Diminishing The U.S. Constitution’s Bankruptcy Power: Congress, Courts & U.S. Trustee

By: Donald L Swanson

The history of bankruptcy in these United States teaches this:

• bankruptcy laws can provide an efficient and effective solution for a great variety of financial problems.

But bankruptcy laws, in these United States, face significant problems, and their effectiveness is being diminished.

First Problem

Bankruptcy has a fundamental problem: nobody likes it.

Everyone recognizes that bankruptcy laws are a necessity in our market economy.  And bankruptcy laws are even founded upon a provision of the U.S. Constitution:

• “Congress shall have power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States” [Art. I, Sec. 8, Cl. 4].

And bankruptcy laws, across human history, are among the most ancient of all laws.  That’s because whenever there is trade, there is a need for credit; and whenever there is credit, financial failure follows—all of which creates the need for bankruptcy laws.

And so it is today in these United States.  We have a market economy that relies heavily on credit (both consumer and commercial), which results in financial failure for many.

But notwithstanding all of that, nobody likes bankruptcy.  It’s considered, at best, a regrettable necessity that should be avoided at all cost.

Second Problem

Another problem for bankruptcy laws is this: bankruptcy has no political constituency.

To be sure, there are entrenched political constituencies against bankruptcy, including:

• creditor groups of all types and stripes; and
• those who see failure-to-pay as a moral shortcoming—regardless of why it happens.

But there is no political constituency that is pro-bankruptcy.  Some political groups will stand up, (i) for the plight of the truly-poor, or (ii) to keep a viable business going.

But try to find a political constituency that stands up for:

• formerly-successful entrepreneurs; or
• middle class folks who lose their jobs because of health problems; or  
• family businesses whose products suddenly become obsolete.

There isn’t any.  And that’s despite the fact that every politician everywhere likes to talk and brag about supporting small businesses.  But let one of those small businesses fail . . . and the story changes—real fast.

The result is this: we get laws designed to punish individual debtors (like Congress’s 2005 BAPCA) and to diminish effective bankruptcy relief (like Congress’s refusal, thus far, to make Subchapter V’s $7.5 million eligibility limit permanent).

The Courts Too

But the nobody-likes-it and no-political-constituency problems for bankruptcy laws aren’t limited to the political sphere—they even bleed over into the courts.  For example:

• the U.S. Supreme Court is openly hostile to benefits for individuals in bankruptcy (see, e.g., the Chicago parking fines opinion and the opinion denying debtor’s discharge based on someone else’s fraud); and
• one Circuit Court openly lauds mass tort litigation that produces little-to-no recoveries for thousands of claimants, while a relatively few claimants get judgments for tens of millions of dollars (mostly punitive damages)—such disparities:
  • exist even though all of those claimants use the same product in the same manner and contract the same types of cancers; and
  • are applauded by the Court as the best form of justice for all the similarly situated claimants–that court even seems to suggest that another 15 years of such vast disparities would be a good thing; and
• such courts have, thus far, cast a blind eye to the effective role bankruptcy laws have played in resolving mass tort problems in asbestos cases and other types of cases.

U.S. Trustee Too?!

But who would have guessed that one of the strongest opponents of using the U.S. Constitution’s bankruptcy power to it’s greatest and most-effective extent would be [ . . . drumroll . . . ] the office of the United States Trustee! 

• That’s the very office responsible for administering the bankruptcy system. 

You’d think that such an office would:

• have an expansive view of the U.S. Constitution’s grant of bankruptcy power to Congress; and
• promote the greatest and most efficient and effective use and application of that power to solve financial problems of all types.

But no.  That’s not what’s happening.  Instead, the U.S. Trustee’s office holds a diminutive view of the Constitution’s bankruptcy power, of Congress’s ability to utilize that power, and of the application of that bankruptcy power in day-to-day cases.

Right now, for example, the U.S. Trustee’s office is opposing all types of third-party releases in any bankruptcy plan in many different kinds of cases—and all the way to the U.S. Supreme Court. 

And the U.S. Trustee’s efforts at the Supreme Court are being opposed by those who have already utilized bankruptcy laws in prior cases to achieve positive results for all concerned.  Such oppositions include:

• an amici brief by the U.S. Conference of Catholic Bishops; and
• an amici brief by Local Councils of the Boy Scouts of America.

Such opponents are calling for a more practical and reasoned approach—instead of the U.S. Trustee’s doctrinaire and inflexible attack.

Conclusion

The U.S. Constitution’s grant of bankruptcy power to Congress has been utilized effectively over many decades and in many contexts.

The use of that bankruptcy power, however, is always under attack and at risk, because of two basic problems: (i) no one likes bankruptcy, and (ii) bankruptcy has no political constituency.

That’s why Congress, the courts and the U.S. Trustee all carry a heavy burden to assure that the Constitution’s bankruptcy power is applied in effective ways to solve the wide variety of financial woes that are always present in any market economy.   

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