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
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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