Commentary: Justice Scalia and Bankruptcy: 'Originalism' Can Sometimes Uphold 'Stupid Laws'

By Bill Rochelle
ABI Editor at Large

Justice Antonin Scalia died on Saturday at age 79 after almost 30 years on the U.S. Supreme Court. He consistently employed a judicial philosophy calling for courts to interpret statutes based on their common meaning, supported by an understanding of the reasoning of those who drafted the law -- whether it be the Constitution or a statute like the Bankruptcy Code. Commonly referred to as "originalism" or "plain meaning," Justice Scalia's philosophy led to a more static view of the Constitution. In the sphere of bankruptcy law, his approach was neither result-oriented nor tied to an economic theory favoring debtors or creditors. Consistently applied, Justice Scalia's methodology produced noteworthy and sometimes unexpected results.

Detroit Public Schools Risks Bankruptcy Without Serious Reforms

Michigan House Speaker Kevin Cotter said today that a bankruptcy reorganization of Detroit Public Schools "must remain on the table" if lawmakers are unwilling to impose "serious academic and financial reforms" on the troubled school district, the Detroit News reported today. Cotter is endorsing a plan his fellow House Republicans proposed today that would pair academic reforms with limits on some collective bargaining rights for teachers, while imposing penalties for teacher "sickouts" and a 401(k)-style retirement plan for new hires. Those are among the strings House Republicans have attached to Gov. Rick Snyder's request for $715 million to relieve the Detroit district of $515 million in operating debt and give a new debt-free district $200 million in start-up funding. Retired Bankruptcy Judge Steven Rhodes, who oversaw the city of Detroit's bankruptcy and is advising the Snyder administration on the Detroit Public Schools, has warned lawmakers against taking the district through a chapter 9 reorganization. The state Treasury Department has estimated that a Detroit school district bankruptcy could leave the state on the hook for at least $1.5 billion of debt the district owes creditors, including the state's own school employee pension fund.

Commentary: How to Bankrupt Public Education, Chicago Style

Chicago public schools are currently in such dire straits that officials from the Illinois governor on down wonder aloud about its solvency, according to a Bloomberg News commentary. Though a few other big-city systems, like Detroit's, are in worse shape, according to the commentary, nowhere else in American public education have local mismanagement and Wall Street engineering collided so spectacularly. The teachers' retirement fund is short about $9.6 billion. The school system owes more than $6 billion to its bondholders. On Wall Street, Chicago schools have the makings of following the same path as Puerto Rico, which is struggling with a $70 billion debt crisis. "They've run out of road," says Dick Simpson, a former city alderman who teaches political science at the University of Illinois at Chicago. The budget math is sobering: Since 2007, actual district spending has soared by more than a third, even as enrollment has fallen 4 percent.

Fed Concerned Corporate Credit Crunch Will Crimp Economic Growth

Federal Reserve policymakers are beginning to worry that a corporate-credit squeeze will constrict economic expansion, Bloomberg News reported yesterday. With banks tightening standards on business loans and investors demanding higher yields on some corporate debt, companies may find it harder and more expensive to raise the money they need to grow. The concern is that it could prompt them to cut back on spending and hiring, hurting the U.S. economy in the process. Central bank Chair Janet Yellen flagged the Fed's focus on credit availability for businesses in an appearance before Congress last week. "That is an important factor" in assessing the outlook for the economy and Fed interest-rate policy, she said on Feb. 10. The toughening of credit criteria by banks "is something that bears watching," she added. As policymakers raised interest rates in December for the first time since 2006, they projected an additional four quarter-percentage-point increases for this year. In presenting the central bank's semi-annual report to lawmakers last week, Yellen suggested that rate rises may be delayed due to turmoil in financial markets.

Credit-Default Swaps Are Back as Investor Fear Grows

Trading volumes in the credit-default swaps market -- where banks and fund managers go to hedge against losses on corporate and government debt -- have surged, Bloomberg News reported on Saturday. Transactions tied to individual entities doubled in the four weeks ended Feb. 5 to a daily average of $12 billion, according to a JPMorgan Chase & Co. analysis of trade repository data. The volume of contracts on benchmark indexes in the market increased two-fold during that period to an average of $87 billion a day. Credit derivatives were one of the fastest-growing businesses for securities firms before the 2008 financial crisis claimed Lehman Brothers Holdings Inc., which was a major dealer in the market. The derivatives fell out of favor as regulators blamed them for exacerbating the financial and sovereign debt crises.

February Episode of "Eye on Bankruptcy" Focuses on Leading Opinions

The February edition of "Eye On Bankruptcy" features ABI Resident Scholar Melissa Jacoby and Judge Robert Gerber (S.D.N.Y.) in conversation with show host Michelle Harner (University of Maryland School of Law) about the leading cases and opinions for the month of January. Decisions covered matters such as the trustee's efforts to collect property from the estate (In re Soundview Elite Ltd., and Gladstone v. U.S. Bankcorp). Other cases covered the court's equitable power (Caesars Entm't Operating Co.) and secured creditor power under section 506(c) (In re Domistyle Inc.). Consumer cases included the latest in the interface between bankruptcy and the FDCPA. The show, recorded in partnership with Bloomberg Law, airs on February 25 at 1:00 p.m. ET. Nearly 2,000 unique viewers have enjoyed the show since its launch last spring. Watch past episodes at www.EyeOnBankruptcy.com.

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