Document Type

Article

Publication Date

1989

Center/Program

Center for Contract and Economic Organization

Center/Program

Program in the Law and Economics of Capital Markets

Abstract

Bankruptcy policy appears to be in disarray. Recent decisions by the United States Supreme Court have only served to reinforce the uncertainties that mar the bankruptcy process. In United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd.,1 the Court held that an undersecured creditor was not entitled to interest on its collateral as compensation for the opportunity costs of delay caused by the bankruptcy process.2 Timbers thus supports the argument that secured creditors should be forced to share the burdens of bankruptcy with other claimants. Conversely, in Norwest Bank Worthington v. Ahlers,3 the Court held that the proposed contribution of future labor on the family farm could not trump the absolute priority rule that bars a debtor's retention of an equity interest over the objections of senior creditors.4 Thus, Ahlers rejects the claim that secured creditors should be forced to share the burdens of bankruptcy through a liberalized contribution rule. Can these decisions be reconciled? And what light do they shed on the future of bankruptcy sharing?

There are a number of ways to rationalize the results in Timbers and Ahlers through careful statutory and doctrinal analyses. The fact that this article does not address them does not belittle the value of careful allegiance to the Bankruptcy Code and prior case law in seeking to predict the future of bankruptcy law.' Nevertheless, few would doubt that the Court could have written carefully reasoned opinions justifying the opposite result in each case.6 Thus, it seems probable that unacknowledged and unexpressed policy considerations may have influenced the Court. This article examines precisely what those policy goals are and what they imply for the future of federal bankruptcy.7 Part I of the article analyzes the traditional objectives of the bankruptcy process in terms of the techniques of contemporary legal analysis. This exercise is principally one of translation, the time-honored task of pouring old wine into new bottles. By attempting to recharacterize old truths in contemporary terms, I mean to clarify what those truths "really mean." Thereafter, Part II sketches a theory that rationalizes the apparently conflicting objectives of bankruptcy law. The theory suggests that the Court's decisions in Timbers and Ahlers are, in fact, entirely consistent and complementary. This approach thus provides a convenient benchmark for assessing how the burdens of bankruptcy ought best to be shared between various claimants of different classes.

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