Vern Countryman and the path of progressive (and populist) bankruptcy scholarship

Harvard Law Review

Volumn 113, Issue 5, 2000, Pages 1075-1128

  Skeel Jr , David A ^a  

^a UNIVERSITY OF PENNSYLVANIA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 23044519517     PISSN: 0017811X     EISSN: None     Source Type: Journal    
DOI: 10.2307/1342339     Document Type: Article

References (280)

1. 381 U.S. 479 (1965).
2. Gerald K. Smith, Vern Countryman, NORTON BANKR. ADVISER, June 1999, at 2, 5 (quoting John Frank).
3. See, e.g., Nick Ravo, Obituary, Vern Countryman, 81, Professor and Commercial Law Expert, N.Y. TIMES, May 17, 1999, at A19.
4. Smith, supra note 2, at 2 (quoting Professor Charles Alan Wright).
5. Under current law, if a contract is executory, the debtor's trustee may reinstate the contract, even if the debtor defaulted prior to bankruptcy. See 11 U.S.C. § 365 (1994).
6. Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L. REV. 439, 460 (1973).
7. For a vivid example, see Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 MINN. L. REV. 227, 234-39 (1989).
8. These events are discussed in more detail in Part II.A., infra.
9. See VERN COUNTRYMAN, UN-AMERICAN ACTIVITIES IN THE STATE OF WASHINGTON (1951).
10. Countryman's articles on loyalty issues include Vern Countryman, The Strange Case of Alger Hiss, 63 YALE L.J. 744 (1954) (book review),
11. and Vern Countryman, Loyalty Tests for Lawyers, 13 LAW. GUILD REV. 149 (1953)
12. [hereinafter Countryman, Loyalty Tests].
13. 10 Ravo, supra note 3, at A19.
14. Smith, supra note 2, at 4 (quoting former student Ken Klee).
15. An anecdote concerning Richard Nixon hints at some of these qualities, as well as Countryman's political leanings. After Nixon's reelection, Gerald Smith gave Countryman a bottle of wine from the inauguration. Countryman's initial response was to refuse to drink the wine. As Watergate ran its course, however, the wine took on a new meaning. When Nixon resigned, Countryman called Smith to say he would drink the wine with great pleasure. See Telephone Interview with Gerald Smith, Lewis & Roca, Phoenix, Ariz. (Feb. 8, 2000).
16. Populism was characterized by a defense of farmers and rural interests, and a hostility toward Wall Street and other concentrations of wealth. Progressivism originated in urban areas and focused on social reform but shared populism's distrust of Wall Street. To distinguish the general term "progressive" from the political movement, I will capitalize references to the Progressive movement. The best account of populism and Progressivism is still RICHARD HOFSTADTER, THE AGE OF REFORM: FROM BRYAN TO F.D.R. (1955).
17. Having joined the Supreme Court in 1939, Justice Douglas was still in his early years on the Court when Countryman arrived in 1942. Prior to his appointment, Douglas had practiced briefly for the firm of Cravath, Swaine & Moore in New York, taught at Columbia and Yale Law Schools, and risen to the chair of the Securities and Exchange Commission.
18. I should note at the outset that my own bankruptcy scholarship would not be characterized as progressive. My work fits more neatly within the law-and-economics literature, though I have tried to moonlight as a progressive from time to time. See, e.g., David A. Skeel, Jr., Markets, Courts, and the Brave New World of Bankruptcy Theory, 1993 WIS. L. REV. 463, 503-09 (using analysis from Karl Polanyi's 1994 book The Great Transformation to criticize recent law-and-economics proposals).
19. In actuality, the origins of legal realism were more complicated than this explanation suggests. For instance, pre-realist Progressives such as Roscoe Pound had already challenged the Langdellian conception when legal realism emerged. For a more nuanced overview of the intellectual history of legal realism, see Thomas C. Grey, Modern American Legal Thought, 106 YALE L.J. 493, 493-508 (1996) (
20. reviewing NEIL DUXBURY, PATTERNS OF AMERICAN JURISPRUDENCE (1995)).
21. LAURA KALMAN, LEGAL REALISM AT YALE: 1927-1960, at 3 (1986).
22. Underhill Moore, Wesley Sturges, and Karl Llewellyn all specialized in commercial law. See generally id. at 20-35 (describing the early legal realists and their methodology); WILLIAM TWINING, KARL LLEWELLYN AND THE REALIST MOVEMENT 128-40 (1973)
23. (describing Llewellyn's early work on sales law issues). Much of Jerome Frank's early work brought the insights of legal realism to bear on corporate law and corporate reorganization. For illustrations of Frank's remarkable, and resolutely legal realist, insights into corporate bankruptcy, see Jerome Frank, Epithetical Jurisprudence and the Work of the Securities and Exchange Commission in the Administration of Chapter X of the Bankruptcy Act, 18 N.Y.U. L. REV. 317 (1941),
24. and Jerome Frank, Some Realistic Reflections on Some Aspects of Corporate Reorganization, 19 VA. L. REV. 541 (1933)
25. [hereinafter, Frank, Some Realistic Reflections]. One of the agendas of this essay is to rekindle academic interest in the bankruptcy scholarship of Douglas, Frank, and other legal realists. A remarkable amount of cutting-edge theory in the recent bankruptcy literature was prefigured by these scholars' writings in the 1930s.
26. Nor was Douglas's influence limited to bankruptcy. He was famously described in the late 1920s as "the outstanding professor of law in the nation." JAMES F. SIMON, INDEPENDENT JOURNEY: THE LIFE OF WILLIAM O. DOUGLAS 109 (1980) (quoting a statement attributed to University of Chicago President Robert Hutchins).
27. The resignations of Douglas and several other prominent legal realists were prompted by the appointment of Young B. Smith rather than Herman Oliphant as Dean of Columbia Law School. Robert Hutchins, who was then the Dean of Yale Law School, took the opportunity to lure Douglas and Underhill Moore to Yale. The best account of these events is KALMAN, supra note 17, at 68-78.
28. Douglas's SEC career is described in more detail in Part I.A., infra. 21 The most plausible alternative would probably be Lynn LoPucki, who has written widely on corporate and personal bankruptcy and conducted an influential study of large corporate reorganizations with William Whitford. See, e.g., Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993).
29. Another leading progressive, Jay Westbrook, is a frequent co-author with Warren and therefore also figures prominently in this essay. Moving beyond mainstream progressive bankruptcy scholarship, the most prominent feminist (and communitarian) has been Karen Gross, see KAREN GROSS, FAILURE AND FORGIVENESS: REBALANCING THE BANKRUPTCY SYSTEM (1997),
30. and David Carlson at times has brought aspects of postmodernism to bear on bankruptcy theory, see, e.g., David G. Carlson, Philosophy in Bankruptcy, 85 MICH. L. REV. 1341, 1389 (1989)
31. (reviewing THOMAS JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986)) ("The whole idea of finding a deep structure in a complicated, historical artifact such as the Bankruptcy Code was doomed from the start.").
32. Steven L. Winter, The Cognitive Dimension of the Agon Between Legal Power and Narrative Meaning, 87 MICH. L. REV. 2225, 2226 (1989). The midrashes are a group of Jewish commentaries speculating about aspects of the Hebrew Scriptures. The Biblical account of Abraham occurs in the book of Genesis.
33. For an influential recent analysis of this approach, see Thomas C. Grey, Langdell's Orthodoxy, 45 U. PITT. L. REV. 1, 11 (1983).
34. WILLIAM O. DOUGLAS, DEMOCRACY AND FINANCE 280 (1940)
35. (quoted with approval in Jerome Frank, Democracy and Finance, 54 HARV. L. REV. 905, 908 (1941) (book review)).
36. Act of July 1, 1898, ch. 541, 30 Stat. 544 (1899). For a detailed account of the political origins of the 1898 Act and the reasons that it survived, see David A. Skeel, Jr., The Genius of the 1898 Bankruptcy Act, 15 BANKR. DEV. J. 321 (1999). Provisions of the current Bankruptcy Code, Act of Nov. 6, 1978, Pub. L. No. 95-598, 92 Stat. 2549 (codified as amended at 11 U.S.C. §§ 101-1330 (1994)), which was enacted in 1978, will be cited hereafter as sections of the "Bankruptcy Code." Provisions of the Bankruptcy Act of 1898 will be cited as sections of the "Bankruptcy Act."
37. In addition to exemptions and the discharge, a third crucial feature of personal bankruptcy was and is the trustee's preference powers. To prevent some creditors from enjoying special treatment, bankruptcy's preference provisions permit the trustee to retrieve payments and other transfers made to creditors shortly before bankruptcy. See Bankruptcy Act § 60.
38. See Bankruptcy Act § 12.
39. The composition provision also required that the debtor make its priority payments in cash at the time the reorganization was confirmed. See H.R. REP. NO. 75-1409, at 48-49 (1937). Small corporations found satisfying this requirement difficult.
40. The emergence of the equity receivership procedure to reorganize the nation's first large corporations that failed, the railroads, is one of the great stories of American legal ingenuity. I have described the history in detail elsewhere. See David A. Skeel, Jr., An Evolutionary Theory of Corporate Law and Corporate Bankruptcy, 51 VAND. L. REV. 1325, 1353-58 (1998).
41. For an extensive overview of the receivership process by a leader of the reorganization bar, see Paul D. Cravath, The Reorganization of Corporations: Bondholders' and Stockholders' Protective Committees; Reorganization Committees; and the Voluntary Recapitalization of Corporations, in SOME LEGAL PHASES OF CORPORATE FINANCING, REORGANIZATION AND REGULATION 153 (1917).
42. In theory, anyone could form a stockholder or bondholder committee. Although outsiders sometimes established competing committees, the underwriter for the securities had an enormous advantage because it already had a list of all the investors.
43. For an extensive history of legal realist empiricism and an excellent, often critical discussion of Douglas's bankruptcy study, see John Henry Schlegel, American Legal Realism and Empirical Social Science: From the Yale Experience, 28 BUFF. L. REV. 459 (1979).
44. William Clark, William O. Douglas & Dorothy S. Thomas, The Business Failures Project - A Problem in Methodology, 39 YALE L.J. 1013, 1013 (1930).
45. William Clark, William O. Douglas & Dorothy S. Thomas, The Business Failures Project - A Problem in Methodology, YALE L.J. 39 1013, 1013 (1930). Id.
46. William Clark, William O. Douglas & Dorothy S. Thomas, The Business Failures Project - A Problem in Methodology, YALE L.J. 39 1013, 1013 (1930). Id.
47. The articles that emerged from this project include Clark, Douglas & Thomas, supra note
48. 33; William O. Douglas & Dorothy S. Thomas, The Business Failures Project - II. An Analysis of Methods of Investigation, 40 YALE L.J. 1034 (1931);
49. William O. Douglas & J. Howard Marshall, A Factual Study of Bankruptcy Administration and Some Suggestions, 32 COLUM. L. REV. 25 (1932);
50. William O. Douglas, Some Functional Aspects of Bankruptcy, 41 YALE L.J. 329 (1932)
51. [hereinafter Douglas, Some Functional Aspects];
52. and William O. Douglas, Wage Earner Bankruptcies - State vs. Federal Control, 42 YALE L.J. 591 (1933)
53. [hereinafter Douglas, Wage Earner Bankruptcies].
54. As this overview suggests, the study was enormously detailed and thus rather intrusive for the debtors involved (who were under substantial pressure to respond because the study bore the imprimatur of the judge). Douglas's biographer suggests that the methods "would have been onerous to the future Justice Douglas, who defined the constitutional right of privacy." SIMON, supra note 19, at 113
55. For an argument that Douglas's theoretical conclusions were only loosely tied to his empirical findings, see Schlegel, supra note 32, at 530-31. Schlegel argues that Douglas and other early legal realists faced a tension between their commitment to empiricism and their desire to achieve immediate social reform. On this view, Douglas abandoned his empiricism in order to pursue social change.
56. William O. Douglas, Bankruptcy, in ENCYCLOPAEDIA OF THE SOCIAL SCIENCES 449, 453 (Edwin R.A. Seligman ed., 1937).
57. See, e.g., Douglas, Some Functional Aspects, supra note 36, at 338-39.
58. See id. at 343 (automobile judgments); id. at 346-47 (speculation and gambling). Douglas included stock speculation within his definition of inappropriate risk taking.
59. Id. at 347.
60. See id. at 332-33 ("Exemplary of an administrative flexibility, lacking in our system, are the following discharge provisions of the Bankruptcy Act of England . . . ."); Douglas & Marshall, supra note 36, at 35-37.
61. This percentage is determined from statistics quoted by Douglas. See Douglas, Some Functional Aspects, supra note 36, at 334.
62. The English approach dates back to 1883 and continues to characterize English bankruptcy law today. For a more recent discussion of England's discretionary discharge, see Douglas G. Boshkoff, Limited, Conditional, and Suspended Discharges in Anglo-American Bankruptcy Proceedings, 131 U. PA. L. REV. 69 (1982).
63. See Douglas, Some Functional Aspects, supra note 36, at 363-64
64. (summarizing proposals for discretionary discharge). In contrast to his faith that a court or administrator could impose appropriate conditions on a debtor's discharge, Douglas was less sanguine about rehabilitation plans proposed by the debtors themselves. Douglas worried that "wage earners may well be under pressure of creditors to [propose a rehabilitation plan rather than seek an immediate discharge]; and [debtors'] excessive optimism may well lead to attempts to do so." Douglas, Wage Earner Bankruptcies, supra note 36, at 631.
65. Douglas had previously been sympathetic to wage earner plans, see Douglas & Marshall, supra note 36, at 49-36 (recommending that wage earner plans be allowed as long as they were strictly voluntary), but he apparently had become more skeptical by 1933, when Wage Earner Bankruptcies was published.
66. Bankruptcy judges were called "referees" until 1973. For simplicity, I will refer to them as "judges" throughout the essay.
67. William O. Douglas, The Hastings Bill and Lessons Learned from the Bankruptcy Studies, 7 J. NAT'L ASS'N REF. BANKR. 25, 25 (1932).
68. The bill - called the "Hastings Bill" - was inspired by the Donovan Report, William J. Donovan, Report of Counsel to the Petitioners, In re Inquiry into the Administration of Bankrupts' Estates (S.D.N.Y. 1930), reprinted in ASS'N OF THE BAR OF THE CITY OF N.Y., IN RE ADMINISTRATION OF BANKRUPT ESTATES (1930), and the Thacher Report, S. DOC. NO. 72-65 (1932), which called for sweeping bankruptcy reform after investigations of existing practice. Douglas participated in the Donovan and Thacher investigations, and both made use of his bankruptcy studies.
69. See Douglas, supra note 47, at 25-26. In addition to defending the proposed shift to an administrative approach, Douglas suggested an even more radical experiment: "Why not abolish this terrifying Federal beaurocracy [sic] [that is, the proposed administrative agency] and return the power [to regulate bankruptcy] to the states?" Id. at 27. Douglas defended his provocative proposal to let the states regulate personal bankruptcy - a proposal that deserves far more attention than it has been given by subsequent scholars - at length in an article he published the same year. See Douglas, Wage Earner Bankruptcies, supra note 36.
70. Douglas, supra note 47, at 26.
71. Congress codified railroad receivership and provided for small debtor and farmer rehabilitation plans in 1933, and codified corporate reorganization (that is, receiverships of large, nonrailroad firms) in 1934. The most important effect of the 1933 and 1934 reforms was to include large-scale corporate and railroad reorganization within the Bankruptcy Act for the first time. For a description and political analysis of these reforms, see Skeel, supra note 30, at 1362-68.
72. See William O. Douglas, Protective Committees in Railroad Reorganizations, 47 HARV. L. REV. 565 (1934).
73. Douglas had also conducted a small, earlier study of equity receiverships in Connecticut. See William O. Douglas & John H. Weir, Equity Receiverships in the United States District Court for Connecticut: 1920-1929, 4 CONN. B. J. 1 (1930).
74. Interestingly, the firms in Douglas's Connecticut study were mid-sized rather than truly large scale, and his study reflected much less hostility than his subsequent work on corporate reorganization would. Throughout this period, Douglas had written a series of important articles on corporate and securities law. See, e.g., William O. Douglas & George E. Bates, Some Effects of the Securities Act upon Investment Banking, 1 U. CHI. L. REV. 283 (1933);
75. William O. Douglas, A Functional Approach to the Law of Business Associations, 23 ILL. L. REV. 673 (1929).
76. See Max Lowenthal, The Railroad Reorganization Act, 47 HARV. L. REV. 18 (1933).
77. See Securities Exchange Act of 1934, Pub. L. No. 73-291, § 211, 48 Stat. 881, 909 (codified at is U.S.C. § 78 (1994)).
78. See SIMON, supra note 19, at 135; James Allen, Introduction, in DOUGLAS, supra note 25, at x (quoting TIME, Oct. 11, 1937).
79. The report, SECURITIES AND EXCH. COMM'N, REPORT ON THE STUDY AND INVESTIGATION OF THE WORK, ACTIVITIES, PERSONNEL AND FUNCTIONS OF PROTECTIVE AND REORGANIZATION COMMITTEES (1936-1940) [hereinafter SEC REPORT], ultimately grew to eight volumes. Douglas later speculated that Vern Countryman was the only person outside the SEC who ever read the entire report. See SIMON, supra note 19, at 149 (noting that even Countryman did not read the report "for bedtime reading but to prepare for his judicial clerkship with Douglas").
80. As Douglas began the study, Fortas was already working for Douglas's friend Jerome Frank at the Agricultural Adjustment Administration. As recounted by Douglas's biographer, "[w]hat soon transpired was an extraordinary exchange of letters between Douglas and Frank, in which Douglas, with an impressive combination of audacity, good humor and persistence, wrenched Fortas away from his protesting employer." SIMON, supra note 19, at 141.
81. Concerning bankers and managers, the report complained: Managements and bankers seek perpetuation of [their] control for the business patronage it commands, which they may take for themselves or allot to others, as they will. They seek, also, to perpetuate that control in order to stifle careful scrutiny of the past history of the corporation. Thereby, claims based on fraud or mismanagement are stilled . . . . Id. at 863.
82. Concerning reorganization lawyers, the report stated: [C]ounsel fees frequently constitute the largest single item on the list of reorganization fees. . . . The vice is that the bar has been charging all that the traffic will bear. It has forsaken the tradition that its members are officers of the court and should request and expect only modest fees. SEC REPORT, supra note 56, at 867.
83. Progressive scholars had been raising these complaints for years by the time Douglas and his staff completed the SEC Report. Most prominently, Max Lowenthal wrote a book-length exposé of the reorganization of the Chicago, Milwaukee & St. Paul Railroad (the "St. Paul") that decried the domination of the process by the Wall Street bankers and bar. See MAX LOWENTHAL, THE INVESTOR PAYS (1933). Interestingly, Douglas himself had worked extensively on the St. Paul case during his brief career as a practicing lawyer at Cravath, Swaine & Moore. See SIMON, supra note 19, at 84-85.
84. The mandatory trustee requirement was by far the most controversial of the SEC proposals. For a more detailed discussion of the proposals and the legislative history, see David A. Skeel, Jr., The Rise and Fall of the SEC in Bankruptcy (Nov. 9, 1999) (unpublished manuscript, on file with the author).
85. Under the SEC proposals (and, after their enactment in the Chandler Act amendments of 1938, under the Bankruptcy Act), both the trustee and the trustee's attorney were required to be "disinterested." Amendments to the Bankruptcy Act of 1898, Act of June 22, 1938, ch. 575, § 156, 52 Stat. 840, 888 (trustee); id. at § 157, 52 Stat at 888 (trustee's attorney). "Disinterested" was defined explicitly to exclude any underwriter of outstanding securities, and any attorney for the debtor or its banks. See id. at § 158, 52 Stat. at 888.
86. See id. at § 176, 52 Stat. at 891.
87. DOUGLAS, supra note 25, at 233. During the SEC investigation, Douglas interrogated all of the most prominent reorganization lawyers. In his often apocryphal autobiography, Douglas claimed that after he finished deposing Robert Swaine, his former boss at Cravath, Swaine marveled that Douglas "stood me on my head and shook all of the fillings out of my teeth." WILLIAM O. DOUGLAS, GO EAST YOUNG MAN: THE EARLY YEARS 260 (1974) [hereinafter, DOUGLAS, GO EAST].
88. Letter from Abe Fortas to William O. Douglas (May 20, 1937) (on file with the Library of Congress, Douglas Papers, Container No. 6).
89. By late 1937 Douglas had become Chairman of the SEC and had launched a stunningly successful effort to reorganize the New York Stock Exchange to better serve investors' interests. He also had become a close advisor to President Roosevelt by this time. See SIMON, supra note 19, at 168-75. These developments obviously did not hurt his influence in the bankruptcy reform process.
90. Act of June 22, 1938, ch. 575, 52 Stat. 840, repealed by Pub. L. No. 95-598, 92 Stat. 2549, 2682 (1978). Prior to the SEC's involvement, the Chandler Bill had consisted of extensive changes proposed by the National Bankruptcy Conference (NBC), an organization that included the leading members of the bankruptcy bar. The SEC dramatically intervened in late 1936, proposing an entirely new set of provisions for the reorganization of large corporations. The Chandler Act reflected a tense alliance between the SEC and the NBC, with the SEC dictating the terms of large corporate reorganizations ("Chapter X") and the NBC influencing the remainder of the Act. For a more detailed discussion, see Skeel, supra note 30, at 1368-72.
91. See Wesley A. Sturges, A Proposed State Collection Act, 43 YALE L.J. 1055 (1934);
92. Wesley A. Sturges & Don E. Cooper, Credit Administration and Wage Earner Bankruptcies, 42 YALE L.J. 487 (1933).
93. Although he thought that Sturges's proposal had limitations, Vern Countryman later discussed it with obvious approval. See Vern Countryman, Improvident Credit Extension: A New Legal Concept Aborning?, 27 ME. L. REV. 1, 6-8 (1975).
94. For a good overview of this debate, see ARTHUR M. SCHLESINGER, JR., THE CRISIS OF THE OLD ORDER: 1919-1933, at 398-405 (1957).
95. Brandeis's views were best known from his famous book excoriating the "Money Trust." LOUIS D. BRANDEIS, OTHER PEOPLE'S MONEY 5 (1914).
96. See SCHLESINGER, supra note 69, at 399-405.
97. Commenting on Douglas's suggestion in his railroad reorganization article that the parties rather than a government agency should develop the terms of reorganization, Frank responded: I am not thoroughly convinced that the technique you advocate is the best one. If the [Interstate Commerce] Commission has too many duties to permit it to undertake, on its own, the formation of a Plan, then it seems to me some agency or agencies should be set up with all the powers that you advocate. Letter from Jerome Frank to William O. Douglas (Jan. 19, 1934) (on file with the Library of Congress, Douglas Papers, Container No. 6).
98. See Consolidated Rock Prods. Co. v. DuBois, 312 U.S. 510, 527 (1941); Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 119 (1939).
99. For a detailed discussion of the absolute priority rule and its history, highlighting the roles of Douglas, Jerome Frank, and Robert Swaine, see Douglas Baird & Robert K. Rasmussen, Boyd's Legacy and Blackstone's Ghost (Dec. 10, 1999) (unpublished manuscript, on file with the Harvard Law Review).
100. See Robert T. Swaine, Reorganization of Corporations: Certain Developments of the Last Decade, 27 COLUM. L. REV. 901, 911-23 (1927). Among other things, flexible priority rules, which became known as "relative priority," permitted shareholders to participate rather than have their interests cut off in favor of higher priority creditors. Shareholders often were an important source of new capital, and because the firm's managers often held stock, relative priority also gave them an incentive to facilitate the reorganization process rather than to resist it.
101. See Frank, Some Realistic Reflections, supra note 18, at 566-69.
102. The collusion could take a variety of forms. Senior creditors might agree to a restructuring pursuant to which the old shareholders acquire the firm at the foreclosure sale in return for a cash contribution, but junior creditors receive neither the right to contribute nor any payment. The risk to junior creditors was magnified by the artificial nature of the sale. Because outside bidders rarely appeared, managers and senior creditors had significant flexibility in valuing the firm's assets. See Baird & Rasmussen, supra note 74, at 14-17; Frank, Some Realistic Reflections, supra note 18, at 553-55.
103. The amendments required that a reorganization plan be "fair and equitable." Chandler Act of 1938, ch. 575, § 221(2), 52 Stat. 840, 897 (codified as amended at 11 U.S.C. § 1129(b)(1) (1994)). Douglas treated this language as a shorthand reference to the absolute priority rule.
104. The progressives were not the only scholars writing about bankruptcy law, of course. Other scholars, the most prominent of whom was James McLaughlin of Harvard, wrote in the doctrinalist tradition. Along with a small group of bankruptcy lawyers and academics, McLaughlin helped to found the National Bankruptcy Conference in 1932. He was the leading doctrinal scholar, and a fixture at congressional hearings on bankruptcy from the 1920s to the 1960s. For an illustrative early article, see James A. McLaughlin, Amendment of the Bankruptcy Act, 40 HARV. L. REV. 341 (1927). Although the interests of these scholars and Douglas's SEC intersected briefly in their combined efforts to promote bankruptcy reform in 1938, the progressives and doctrinalists otherwise had little in common. The doctrinalists were traditional and conservative, whereas the progressives took a passionate interest in experimentation and change.
105. Elizabeth Warren & Jay Lawrence Westbrook, Searching for Reorganization Realities, 72 WASH. U. L.Q. 1257, 1258 (1994).
106. In addition to the distinctions that I note in the text, Warren can be seen as populist in orientation, whereas Douglas's views have more in common with the Progressive movement
107. TERESA A. SULLIVAN, ELIZABETH WARREN & JAY LAWRENCE WESTBROOK, AS WE FORGIVE OUR DEBTORS: BANKRUPTCY AND CONSUMER CREDIT IN AMERICA (1989).
108. DAVID T. STANLEY & MARJORIE GIRTH, BANKRUPTCY: PROBLEM, PROCESS, REFORM (1971).
109. SULLIVAN, WARREN & WESTBROOK, supra note 82, at 17. For a detailed description of the study and its methodology, see id. at 17-19. Unlike Douglas, Warren and her co-authors relied for their study on filing data rather than on interviews with debtors.
110. See id. at 17-18.
111. See id. at 65.
112. See id. at 84-105.
113. See id. at 208. Congress added the second option, which was traditionally known as a "wage earner plan," in 1938. For a description of this development, see H.R. REP. NO. 75-1409, at 52-55 (1937). Although this approach delays a debtor's discharge, lawmakers believed it would reduce the stigma of bankruptcy. If debtors committed to continue paying for several more years, lawmakers reasoned, they and their creditors would be less likely to view bankruptcy as abandoning their obligations. To reinforce this perception, debtors who sought an immediate discharge were referred to as "bankrupts" until 1978, whereas those who proposed a rehabilitation plan were called "debtors."
114. For a brief, condemnatory overview of the creditor groups' position, see Vern Countryman, Bankruptcy and the Individual Debtor - And a Modest Proposal to Return to the Seventeenth Century, 32 CATH. U. L. REV. 809, 821-26 (1983).
115. See SULLIVAN, WARREN & WESTBROOK, supra note 82, at 220-23.
116. In an earlier article, Warren and her co-authors subjected the study (known as the "Purdue Study," based on the university affiliation of its authors) to withering scrutiny. See Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, Limiting Access to Bankruptcy Discharge: An Analysis of the Creditors' Data, 1983 WIS. L. REV. 1091. They concluded: The Study lacks crucial expertise, is designed incorrectly, asks a series of inartful questions, gathers its data improperly, misanalyses the statistical data and draws erroneous and biased inferences from the data analysis. Moreover, error after error increases the count of the debtors who "could pay" and the amount of the debt that could be recovered . . . . Id. at 1145.
117. The theory was that if Congress diminished debtors' exemptions, debtors would be unable to protect their property and still receive an immediate discharge. If the exemptions were too small to protect important property, and debtors wanted to keep the property, they would need to file under Chapter 13. In Chapter 13, debtors could propose a rehabilitation plan that promised ongoing payments to creditors while permitting the debtors to keep their property. In Chapter 7, on the other hand, nonexempt property would be sold and the proceeds distributed to creditors. For a general discussion of exemptions, see p. 1082.
118. Elizabeth Warren, Reducing Bankruptcy Protection for Consumers: A Response, 72 GEO. L.J. 1333, 1343 (1984).
119. See id. at 1344-45 (citing evidence that a disproportionate percentage of debtors in Texas choose Chapter 13, despite high exemptions, and that lower exemptions do not decrease bankruptcy filings); see also SULLIVAN, WARREN & WESTBROOK, supra note 82, at 19-20 (suggesting that the authors' data cast doubt on the assumption in the 1984 amendments to the Bankruptcy Code that altering the statute would influence debtors' filing decisions).
120. See SULLIVAN, WARREN & WESTBROOK, supra note 82, at 339-41 (summarizing conclusions). Warren and her co-authors have revisited their findings in a new study. Their preliminary analysis confirms the general conclusions of As We Forgive Our Debtors. See Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, Consumer Debtors Ten Years Later: A Financial Comparison of Consumer Bankrupts 1981-1991, 68 AM. BANKR. L.J. 121, 125 (1994).
121. Elizabeth Warren, Bankruptcy Policymaking in an Imperfect World, 92 MICH. L. REV. 336, 378 (1993) (focusing on corporate bankruptcy).
122. As described above, the drafter and principal advocate for these provisions was William Douglas himself. See supra pp. 1088-91.
123. See supra p. 1092.
124. See id.
125. To avoid these strictures, an increasing number of large firms attempted to file for bankruptcy under Chapter XI, the provisions designed for smaller debtors. The SEC tried, but ultimately failed, to prevent this practice. For a discussion and political explanation of the demise of the SEC in bankruptcy, see Skeel, supra note 61.
126. See 11 U.S.C. § 1107 (1994) (vesting authority in "debtor in possession"); 11 U.S.C. § 1121 (1994) (providing a 120-day exclusivity period).
127. See 11 U.S.C. § 1129(b) (1994) (applying the absolute priority rule only if the class dissents).
128. See KEVIN H. DELANEY, STRATEGIC BANKRUPTCY: How CORPORATIONS AND THEIR CREDITORS USE CHAPTER II TO THEIR ADVANTAGE 2-3 (1992).
129. See id. at 1-2.
130. See id. at 3.
131. See, e.g., RICHARD B. SOBOL, BENDING THE LAW: THE STORY OF THE DALKON SHIELD BANKRUPTCY 337, 339-40 (1991) (describing and criticizing the treatment of Dalkon Shield victims in the A.H. Robins bankruptcy).
132. For a scathing account of this process - and the burden of lawyers' fees and other costs - by the manager of a firm that filed for bankruptcy, see SOL STEIN, A FEAST FOR LAWYERS (1989).
133. See Lynn M. LoPucki, The Trouble with Chapter 11, 1993 WIS. L. REV. 729, 747-49.
134. See Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043 (1992).
135. See id. at 1049, 1067-72.
136. See id. at 1050, 1078-88. In the wake of the Bradley and Rosenzweig article, law and economics scholars proposed a variety of other alternatives to Chapter n. See, e.g., Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311, 312, 323-33 (1993)
137. (arguing for a stock cancellation proposal similar to Bradley's and Rosenzweig's proposal); Robert K. Rasmussen, Debtor's Choice: A Menu Approach to Corporate Bankruptcy, 71 TEX. L. REV. 51, 100-21 (1992) (proposing a "menu" approach allowing debtors to select from a variety of bankruptcy options).
138. See Wade Lambert & Milo Geyelin, Bankruptcy Lawyers Dispute Call for Scrapping Chapter 11 Process, WALL ST. J., Mar. 19, 1992, at B5.
139. See Elizabeth Warren, The Untenable Case for Repeal of Chapter 11, 102 YALE L.J. 437, 439-79 (1992).
140. Lynn LoPucki was equally dismissive. See Lynn M. LoPucki, Strange Visions in a Strange World: A Reply to Professors Bradley and Rosenzweig, 91 MICH. L. REV. 79, 81-110 (1992).
141. See Elizabeth Warren, Bankruptcy Policy, 54 U. CHI. L. REV. 775, 787 (1987)
142. (listing Continental as one of "a host of . . . bankruptcy success stories"). Although Warren acknowledges critics' concerns about Chapter II, she argues that outcomes would be far worse in the absence of the reorganization provisions. See Elizabeth Warren, Bankruptcy Is a Better Alternative, NAT'L L.J., Apr. 20, 1992, at 15
143. [hereinafter, Warren, Better Alternative].
144. In an exchange with law and economics scholar Douglas Baird, Warren repeatedly criticized Baird's effort to bracket distributional considerations: "Baird cannot assert that he is offering no distributional scheme . . . . Any scheme distributes, whether Baird chooses to discuss it or not" Warren, Bankruptcy Policy, supra note 114, at 808.
145. Warren argues that the bankruptcy system as a whole is designed to address four separate, though interrelated, goals: maximizing the value of the troubled firm, distributing value (by taking distributional concerns into account), internalizing the costs of failure, and encouraging debtors and their managers to initiate bankruptcy, rather than relying on governmental officials to do so. See Warren, supra note 96, at 344-73. In Warren's view, the more manager-friendly confines of Chapter II advance both the first and fourth of these goals. See id. at 372.
146. See supra pp. 1087, 1090.
147. See Swaine, supra note 75, at 907.
148. Other prominent progressives, such as Lynn LoPucki and Karen Gross, have also established (or maintained) close ties to the bankruptcy bar.
149. Warren has served as a member of the executive committee and as a chair of the new members committee. See E-Mail Correspondence from Professor Douglas Baird, University of Chicago Law School, to David Skeel (Feb. 9, 2000) (on file with the author); see also Telephone Interview with Gerald Smith, Lewis & Roca, Phoenix, Ariz. (Feb. 8, 2000) (noting Warren's influence).
150. Depending on how one counts (and what one includes), this Commission, which issued its report in October 1997, was the fourth major governmental study of bankruptcy in this century. The four studies are: 1) the Donovan and Thacher reports of the early 1930s, which investigated abuses in bankruptcy administration, see supra note 48; 2) the SEC "protective committee" study headed by William Douglas, see supra pp. 1088-89; 3) a report by the National Bankruptcy Commission of 1973, which proposed the sweeping overhaul of U.S. bankruptcy law that eventually led to the enactment of the 1978 Code, see COMMISSION ON THE BANKR. LAWS OF THE UNITED STATES, REPORT, H.R. DOC. NO. 93-137, (1973) [hereinafter 1973 COMMISSION REPORT]; and 4) a report by the National Bankruptcy Review Commission of 1997, see NAT'L BANKR. REVIEW COMM'N, BANKRUPTCY: THE NEXT TWENTY YEARS (1997),
151. available at National Bankruptcy Review Commission (visited Jan. 24, 2000) 〈http://www.nbrc.gov/report-cont.html〉 [hereinafter 1997 COMMISSION REPORT].
152. See 1997 COMMISSION REPORT, supra note 121, ch. 1, at 89-91 (criticizing "means testing" proposals that would require more debtors to use Chapter 13 and concluding that the Commission's "proposals contemplate no change in the basic structure of consumer bankruptcy"). Warren explains the Commission's views and defends the immediate discharge against criticism by the consumer credit industry in several articles published since the 1997 Commission Report was released. See Elizabeth Warren, The Bankruptcy Crisis, 73 IND. L.J. 1080 (1998)
153. (analyzing and answering studies on bankruptcy sponsored by the consumer credit industry); Elizabeth Warren, A Principled Approach to Consumer Bankruptcy, 71 AM. BANKR. L.J. 483 (1997)
154. (discussing the process that influenced the Commission's recommendations about the consumer bankruptcy system) [hereinafter Warren, A Principled Approach].
155. See Katharine Q. Seelye, First Lady in a Messy Fight On the Eve of Her Campaign, N.Y. TIMES, June 27, 1999, at AI ("In the spring of 1998, Mrs. Clinton sought a private tutorial in bankruptcy law from a Harvard Law professor, Elizabeth Warren, who has strongly opposed the legislation.").
156. Douglas and the early progressives believed that the practice of pre-bankruptcy solicitation magnified the influence of the Wall Street bankers and lawyers, because it allowed them to take advantage of the limited information and influence of scattered investors. As noted earlier, the Chandler Act addressed this concern by prohibiting the parties from soliciting the approval of banks and lawyers until after the court had given its blessing to the reorganization plan in question. See Pub. L. No. 95-598, 92 Stat. 2682 (repealed 1978). The 1978 Code expressly authorizes pre-bankruptcy solicitations. See 11 U.S.C. § 1126 (1994).
157. See Memorandum from Jay M. Goffman, Skadden, Arps, Slate, Meagher & Flom to Elizabeth Warren, Proposed Amendments to Bankruptcy Code and Securities Laws Relating to Prepackaged Bankruptcy Cases 5-6 (June 12, 1997) (on file with the author).
158. See 1997 COMMISSION REPORT, supra note 121, ch. 2, at 589-95 (applying the rules of the Bankruptcy Code and waiving securities law disclosure requirements for solicitations made within 120 days prior to bankruptcy). The Commission's proposal to exempt prepackaged bankruptcy from the securities laws did not meet uniform approval. For example, it drew a concerned letter from Richard Walker, General Counsel of the SEC, who questioned whether the need to reduce costs and streamline bankruptcy "is a sufficient basis for the elimination of important securities law protections for public investors provided by Securities Act registration." Letter from Richard H. Walker, General Counsel, SEC, to National Bankruptcy Review Commission (Oct. 1, 1997) (on file with the author).
159. Others may remember the game as "Rumors," "Operator," or "Telephone."
160. See Letter from Judson F. Falknor, Dean, University of Washington School of Law, to Justice William O. Douglas (June 18, 1942) (on file with the Library of Congress, Douglas Papers, Container No. 1118). Attached to the letter is a copy of Countryman's law school transcript.
161. Id.
162. Douglas's biographer reports that Douglas "had been hired as an all-purpose handyman at Falkenberg's Jewelry Store" prior to his freshman year at Whitman College in Walla Walla, Washington. "He had also signed on as an early-morning janitor in a candy store and as a dinner-hour waiter in a hash house." SIMON, supra note 19, at 48. For Douglas's own account of his crowded college schedule, see DOUGLAS, GO EAST, supra note 64, at 97-98.
163. Two of the most important were Douglas's decisions defining the absolute priority rule. See Consolidated Rock Prods. Co. v. Du Bois, 312 U.S. 510 (1941); Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106 (1939); supra p. 1092.
164. After the clerkship and his time in the Army, and before leaving for Yale Law School in 1947, Countryman taught for a year at the University of Washington School of Law. See ASSOCIATION OF AMERICAN LAW SCHOOLS, THE AALS DIRECTORY OF LAW TEACHERS: 1998-99, at 360 (1998) (containing biographical data for Countryman).
165. Douglas wrote to Wesley Sturges, a close friend and by this time the dean of Yale Law School: [Countryman] is a first-rate man in every respect. He did excellent work for me. And I would rate him as high as any law clerk I have known at the Court. . . . He has a very superior mind, great capacity for work, imagination, creative ability, and resourcefulness. He is an unusually gifted person. Letter from Justice William O. Douglas to Wesley A. Sturges, Dean, Yale Law School (May 3, 1946) (on file with the Library of Congress, Douglas Papers, Container No. 1118).
166. For a fascinating account of the loyalty cases from the perspective of Abe Fortas and the Washington law firm now called Arnold & Porter, which was one of the few law firms willing to represent loyalty case defendants, see LAURA KALMAN, ABE FORTAS: A BIOGRAPHY 125-51 (1990).
167. See sources cited cited above in note 9. For a description of Countryman's role, and of the Yale tenure fight described in the text below, see KALMAN, cited above in note 17, at 196-200.
168. See Dennis v. United States, 341 U.S. 494, 581-92 (1951) (Douglas, J., dissenting).
169. See KALMAN, supra note 17, at 197.
170. Letter from Justice William O. Douglas to Dr. Alfred Whitney Griswold, President, Yale University (Jan. 26, 1953) (on file with the Library of Congress, Douglas Papers, Container No. 1118).
171. Letter from Justice William O. Douglas to Harry Shulman, Dean, Yale Law School (Jan. 27, 1955) (on file with the Library of Congress, Douglas Papers, Container No. 1118).
172. See KALMAN, supra note 17, at 198-99.
173. Harvard's reputation dated back to the rise of legal realism and the attack on Langdellian legal science in Douglas's era, and included often bitter attacks by Yale professors on Harvard Law School, and vice versa. See KALMAN, supra note 17, at 23-29.
174. Letter from Vern Countryman to Justice William O. Douglas (undated) (on file with the Library of Congress, Douglas Papers, Container No. 1118).
175. Letter from Justice William O. Douglas to Vern Countryman (Jan. 14, 1964) (on file with the Library of Congress, Douglas Papers, Container No. 1118).
176. See DOUGLAS OF THE SUPREME COURT: A SELECTION OF HIS OPINIONS (Vern Countryman ed., 1959).
177. Countryman's articles on Douglas include Vern Countryman, Scholarship and Common Sense, 93 HARV. L. REV. 1407 (1980)
178. [hereinafter, Countryman, Common Sense];
179. Vern Countryman, Search and Seizure in a Shambles? Recasting Fourth Amendment Law in the Mold of Justice Douglas, 64 IOWA L. REV. 435 (1979);
180. Vern Countryman, Justice Douglas and Freedom of Expression, 1978 U. ILL. L.F. 301 (1978);
181. Vern Countryman, The Contribution of the Douglas Dissents, 10 GA. L. REV. 331 (1976);
182. Vern Countryman, Business Regulation, 74 COLUM. L. REV. 366 (1974),
183. one of a group of articles in tribute to Justice Douglas; Vern Countryman, Justice Douglas: Expositor of the Bankruptcy Law, 16 UCLA L. REV. 773 (1969);
184. and Vern Countryman, The Constitution and Job Discrimination, 39 WASH. L. REV. 74 (1964).
185. See VERN COUNTRYMAN & JAMES WILLIAM MOORE, DEBTORS' AND CREDITORS' RIGHTS: CASES AND MATERIALS (1951);
186. see also KALMAN, supra note 17, at 189 (describing Countryman's casebook as squarely within the legal realist tradition). Countryman also co-authored a casebook on lawyers and legal ethics. VERN COUNTRYMAN & TED FINMAN, THE LAWYER IN MODERN SOCIETY (1966).
187. The strongest justification for discharging an individual's obligations - to give her a "fresh start" that relieves her of her burden of debt and motivates her to try starting anew - applies much less powerfully to a corporate debtor because corporations are artificial entities that do not need to be preserved if they are financially unviable.
188. Telephone Interview with Gerald Smith, Lewis & Roca, Phoenix, Ariz. (Aug. 9, 1999).
189. See Telephone Interview with Professor Lawrence King, New York University School of Law (July 20, 1999).
190. Countryman, Common Sense, supra note 144, at 1407.
191. Countryman, Common Sense, Id. (quoting Schneider v. Smith, 390 U.S. 17, 25 (1968) (Douglas, J., dissenting)) (internal quotation marks omitted).
192. Countryman may have been even more committed to civil liberties than was Douglas. In an interview many years after his clerkship with Douglas, Countryman recounted their passionate arguments on the first Japanese internment case. Countryman insisted that internment violated Japanese-American citizens' First Amendment rights, but Douglas voted with the Supreme Court majority to uphold the wartime measure. See SIMON, supra note 19, at 242-43 (describing Countryman's and Douglas's arguments about Hirabayashi v. United States, 320 U.S. 81 (1943)).
193. See, e.g., Countryman, supra note 68, at 1 (citing FED. RESERVE BULL. A52, A54 (Dec. 1970)); id. at A44, A47 (July 1974)). At the same time, personal bankruptcy filings also expanded dramatically, from 11,051 in 1943 to 97,750 in 1960 and to 178,202 in 1970. See STANLEY & GIRTH, supra note 83, at 25 tbl.3-1.
194. Nationally, the consumer advocacy movement was often associated with Ralph Nader and his allies. Consumer advocates scored important victories in commercial law with the enactment of such legislation as the Consumer Credit Protection Act of 1968, Pub. L. No. 90-321, 82 Stat. 146 (codified as amended at 15 U.S.C. §§ 1601-1693r (Supp. IV 1998)), and state provisions based on the Uniform Consumer Credit Code promulgated by the National Conference of Commissioners on Uniform State Laws in 1974, UNIF. CONSUMER CREDIT CODE, 7A U.L.A. 1 (1974).
195. Indeed, Bill Whitford has suggested that personal bankruptcy has become one of the few remaining strongholds of individualized justice for consumers, given the trend toward class-action consumer litigation. See William C. Whitford, The Ideal of Individualized Justice: Consumer Bankruptcy as Consumer Protection, and Consumer Protection in Consumer Bankruptcy, 68 AM. BANKR. L.J. 397, 402-03 (1994).
196. For a discussion of the Chandler Act, see note 67.
197. From 1939 to 1953, the numbers of Chapter X cases filed were as follows: 1939: 577 1944: 95 1949: 113 1940: 291 1945: 70 1950: 102 1941: 291 1946: 60 1951: 75 1942: 165 1947: 94 1952: 64 1943: 109 1948: 105 1953: 61 See Hearings on S. 235 and S. 236 Before the Subcomm. on Improvements in Judiciary Machinery of the Senate Comm. on the Judiciary, 94th Cong. 778 (1975) [hereinafter 1975-1976 Senate Hearings]. 157 Because filing for bankruptcy under Chapter X meant that managers of large firms would lose their jobs to an independent trustee, such managers avoided Chapter X for as long as possible. In later years, they increasingly sought to invoke the less onerous provisions of Chapter XI, which was designed for smaller firms. See Skeel, supra note 30, at 1341-42.
198. Letter from Vern Countryman to William Douglas (Nov. 15, 1972) (on file with the Library of Congress, Douglas Papers, Container No. 1118).
199. Countryman, supra note 68, at 1-7.
200. See id. at 9 ("This proposal [an earlier version of Countryman's ultimate proposal] was modeled on § 2-302 of the Uniform Commercial Code . . . ."). Under U.C.C. § 2-302, courts are authorized to invalidate "unconscionable" sales transactions. See U.C.C. § 2-302 (1997).
201. Countryman proposed that lawmakers define an "improvident credit extension" as "a contractual extension of credit to a debtor where it cannot reasonably be expected that the debtor can repay . . . in view of the circumstances of the debtor at the time credit was extended as these circumstances were known to the creditor or would have been revealed to him on reasonable inquiry prior to the credit extension." Countryman, supra note 68, at 23.
202. See 1973 COMMISSION REPORT, supra note 121, pt I, at 22 (noting that the proposed § 4-403(c) would disallow any "unconscionable consumer claim"). Countryman continued to advocate the provision throughout the lengthy legislative process that led to the 1978 Code. See, e.g., 1975-1976 Senate Hearings, supra note 156, at 1037 (statement of Vern Countryman) (arguing for disallowance of claims based on improvident credit extensions).
203. Prior to the 1970 amendment, Pub. L. No. 91-467, 84 Stat. 990 (1970), creditors often challenged debtors' bankruptcy discharges in state court, alleging that the creditors' claims should not be treated as discharged due to fraud by the debtors. Critics complained that the suits amounted to harassment, and many debtors could not afford to contest them. The 1970 amendment required that challenges to a debtor's discharge be brought in the bankruptcy court before the conclusion of the case. See id. at 992-93. For a background discussion of the amendment and its history, see Vern C. Countryman, The New Dischargeability Law, 45 AM. BANKR. L.J. 1 (1971).
204. See supra pp. 1086-87.
205. Countryman, supra note 89, at 821 (quoting Joint Hearing on S. 3863 Before Subcomms. of the House and Senate Judiciary Comms., 73d Cong. 546, 743 (1932)).
206. See Vern Countryman, The Bankruptcy Boom, 77 HARV. L. REV. 1452, 1460 (1964) (describing the voluntary wage earner plan in Chapter XIII - the predecessor to current Chapter 13 - as a "solution[] available under the Bankruptcy Act which [is] preferable, from the creditors' viewpoint, to a straight bankruptcy proceeding").
207. See Countryman, supra note 6 (discussing the role of executory contracts in both corporate and personal bankruptcy law); Vern Countryman, The Use of State Law in Bankruptcy Cases (pts. 1 & 2), 47 N.Y.U. L. REV. 407, 631 (1972) (arguing that Congress should override state law on various bankruptcy issues, rather than simply adhering to state law in bankruptcy).
208. See Smith, supra note 2, at 4.
209. The 1973 Commission proposed to retain the absolute priority rule, but to relax the valuation procedure by permitting plans that gave junior creditors an interest as long as there was a "reasonable basis for the valuation" and a "'reasonable probability' of fully compensating prior claims and interests." 1973 COMMISSION REPORT, supra note 121, pt. II, at 255 (explaining proposed § 7-303). As finally enacted, the 1978 Code went further, and waved off absolute priority altogether for any class that voted in favor of the plan. See supra p. 1097.
210. 1975-1976 Senate Hearings, supra note 156, at 1043. Interestingly, given the recent debate over the so-called new value exception to the absolute priority rule, Countryman also sharply criticized the 1973 Commission's proposal to permit existing shareholders to participate in a reorganization if they "make a contribution which is important to the operation of the reorganized debtor." Id. at 1044 (quoting § 7-303 of the Bankruptcy Act) (internal quotation marks omitted).
211. See supra pp. 1086-87, 1086-87, 1090.
212. He also was wiling to criticize the judges themselves, at least in the aggregate. "There are some very good presently incumbent bankruptcy judges," Countryman told Congress in 1977, "but there are also some terrible ones. . . . We really need to elevate the status of this court so that we can attract better people." Hearings Before the Subcomm. on Civil and Constitutional Issues of the House Comm. on the Judiciary, 95th Cong. 254 (1977) (statement of Vern Countryman).
213. See, e.g., id. at 238 (memorandum of the National Bankruptcy Conference, represented by, among others, Vern Countryman, vice-chair).
214. In criticizing loyalty tests for lawyers in 1953, for instance, Countryman pointed out that "with very few exceptions, these tests have been imposed by, or at least at the instance of, the bar itself." Countryman, Loyalty Tests, supra note 9, at 149.
215. He complained that "in this instance the hysterical men [calling for loyalty tests] have had the full support of the American Bar Association." Countryman, Loyalty Tests, Id.
216. I have described this transition in detail elsewhere. See Skeel, supra note 61.
217. See generally Leonard M. Rosen & Jane Lee Vris, A History of the Bankruptcy Bar in the Second Circuit, in THE DEVELOPMENT OF BANKRUPTCY & REORGANIZATION LAW IN THE COURTS OF THE SECOND CIRCUIT OF THE UNITED STATES 155, 181 (United States Courts for the Second Circuit Committee on History and Commemorative Events ed., 1993) (referring to the growth of the "smaller, predominently [sic] Jewish firms specializing in bankruptcy").
218. See KALMAN, supra note 134, at 132.
219. Prior to Countryman, doctrinal bankruptcy scholarship was often viewed as conservative in nature. Countryman was arguably the first scholar to wed the doctrinal approach with unmistakably progressive instincts. This combination is now so pervasive that, in a recent account of the debates between progressives and law and economics-oriented bankruptcy scholars, Douglas Baird refers to the progressives, without irony, as "traditionalists." See Douglas G. Baird, Bankruptcy's Uncontested Axioms, 108 YALE L.J. 573, 576 (1998).
220. For a brief description of the bar's campaign to reform bankruptcy law, see Rosen & Vris, cited above in note 176, at 182-85. The reformers' principal concern was to alter the role of the bankruptcy judge, so that judges no longer performed both administrative and judicial functions. Many observers believed that judges' involvement in administrative procedures such as the initial creditors' meeting made it impossible for them to render truly objective rulings when judicial issues arose. For an important discussion of the concerns with the then existing approach by a leader in the reform effort, see George M. Treister, Bankruptcy Jurisdiction: Is it Too Summary?, 39 S. CAL. L. REV. 78, 85-90 (1966), which discusses perceived conflicts of interest.
221. See, e.g., William H. Meckling, Financial Markets, Default, and Bankruptcy: The Role of the State, 41 LAW & CONTEMP. PROBS. 13, 27 (1977) ("Changes in bankruptcy law which lower the costs or raise the benefits to debtors of one of [the bankruptcy or informal settlement options] . . . will without question increase . . . the total number of debtors who elect [that option].").
222. For example, Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook have complained that to Meckling and other early economics-based scholars, the "bald assertion that manipulating the laws would produce predictable effects in debtor behavior . . . was evidently so obvious as to require no empirical substantiation." SULLIVAN, WARREN & WESTBROOK, supra note 82, at 232.
223. Douglas's optimism about the University of Chicago Law School was based on his friendship with Robert Hutchins, a fervent legal realist who left Yale to become President of the University of Chicago in 1929.
224. Letter from Vern Countryman to William O. Douglas (Oct. 28, 1948) (on file with the Library of Congress, Douglas Files, Container No. 1118).
225. Jackson first articulated the creditors' bargain theory in Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors' Bargain, 91 YALE L.J. 857, 859-71 (1982).
226. He co-authored several subsequent elaborations of the theory with Douglas Baird, see, e.g., Douglas G. Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 U. CHI. L. REV. 97 (1984),
227. and eventually published the analysis as a book, THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986).
228. Robert E. Scott, Through Bankruptcy with the Creditors' Bargain Heuristic, 53 U. CHI. L. REV. 690, 692 (1986).
229. See, e.g., Warren, Bankruptcy Policy, supra note 114, at 811-12 (quoting this claim and suggesting that law and economics analysis, though "seductive," is misguided).
230. Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 VAND. L. REV. 713, 827 (1985) (citations omitted).
231. See, e.g., Telephone Interview with Maura Kelly, Assistant to Vern Countryman (Nov. 12, 1999). Jackson left Harvard to become Dean of the University of Virginia School of Law in 1988.
232. See, e.g., Countryman, supra note 68, at 5-6 ("[T]here is evidence . . . that institutional credit extenders will often overcommit the debtor even when they have accurate credit [information].").
233. See, e.g., GROSS, supra note 22, at 129 (arguing that "rehabilitation is facilitated by curtailing creditors' options and is justified because debtor rehabilitation trumps creditor choice"); Warren, Bankruptcy Policy, supra note 114, at 787 ("Chapter II of the Bankruptcy Code gives bankrupt businesses another opportunity to succeed . . . . [T]he revival of an otherwise failing business also serves the distributional interests of many who are not technically 'creditors' but who have an interest in a business's continued existence.").
234. See, e.g., Warren, supra note 96, at 341 ("Consumer bankruptcy policy rightly concerns itself with the fresh start in ways that are not nearly so pressing for corporate debtors. . . . Analogies between the two may sometimes be apt, but the circumstances differ sufficiently to justify discrete policy discussions.").
235. Donald R. Korobkin, Rehabilitating Values: A Jurisprudence of Bankruptcy, 91 COLUM. L. REV. 717, 722 (1991). Korobkin characterizes corporate bankruptcy as "creating conditions for a discourse in which values of participants may be rehabilitated into a coherent and informed vision of . . . the enterprise." Id. at 789.
236. See Warren, A Principled Approach, supra note 122, at 491-506.
237. The pioneering work in the 1980s of Douglas Baird and Thomas Jackson initiated this trend. Baird's and Jackson's "creditors' bargain" model called for strict compliance with state law priority rules. See, e.g., JACKSON, supra note 184; Baird & Jackson, supra note 184.
238. See supra note III. The most recent analysis by law and economics scholars focuses on the possibility that firms could devise their own bankruptcy rules by contract rather than depending entirely on state-supplied bankruptcy laws. See generally Alan Schwartz, A Contract Theory Approach to Business Bankruptcy, 107 YALE L.J. 1807, 1808-09 (1998)
239. (developing a model of bankruptcy contract that could be adjusted to reflect a debtor's arrangements with subsequent creditors); see also Lynn M. LoPucki, Contract Bankruptcy: A Reply to Alan Schwartz, 109 YALE L.J. 317 (offering a sustained critique of Schwartz's model).
240. SULLIVAN, WARREN & WESTBROOK, supra note 82.
241. TERESA A. SULLIVAN, ELIZABETH WARREN & JAY L. WESTBROOK, THE FRAGILE MIDDLE CLASS: AMERICANS IN FINANCIAL CRISIS (2000).
242. See Warren & Westbrook, supra note 80, at 1258 (describing their projected business bankruptcy study).
243. See generally SULLIVAN, WARREN & WESTBROOK, supra note 82, at 265 n.8 ("Vern Countryman is another scholar who has long lamented the absence of useful data in the bankruptcy area and who has been wary of economic models with no data to back them up.").
244. Progressive scholars have tended to rely on traditional empirical methods - such as the use by Sullivan, Warren, and Westbrook of data gathered from bankruptcy filing documents and interviews - a strategy quite similar to William Douglas's earlier approach. Law and economics scholars (and economists), by contrast, have focused on mathematical analysis of stock prices and other precisely quantifiable data.
245. I have borrowed the term "translation" from Lawrence Lessig's influential work in constitutional law. See, e.g., Lawrence Lessig, Understanding Changed Readings: Fidelity and Theory, 47 STAN. L. REV. 395, 400-01 (1995).
246. See supra p. 1085.
247. Some commentators have characterized Douglas's early academic stance as a strategy of calculated neutrality designed to further his academic ambitions. See, e.g., SIMON, supra note 19, at 108 ("[F]or Douglas the ambitious young assistant professor of law at Yale, pushing hard for promotion and recognition in his field of commercial law, the restraint was not surprising."). My own conclusion is that Douglas's writings accurately reflected his views in the early 1930s. It is worth noting in this regard that, as reform-minded as it was, the Progressive political movement of the early 1900s was itself conservative in many essential respects. See GABRIEL KOLKO, THE TRIUMPH OF CONSERVATISM 2 (1967).
248. Vern Countryman's own writing is instructive in this regard. Although he referred on several occasions to Wesley Sturges's pioneering work on consumer bankruptcy, see, e.g., Countryman, supra note 68, at 6-8 (referring to Sturges as "a keen student of credit practices" and discussing Sturges's proposal for altering creditor default rights), Countryman rarely cited Douglas's scholarship in this area.
249. See Warren, A Principled Approach, supra note 122, at 486-88.
250. For an extensive discussion of this phenomenon, see David A. Moss & Gibbs A. Johnson, The Rise of Consumer Bankruptcy: Evolution, Revolution, or Both?, 73 AM. BANKR. L.J. 311, 332-46 (1999).
251. Important recent contributions include Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts, 17 HARV. J.L. & PUB. POL'Y 801 (1994),
252. and Jean Braucher, Lawyers and Consumer Bankruptcy: One Code, Many Cultures, 67 AM. BANKR. L.J. 501 (1993), which documents variation among districts in the percentage of debtors who invoke Chapter 13 rather than Chapter 7, see id. at 502-03.
253. For example, these variations in the percentage of debtors who seek rehabilitation rather than immediate discharge suggest that changes that give significant discretion to the bankruptcy judge - such as the 1984 amendment of Bankruptcy Code section 707(b) authorizing judges to prohibit a debtor's use of Chapter 7 if it would be a "substantial abuse," 11 U.S.C. § 707 (1994) - will do little to alter current patterns in debtors' choice between Chapter 7 and Chapter 13.
254. See SULLIVAN, WARREN & WESTBROOK, supra note 82, at 147, 151. Another prominent progressive, Karen Gross, devotes a lengthy review of As We Forgive Our Debtors to the book's findings about women debtors and calls for further feminist inquiry. See Karen Gross, Re-Vision of the Bankruptcy System: New Images of Individual Debtors, 88 MICH. L. REV. 1506, 1510-12 (1990).
255. See SULLIVAN, WARREN & WESTBROOK, supra note 197.
256. Banking Act of 1933, ch. 89, 48 Stat. 162 (codified as amended at 12 U.S.C. §§ 24, 78, 377-78 (1994)) (repealed 1999).
257. The most important recent discussion of these developments is MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE (1994).
258. As Douglas predicted in a letter to President Roosevelt before the Chandler Act was enacted, "the reorganization study and investigation . . . is now culminating in a comprehensive legislative program which should go far towards carrying into the reorganization field the high standards for finance which you have sponsored." SIMON, supra note 19, at 156.
259. Warren points out: When people speak of the nightmare of the Johns Manville trust or the Eastern Airlines debacle, it is well to think of the debacle outside bankruptcy. No doubt some asbestosis claimants would have collected big judgments in full, but at some point - at the 100th claimant, or the 1000th, or the 100,000th - Manville would have been out of money and the later victims would have received nothing. Warren, Better Alternative, supra note 114, at 16.
260. See, e.g., Warren, supra note 96, at 343-44 (describing the goals of the business bankruptcy system with implicit approval).
261. See Rosen & Vris, supra note 176, at 156 (noting that 49 of the 50 largest New York firms now describe themselves as having bankruptcy expertise); id. at 185 (describing the substantial bankruptcy practices of Simpson, Thacher & Bartlett, Shearman & Sterling, and White & Case).
262. See In re Leslie Fay Cos., 175 B.R 525, 539 (Bankr. S.D.N.Y. 1994).
263. The 1997 Commission initially proposed to amend the Bankruptcy Code's "disinterestedness" standard to preclude an attorney from representing the debtor only if she had a "material" conflict of interest. For discussion of these events, see Todd J. Zywicki, Mend It, Don't End It: The Case for Retaining the Disinterestedness Requirement for Debtor in Possession's Professionals, 18 MISS. C. L. REV. 291 (1998).
264. For an argument defending more flexible standards, see Gerald K. Smith, Standards for the Employment of Professionals in Bankruptcy Cases: A Response to Professor Zywicki's Case for Retaining the Disinterestedness Requirement for Debtor in Possession's Professionals, 18 MISS. C. L. REV. 327 (1998).
265. For a detailed discussion of the Code's repudiation of the SEC and the New Deal vision of large-scale corporate reorganization, see Skeel, supra note 61.
266. For a detailed discussion of the Code's repudiation of the SEC and the New Deal vision of large-scale corporate reorganization, see Skeel, supra note 61.
267. Under the 1938 Chandler Act amendments, the court could not confirm a reorganization plan in a Chapter X case until the SEC had issued a report on the proposal. The 1978 Code left the SEC with little role in corporate reorganization. See id. 221 Thus, Congress might authorize the SEC to use its rulemaking process to develop conflicts rules. This delegation would diminish the ad hoc quality of the existing caselaw and would permit an ongoing response to conflicts problems. The SEC might also play a useful role in regulating claims trading and related issues.
268. Thus, Congress might authorize the SEC to use its rulemaking process to develop conflicts rules. This delegation would diminish the ad hoc quality of the existing caselaw and would permit an ongoing response to conflicts problems. The SEC might also play a useful role in regulating claims trading and related issues.
269. The most prominent accounts (neither by legal academics) are DELANEY, supra note 103 (strategic bankruptcy), and SOBOL, supra note 106 (the A.H. Robins case). It is important to emphasize, however, that Chapter 11 is not a picnic for the debtor's managers. Many managers are replaced before the end of the reorganization process. See Stuart C. Gilson, Bankruptcy, Boards, Banks, and Blockholders: Evidence on Changes in Corporate Ownership and Control When Firms Default, 27 J. FIN. ECON. 355, 373-79 (1990). Nevertheless, managers clearly fare better in Chapter 11 than under prior law.
270. See supra pp. 1089-90.
271. Regulators have precisely this authority in bank and insurance insolvency cases (which are not governed by the Bankruptcy Code). In both contexts, there is a strong presumption that managers should be removed. See, e.g., 12 U.S.C. § 18310(f)(2)(F)(ii) (1994). Progressives might call for a similar but less draconian approach in bankruptcy.
272. Existing bankruptcy law sharply limits the effectiveness of derivative litigation alleging that a debtor's managers have breached their fiduciary duties. Plaintiffs' attorneys who have brought litigation against the managers before bankruptcy, for instance, often abandon the litigation due to the procedural obstacles posed by bankruptcy law. I have discussed these problems at length in other work. See David A. Skeel, Jr., Rethinking the Line Between Corporate Law and Corporate Bankruptcy, 72 TEX. L. REV. 471, 498-506 (1994).
273. See Douglas Bordewieck & Vern Countryman, The Rejection of Collective Bargaining Agreements by Chapter 11 Debtors, 57 AM. BANKR. L.J. 293, 299-300 (1983).
274. See Warren, Bankruptcy Policy, supra note 114, at 792 ("[T]he Code suggests that the distributional aim of bankruptcy should be tailored to the facts of the case - permitting impairment of labor contracts if it is essential for a successful reorganization and rejecting it if it is not").
275. 15 PA. CONS. STAT. §§ 2581-83 (1995). The Pennsylvania provisions provide compensation for employees who are laid off within six months of a takeover. To be effective in a subsequent bankruptcy, such provisions would need to be given priority status.
276. Corporate law progressives have made similar arguments in defense of antitakeover statutes such as "other constituency" provisions that permit the managers of a firm that is the target of a takeover bid to consider factors other than stock value in deciding whether to reject the bid. Although these provisions strengthen managers' hands, progressive scholars see them as also benefiting employees and the local community. See, e.g., Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 TEX. L. REV. 579 (1992). Corporate progressives also share with bankruptcy progressives an increasing emphasis on communitarian values. See GROSS, supra note 22 (bankruptcy); PROGRESSIVE CORPORATE LAW (Lawrence E. Mitchell ed., 1995).
277. In the legislative hearings on the Chandler Act, for instance, William Douglas ignored lawyers' complaints that the mandatory trustee requirement would cause managers to avoid bankruptcy at all costs. Only a strong measure, he maintained, would solve the problems with existing law. Douglas insisted that the involvement of an independent trustee was "the keystone of th[e] program." Revision of the Bankruptcy Act: Hearing on H.R. 6439 Before the House Comm. on the Judiciary, 75th Cong. 163-64, 175-77 (1937) (statement of William Douglas).
278. Douglas Baird makes a somewhat similar point. See Baird, supra note 178, at 589; see also Robert K. Rasmussen, An Essay on Optimal Bankruptcy Rules and Social Justice, 1994 U. ILL. L. REV. 1, 12-14 (emphasizing the importance of ex ante effects).
279. Somewhat counterintuitively, harsh bankruptcy laws tend to encourage relational governance outside of bankruptcy and a less market-driven approach to corporate law generally. See Skeel, supra note 30, at 1339-46.
280. See id.