DEBT’S DOMINION: A HISTORY OF BANKRUPTCY LAW IN AMERICA

Vol. 16 No.5 (May, 2006), pp.349-352

DEBT’S DOMINION: A HISTORY OF BANKRUPTCY LAW IN AMERICA, by David A. Skeel, Jr. Princeton: Princeton University Press, 2001 (2nd Printing and Paperback edition, 2004). 296pp. Cloth. $67.50/£43.95. ISBN: 0-691-08810-1. Paper. $19.95/£12.95. ISBN: 0-691-11637-7.

Reviewed by Thomas G.W. Telfer, Faculty of Law, University of Western Ontario. Email: ttelfer [at] uwo.ca

DEBT’S DOMINION demonstrates that American bankruptcy law has long been a “legislative battleground” (p.23). David Skeel stakes out a claim for a book that is a “complete account of the political factors that produced modern American bankruptcy law over the course of the last century” (p.2). In contrast to other historical studies (Mann 2002; Balleisen 2001; Lee Thompson 2004), all of which focus on periods of time associated with one of the earlier short-lived Bankruptcy Acts of 1800, 1841 and 1867, Skeel’s work covers the political economy of bankruptcy law from its birth (largely from the final decades of the nineteenth century) to recent times.

Skeel’s work encompasses late nineteenth century reforms (both legislative and judicial), the Depression and New Deal reforms, as well as the Bankruptcy Code of 1978. The book ventures beyond 1978, and provides an overview of recent scholarship that debates the future direction of corporate and consumer bankruptcy law. Indeed the book, although published before the enactment of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, provides the background for the most recent reforms. Not since Charles Warren’s (1935) depression era book has an author sought to explain the evolution of bankruptcy law over such a broad period of time.

Skeel adopts a multidisciplinary approach and principally relies upon the insights of public choice theory. In particular, he makes use of interest group theory to explain legislative change. His approach takes into account the role of ideology and acknowledges that particular individuals had a direct hand in shaping reforms. The “political determinants of U.S. bankruptcy law,” according to Skeel, are “creditor groups, prodebtor interests and bankruptcy professionals” (p.16). Bankruptcy law reflected “a compromise between organized creditor groups and the countervailing pressures of populism and other prodebtor movements” (p.16). Within this compromise lawyers and judges, sought to expand the scope of bankruptcy law and “their own prominence” (p.16).

Nineteenth century bankruptcy law has always presented a puzzle for historians. Congress passed three bankruptcy laws in 1800, 1841 and 1867, and repealed each of them shortly after enactment. Readers more interested in a detailed coverage of these earlier nineteenth century Acts will have to look to other historical works. However, Skeel provides a general theory for the instability of the earlier short-lived [*350] bankruptcy statutes. Borrowing from social choice theory, Skeel finds legislative cycling in relation to bankruptcy reform. He argues that Members of Congress held inconsistent and what he calls “cyclical” preferences in relation to bankruptcy reform. The “multiplicity of views,” according to Skeel, “contributed to Congress’s inability to reach a stable outcome on federal bankruptcy legislation throughout the nineteenth century” (p.30).

To explain the success of the 1898 Act, which ended legislative cycling and established a permanent Act, Skeel turns to the rise of organized local and national commercial trade groups as “the driving force behind the 1898 act” (p.36). Merchants who traded across state lines complained that debtors often favoured local creditors, such as family members, rather than distant creditors. Without a bankruptcy law, merchants engaging in interstate commerce were at risk of being paid last or not at all (p.36). A national bankruptcy law that enabled a trustee to set aside payments to local or family creditors was vital to any merchant who traded at a distance.

The growing importance of national interest groups might also be understood in the broader context of Peter Coleman’s (1974) earlier work on the necessity of a national bankruptcy law at the end of the nineteenth century. According to Coleman, debtor-creditor relations became “commercialized, depersonalized, and channeled through the corporate, legalistic and institutionalized structure of commercial finance.” These changes to debtor-creditor relations made a bankruptcy regime “imperative” (1974, at 248).

Although national commercial interest groups had a significant influence on the 1898 Act, Skeel emphasizes that prodebtor forces had a “crucial restraining effect” (p.38) on the creditors’ proposals for bankruptcy reform in 1898. The Act was sympathetic to both debtor and creditor interests, but perhaps more importantly it established an adversarial judicial process rather than an expensive administrative procedure. This adversarial process “created an enormous demand for a bankruptcy bar, and . . . lawyers came out of the woodwork to fill the need” (p.43).

While a general bankruptcy bar began to appear with the passage of the 1898 Act, Skeel also traces the emergence of a separate and elite Wall Street reorganization bar whose growth coincided with the development of the court-based equity receivership. Initially used to reorganize insolvent railroads, the equity receivership became a broader reorganization tool for other firms. Wall Street lawyers and bankers “were the guiding influences on the receivership process, and its most obvious beneficiaries” (p.63).

The two bars suffered different fates during the Depression and New Deal era. The general bankruptcy bar surfaced from the 1930s “unscathed” (p.73) whereas the New Deal bankruptcy legislation “decimated” (p.101) the elite bar. Relying upon interest group theory, Skeel demonstrates how the general bankruptcy bar was able to resist [*351] Depression era proposals that would have shifted bankruptcy law to an administrative model. However, the author acknowledges that interest group theory does not fully explain all outcomes. The role of individuals “often play a crucial role” (p.117), and in the case of corporate reorganizations, William Douglas, chair of the SEC, played a prominent role. Skeel suggests that Douglas and the New Deal reformers “set out to tame, and in effect to destroy, the traditional Wall Street reorganization practice” (p.102). The new Chapter X, enacted in 1938, replaced private negotiation involving Wall Street lawyers and bankers in favour of governmental oversight.

The 1978 Bankruptcy Code, however, repudiated the New Deal vision of corporate reorganization. In contrast to the former Chapter X, the new Chapter 11 left management in control during reorganization. The story of this dramatic shift in corporate reorganization law in 1978 cannot simply be explained by the influence of the bar. Skeel finds the seeds of the destruction of the New Deal legislation in the complete victory claimed by the SEC in the 1930s. The story, which Skeel claims “has not previously been told” (p.161), takes into account the fact that the New Deal reforms had destroyed the elite Wall Street reorganization practice. This left the SEC with many interest group enemies but no allies. The SEC found itself aligned against bankruptcy lawyers, judges and even large creditors.

Skeel’s three eras of bankruptcy reform might well be followed now by a “new era” which embraces the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (Tabb 2006, at 28). Skeel’s Chapter 7 anticipates and perhaps foreshadows the ultimate success of this legislation. Relying upon the insights of institutional law and economics, Skeel argues that the consumer credit industry had a large incentive to seek the tightening of the bankruptcy discharge for consumer debtors. With larger and larger numbers of debtors filing for bankruptcy, the potential benefits to creditors of altering the “rules of the game” (p.202) had increased dramatically. Thus one should not be surprised at the victory of the creditor lobby in this latest battle over bankruptcy reform (Tabb 2006, at 69).

During the most recent consumer bankruptcy reform debates, creditors relied upon the moral argument that “debtors have a responsibility to make good on their obligations.” Skeel claims that this line of argument is not new and “appeared in one form or another in every bankruptcy debate” (p.191). If commercial morality played a role in the nineteenth century to what extent did it play a role in the repeal of the earlier nineteenth century bankruptcy statutes? More importantly, how did commercial morality in the nineteenth century differ from what creditors advocated in the twentieth and twenty-first centuries?

A similar question may be posed in relation to Skeel’s political determinants of bankruptcy law. Skeel concludes that the forces that shaped nineteenth century law – creditors, populist prodebtor ideology and bankruptcy professionals – are still “a handy and reliable guide to [*352] the wilds of U.S. bankruptcy law” (p.240). Although these determinants provide an overarching theme, the nature of debtor-creditor relations in the nineteenth century was clearly different than that during the era of mass-market debt of today.

Despite these queries, David Skeel’s work provides us with a valuable one-volume overview of the progression of American consumer and corporate bankruptcy law over the last century. Not only does it trace the evolution of the law during key periods in broad terms, but it also examines in great detail some of the important moments in the legislative history of American bankruptcy law.

REFERENCES:

Balleisen, Edward J. 2001. NAVIGATING FAILURE: BANKRUPTCY AND COMMERCIAL SOCIETY IN ANTEBELLUM AMERICA. Chapel Hill, N.C.: University of North Carolina Press.

Coleman, Peter J. 1974. DEBTORS AND CREDITORS IN AMERICA: INSOLVENCY, IMPRISONMENT FOR DEBT, AND BANKRUPTCY, 1607-1900. Madison: State Historical Society of Wisconsin.

Lee Thompson, Elizabeth. 2004. THE RECONSTRUCTION OF SOUTHERN DEBTORS: BANKRUPTCY AFTER THE CIVIL WAR. Athens, Georgia: University of Georgia Press.

Mann, Bruce H. 2002. REPUBLIC OF DEBTORS: BANKRUPTCY IN THE AGE OF AMERICAN INDEPENDENCE. Cambridge, Mass.: Harvard University Press.

Tabb, Charles J. 2006. “Consumer Bankruptcy After the Fall: United States Law Under S. 256.” 43 CANADIAN BUSINESS LAW JOURNAL 28-75.

Warren, Charles. 1935. BANKRUPTCY IN UNITED STATES HISTORY. Cambridge, Mass.: Harvard University Press.

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