with “hearings of a subcommittee of the Senate Judiciary Committee” looking into the possibility of “appointing a Bankruptcy Commission.”

Based on “information collected in those hearings,” Congress created, in 1970, a “Commission on the Bankruptcy Laws of the United States.” In doing so, Congress emphasized three problems that brought bankruptcy issues to the fore:

  • “a radical upturn in bankruptcy filings”;
  • “a shared sense” that the then-existing bankruptcy system “was functioning poorly”; and
  • “the vast expansion of credit” in recent times.

Commission members were appointed by the President, the President of the Senate, the Speaker of the House and the Chief Justice of the Supreme Court. Members included “distinguished bankruptcy experts,” two U.S. Senators, two U.S. Representatives, and two “experienced judges.” Michigan Law Professor Frank Kennedy served as the Commission’s “Executive Director (and presumably the principal draftsman of the Commission’s work).”

The Commission took such actions as:

  • Authorizing studies on “operations of the existing system”;
  • Conferring with “important stakeholders around the country”; and
  • Enlisting services of business and law faculty scholars and of “research institutes like the Brookings Institution and the American Bar Foundation.”

1973 Commission Report

The Commission produced a detailed report in 1973 “recommending wholesale changes to almost every aspect of the bankruptcy system in this country.” The report “was almost entirely unanimous” among Commission members. The primary exception involves an argument that the proposed reforms could be accomplished “without the new tier of judges that the Commission recommended.”

1978 Legislation

The Commission’s work and report “set the framework” for future legislation. In fact, “much of the structure, and even the language, of the Bankruptcy Code of 1978 finds its source in the Commission’s 1973 report.”

All political sides in Congress agreed, in 1978, about the existence of a “pressing need” for “the modernization of the bankruptcy law.” Accordingly, “both Houses of Congress adopted” the Bankruptcy Code of 1978 “by voice votes.” President Carter signed it into law in November 1978, and it “took effect, for the most part, on October 1, 1979.”

Significance

Here are some observations from Ronald J. Mann’s book about the Bankruptcy Code’s enactment:

“Looking back from the present day, it is difficult to convey the importance of the Code’s adoption”; and

“Perhaps the most salient indicator of the long-term vision behind” the bankruptcy reform is this: the Bankruptcy Code of 1978 “is the only major revision of the bankruptcy laws not enacted” in these United States “as a response to a severe depression” (emphasis added).

Conclusion

It’s easy to forget the labors of those who laid the foundation for what’s happening today. Preparations for enactment of the Bankruptcy Code are among those labors that are largely forgotten. Yet it is precisely the fruit those bankruptcy labors that are serving our economic system so well today.

Footnote 1: This article is based upon a book by Ronald J. Mann, titled Bankruptcy and the U.S. Supreme Court (Cambridge University Press 2017). All information and quotes herein are taken from this book, except as otherwise noted.

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