Vol. 2 No. 6 (June, 1992) pp. 95-96

STRATEGIC BANKRUPTCY: HOW CORPORATIONS AND CREDITORS USE CHAPTER 11 TO THEIR ADVANTAGE by Kevin J. Delaney. Berkeley: University of California Press, 1992. 213 pp. Cloth $23.00.

Reviewed by Harry P. Stumpf, Department of Political Science, University of New Mexico.

For decades we in the "Law and Society Movement" have been touting the desirability -- indeed, the necessity -- of genuinely interdisciplinary research which places the study of law in its broader social perspective. No better example of such research can be seen than that contained in this book. Bankruptcy is, by its nature, neither a purely historical, economic, legal, social, nor political matter. It is all of these. While in the past economists -- and to a lesser extent lawyers -- have provided most of the theoretical work in the field, the point driven home in this book is that bankruptcy can be profitably viewed from a social and political perspective as well. This is especially true with the broadening and changing socio-legal definition of bankruptcy (discussed in the early chapters), which has broadened the possibilities for the use of the bankruptcy code for abjectly political purposes.

The casual newspaper reader could hardly have failed to have noticed most of the cases described in this book. I clearly recall reading about the Continental Airlines' use of the bankruptcy code to destroy unions. At the time I noted that this would constitute an excellent case study of the political use of the Bankruptcy Re- form Act of 1978. STRATEGIC BANKRUPTCY is such a study.

The author begins with a brief history of bankruptcy laws. He demonstrates that conceptions of bankruptcy have evolved from acts of moral turpitude committed by an individual to a financial state of affairs reflected in a corporation's balance sheet. By a considerable loosening of conditions under which bankruptcy could be claimed, the 1978 Congressional legislation moved us one step further, more fully enabling corporations and their financial partners to use the bankruptcy laws as a business strategy to reward allies and punish enemies. This was brought about largely through an incredibly broad definition of "claim" whereby business insolvency could be based on future claims against the firm regardless of their probability. This provision, combined with an enhancement of the power of creditors' committees, helped corporate managers retain control or events even after the declaration of bankruptcy. Companies could thus manipulate their business activities after filing to take advantage of their new protection under the law.

One indication of this vast new potential under the bankruptcy laws may be seen in the significant increase in the number and importance of bankruptcy lawyers. Prior to the 1978 legislation the practice of bankruptcy law commanded but limited fees and even less respect. But from 1979 to 1987, reports the author, Skadden, Arps, New York's largest law firm, went from zero to twenty-two lawyers working in bankruptcy. Similarly, Weil, Gotshal, an important firm in the Texaco bankruptcy case, had sixty lawyers, or nearly 15 percent of its entire firm, working in bankruptcy law in 1987 (p. 33).

The body of the book consists of three case studies of the corporate use of bankruptcy for political purposes: the Johns- Manville Corporation's filing in 1982 to avoid the payment of claims arising out of the incidence of asbestosis in citizens exposed to the company's products; Frank Lorenzo's Continental Airlines' filing in 1983 to break the unions and undercut competitor airlines; and Texaco's filing in 1987 to avoid paying over $10 billion (yes, $10 BILLION) in court-ordered damages to Pennzoil. For the reader who has long thought "business ethics" to be a contradiction in terms this book furnishes strong support. The incredible duplicity, chicanery, and just plain sleaze exhibited by these corporations is sickening. The order of the day included any perversion of the law or twisting of the facts to protect corporate interests, regardless of harm done to others. And the bankruptcy court in each

Page 96 follows:

case sustained the actions, based on a probably fair reading of the unbelievably broad terms of action permitted in the 1978 Act.

Thus, in the case of the Manville Chapter 11 filing, it was the tens of thousands of citizens facing the long agony and death from asbestosis who paid the price of this corporate strategy. Manville's creditors such as Morgan Guaranty received full payment on the money owed based on Manville's declaration of future liabilities far in excess of what anyone could possibly demonstrate. In the case of Continental Airlines, which had over two billion dollars in assets at the time of bankruptcy filing, virtually everything of importance having to do with the rights of labor was sacrificed in a corporate strategy designed to improve the competitive advantage of the airline. Admitting that the company's problem was not cash but labor, Frank Lorenzo, immediately upon filing bankruptcy, unilaterally abrogated all of its labor contracts, cut wages up to 50 percent, and imposed new work rules which included longer stretches of work, no assured time off, and shorter rest breaks (p. 96). The firm was clearly not really bankrupt as that term is usually used, but the unions' attempt to have the filing dismissed as fraudulent was unsuccessful.

The Texaco case was in some ways worse. Faced with a court award of over $10 billion dollars for its illegal activities in attempting to acquire Getty Oil Company, Texaco was permitted to file bankruptcy in spite of the fact that it had assets in excess of $37 billion. At no time did the company claim it could not pay the court award; only that it was "financially impracticable" to do so (p. 159). Thus, one of the richest corporations in the world successfully pled poverty before the bankruptcy court in order to avoid meeting its court-imposed financial/legal obligations. As pointed out by the author, this is completely contrary to the law of indigency where courts customarily require a filing fee for appeals, regardless of the financial status of appellants (139, 141).

The central points of the study are clear. Most importantly, bankruptcy laws, while originally intended to create a neutral forum to collect debt and to reflect market forces in making judgments about efficient and inefficient firms, have evolved into political levers, highly useful to corporations and their creditors in avoiding lawful obligations by shifting them to less politically-powerful entities. That law is a political instrument is clear. That the reform of our bankruptcy laws has provided us with an especially pointed example of this truth is the central thesis of this book.

Indeed, in this brief, well-written and well-research study we have such an unusually clear example of law's social and political significance that I would recommend the book to the general reader. As a study in corporate greed, the uses and cynical misuses of the law for political ends, and the inextricable intertwining of law with history, sociology, economics and politics, particularly the latter, the book has few equals. If the central thesis of the Critical Legal Studies scholars needs any support, this book should do it. LAW IS POLITICS. To assume otherwise is to continue to mislead citizen and scholar alike in our continuing struggle to make democracy work.


Copyright 1992