By: Donald L Swanson

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

• Granfinanciera v. Nordberg, 492 U.S. 33, 94 (1989) (Justices Blackmun and O’Connor dissenting, emphasis added).

Justices Blackmun and O’Connor were right, of course:

• the reach and scope of bankruptcy laws are vast;
• the Bankruptcy Code, itself, is of monstrous size and complexity;
• a huge body of caselaw construing the Bankruptcy Code already exists, from the bankruptcy courts and their appellate overseers, and continues to expand;
• the U.S. Supreme Court regularly hears bankruptcy disputes to enforce the U.S. Constitution’s requirement that bankruptcy laws be “uniform . . . throughout the United States”; and
• each business in financial stress, whether large or small, presents a unique set of circumstances that magnify the complexities inherent in our bankruptcy system, requiring flexibility and ongoing creativity within the system.  

The need is undeniable, for a system of “expert equitable tribunals” to manage and apply our court-supervised bankruptcy system throughout the United States and its territories.

So, I always find it interesting . . . and a bit troubling . . . to hear of states trying to develop their own court-supervised, bankruptcy-alternative systems, under the guise of an assignment for benefit of creditors (“ABC”).  Such systems tend to be in the form of:

• court-supervised liquidation processes, masquerading under the ABC name; or
• dumping ABC provisions into receivership statutes and, thereby, rendering ABC processes indistinguishable from receiverships.

What such bankruptcy-alternative ABC systems (i.e., ABC laws with court supervision) accomplish is this:

• they are rarely used; and
• state courts are ill-equipped to deal with the complexities involved.

There are exceptions, of course.  Delaware has its Chancery Court, which serves as an “expert equitable tribunal” for Delaware’s ABC statutes. And Florida has its Circuit Court.  But outside the few exceptions:

• states are rarely able to provide an “expert equitable tribunal” to deal with the complexities involved; and
• court-supervised ABC systems are a bust.

Conclusion

Whenever a state legislature is inclined toward converting ABCs from an out-of-court process under the common law into a court-supervised process, that legislature should consider whether such an approach:

• might destroy the prospect of ABCs being utilized in that state; and
• can be supported by an “expert equitable tribunal” to manage the liquidation of financially distressed businesses—in the same manner and with the same expertise as a bankruptcy court.

Post Script

A Drafting Committee of the Uniform Law Commission is preparing a uniform law on assignments for benefit of creditors. 

My view is that such a uniform law should codify an out-of-court approach for ABCs because, inter alia, the vast majority of our United States are unable to provide the bankruptcy-like “expert equitable tribunal” that is needed to support a court-supervised system. 

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