Daniel on The Historiographical Problem of Municipal Bankruptcy Law

Josiah M. Daniel, III, Vinson & Elkins, LLP; University of Texas, Austin, Department of History, has published The Historiographical Problem of Municipal Bankruptcy Law. Here is the abstract.

This is the first archivally researched history of the genesis of municipal bankruptcy law, 1933-1938. It also compares the historical method with law and economics (L&E) for finding and telling the story. Congressman Hatton Sumners, Judiciary Committee chair, was the key actor. The legislative process was a laboratory for new forms of relief under the Bankruptcy Clause of the Constitution, seeking to relieve the insolvency experienced during the Depression by irrigation districts in “the Valley” of Texas, new towns in Florida, and elsewhere across the nation that could not collect taxes and pay their municipal bonds. State governments were helpless; the Constitution’s Contract Clause forbade “impairing the Obligation of Contracts,” and voluntary, private restructuring agreements were frustrated by the “holdout problem.” From a variety of models, it was composition with creditors that succeeded politically. Congress from 1933 to 1937 amended the Bankruptcy Act of 1898 by enacting the First and Second Municipal Bankruptcy Acts—known as Chapter IX—based on composition. L&E scholars credit this to freshman Florida congressman Mark Wilcox who worked in conjunction with a bondholders’ group. But it was Sumners who determined that the composition model was constitutional and politically most feasible. He navigated through opposition that insisted “bankruptcy” required turnover of the debtor’s assets in exchange for a discharge and that such legislation would destroy the municipal credit market. Municipal bankruptcy did leave all assets in the debtor’s hands and granted a discharge, and the credit market survived. And relevantly to a key issue in reorganizational bankruptcy today, Sumners crafted the first, and still the only, statutory injunctive relief applicable in the bankruptcy case of an artificial entity for the protection of nondebtor third parties—here, all officers and inhabitants of a municipal debtor—against creditors’ collection efforts. Municipal bankruptcy became a New Deal agenda item, and Franklin Roosevelt helped push the legislation to enactment in the spring of 1934. The Supreme Court invalidated the first act in the 1936 Ashton case, but Justice Cardozo dissented and outlined small changes that Sumners and Congress utilized in enacting the second act in 1937. Then Sumners led the oral arguments in 1938’s Bekins case that sustained it. Municipal bankruptcy law succeeded in effectuating municipal-bond restructuring agreements, and its essence lives in today’s Bankruptcy Code as Chapter 9, providing discharge of unpayable debt and more commonly furnishing the platform upon which towns and taxing districts negotiate such deals. Chapter IX worked in the past, and Chapter 9 works today. Sumners, not Wilcox, was primarily responsible for the legislation. Nothing was assured; the story demonstrates change over time, with Sumners the key actor. And the project of finding and interpreting the genesis of municipal bankruptcy is one for legal history, not for L&E, the author argues.

DOwnload the article from SSRN at the link.

Pardo on Rethinking Antebellum Bankruptcy @WashULaw @COLawReview

Rafael I. Pardo, Washington University, St. Louis, School of Law, is publishing Rethinking Antebellum Bankruptcy in volume 95 of the University of Colorado Law Review. Here is the abstract.

Bankruptcy law has been repeatedly reinvented over time in response to changing circumstances. The Bankruptcy Act of 1841—passed by Congress to address the financial ruin caused by the Panic of 1837—constituted a revolutionary break from its immediate predecessor, the Bankruptcy Act of 1800, which was the nation’s first bankruptcy statute. Although Congress repealed the 1841 Act in 1843, the legislation lasted significantly longer than recognized by scholars. The repeal legislation permitted pending bankruptcy cases to be finally resolved pursuant to the Act’s terms. Because debtors flooded the judicially understaffed 1841 Act system with over 46,000 cases, the Act’s administration continued into the 1860s, thereby allowing further development of the law. Importantly, the system operated at a time when the role of the business of slavery in the national economy was increasingly expanding. This Article focuses on two postrepeal episodes involving legal innovation under the Act to demonstrate how an expanded periodization of its duration yields fresh insights into understanding the interaction between federal bankruptcy law and slavery: (1) the judicial constitutional settlement of voluntary bankruptcy relief, part of which occurred through a case involving a bankrupt enslaver; and (2) the practice pursuant to which some federal district courts empowered assignees—the federal court officials appointed to administer property surrendered by bankrupts in 1841 Act cases—to operate a bankrupt’s business before liquidating it, as evidenced by certain cases involving plantation owners who sought relief under the Act.

Download the article from SSRN at the link.

Sheley and Rosen on The Purloined Debtor: Edgar Allan Poe's Bankruptcy in Law and Letters @zvisrosen @erin_sheley

Erin L. Sheley, California Western School of Law, and Zvi S. Rosen, Southern Illinois University School of Law, are publishing The Purloined Debtor: Edgar Allan Poe's Bankruptcy in Law and Letters in the Yale Journal of Law and the Humanities. Here is the abstract.

This Article represents the first interdisciplinary case study of the Poe bankruptcy as an inflection point in the legal and cultural history of debt. It shows both how the pitfalls of a short, debtor-focused chapter in bankruptcy history gave rise to the system of today, and how Poe’s indebtedness and bankruptcy helped shape the American Gothic literary forms he made famous. Part One compares bankruptcy law in Poe’s time to that of today, also explaining how bankruptcy came to be and why it was revolutionary. Part Two presents a brief life of Poe and collects evidence of the literal and intellectual impact of the law on his life and thought. Turning to his literary work, it argues that Poe’s fixation on the relationship between debt, degeneration, and official naming reflects the impact of the burgeoning bankruptcy system on individual identity in a Gothic framework. Part Three explores Poe’s bankruptcy case from a technical legal perspective, both in the context of the law at the time and hindsight, showing that there were serious conflicts of interest in the case. We conclude by arguing that Poe’s case, read alongside his literary output, reveals both legal and narrative contradictions at the heart of bankruptcy, which the 1841 Act did a poor job of resolving. On the one hand, bankruptcy reframes the identity of the debtor, who becomes the object of a quasi-confessional process. On the other, bankruptcy restores some degree of material agency to the debtor as a subject, often at the expense of creditors.

Download the article from SSRN at the link.

Perelman on A Bankruptcy History of the United States @yalesom

Mark Perelman, Yale School of Management, has published A Bankruptcy History of the United States. Here is the abstract.

Financial crises destroy value and radicalize the political sphere. Are these events random, idiosyncratic, or driven by some force? The ex-post answers — be they monetary, criminal, or international contagion — have a profound impact on the role of government in society, but have questionable predictive power. In the United States, only the Federal government can impair contracts across States through the bankruptcy process. The history of bankruptcy law is intertwined with that of crises and banking law, and, as we argue, is a consistent cause, accelerant, and reaction of financial crises.

Download the article from SSRN at the link.

Pardo on Financial Freedom Suits: Bankruptcy, Race, and Citizenship in Antebellum America @EmoryLaw

Rafael I. Pardo, Emory University School of Law, is publishing Financial Freedom Suits: Bankruptcy, Race, and Citizenship in Antebellum America in the Arizona Law Review. Here is the abstract.

This Article presents a new frame of reference for thinking about how the federal government facilitated citizenship claims by free people of color in the antebellum United States. While scholars have accounted for various ways in which free black litigants may have made such claims, they have not considered how the Bankruptcy Act of 1841 enabled overindebted free people of color to reconstruct their economic lives, thereby restoring the financial freedom that was and continues to be an essential component of American citizenship. Relying on a variety of primary sources, including manuscript court records, this Article shows how six free men of color in the Eastern District of Louisiana leveraged the economic benefit provided by the 1841 Act to reintegrate into their commercial communities and thereby protect their claims to citizenship.

Download the article from SSRN at the link.