U.S. Department of Justice & Bankruptcy: A Massive and Irreconcilable Conflict Of Interest

By: Donald L Swanson

Recent political flaps within the Department of Justice highlight a more-basic bankruptcy concern that is neither partisan nor political.  The more-basic concern is this:

• the Department of Justice has, for its multiple roles in bankruptcy laws and practice, a massive and irreconcilable conflict of interest.  

First Awareness

The first time my antennae goes up on this more-basic concern is during a national bankruptcy conference at least a decade (maybe two) ago—while watching a panel discussion. The panel includes a U.S. Trustee representative (the U.S. Trustee’s office is within the Department of Justice) on six-or-so complex bankruptcy issues.  On every one of those issues, as I recall, the U.S. Trustee’s position is some version of this:

• “That approach is not explicitly authorized by the Bankruptcy Code; so, it can’t be done.”  

The first time hearing that answer, I am surprised—had never heard such a thing before.  By the third time, I’m thinking: “That doesn’t sound right.”  At the fourth time, the other panelists are obviously frustrated.  By the sixth time, I’m thinking: “That response is crazy! On every one of those issue, it diminishes the bankruptcy power and favors creditors.”

Preconception

And my preconception is completely shattered by those answers.  My erroneous preconception is that the U.S. Trustee’s office would be fighting for an expansive view of the Bankruptcy Code to:

• make the bankruptcy power granted to Congress in the U.S. Constitution as effective as possible;
• enhance what’s good for the bankruptcy system as a whole — not what’s good for a particular type of bankruptcy constituency; and
• meet the ever-increasing bankruptcy needs of an expanding and credit-based economy.

“Aha!” Moment

My moment of, “Aha . . . that’s why this is happening!” comes later — while reading an amicus brief before the U.S. Supreme Court on a bankruptcy question, filed by the Department of Justice’s Solicitor General. 

The brief takes a pro-creditor position that’s contrary to the majority view among U.S. courts of appeals.  While reading the brief, I find the Solicitor General’s position curious. But everything comes into focus upon going back to the “Interest of the United States” portion of the brief that says something like this:

• “The United States is the Nation’s largest creditor . . .”;
• “Federal agencies also may participate in bankruptcy proceedings on the creditor side . . .”;
• “United States Trustees are charged with supervising the administration of bankruptcy cases . . .”; and
• “The United States therefore has a substantial interest in the bankruptcy question presented.”

All of a sudden it all makes sense—the Department of Justice:

• has a conflict of interest in bankruptcy as the Nation’s largest creditor;
• will, therefore, almost always act in bankruptcy cases to protect the interests of creditors; and
• will be concerned about best interests of the entire bankruptcy system, on important and unresolved issues, only when the rights of creditors are protected.  

Irreconcilable Conflict

That’s a conflict of interest. The conflict is massive! And the conflict is a detriment to the best interests of the bankruptcy system as a whole!  

Further, the conflict is a basic and fundamental and irreconcilable problem that’s built into our system.  And the U.S. Supreme Court frequently (maybe even almost-always) adopts the positions espoused by the Department of Justice in bankruptcy cases.

Conclusion

There is no solution to this conflict of interest problem.

The only way to even begin to address it, that I can see, is to at least acknowledge its existence in every bankruptcy context where the conflict comes into play.

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