Emory Bankruptcy Developments Journal


Adam Feibelman


Anticipating a wave of bankruptcies caused by the economic and financial effects of the COVID-19 pandemic, numerous commentators proposed measures to expand the institutional capacity of the bankruptcy system. A number of these proposals would represent dramatic and systematic government involvement in the U.S. bankruptcy system. Such involvement by the government in the bankruptcy system is a topic that is largely ignored in the literature on bankruptcy. Where it is observed, it is generally criticized. Among other things, it sits uneasily with dominant theories of bankruptcy that assume the bankruptcy system should be driven by the interests of direct stakeholders in particular cases. This Article argues that involvement or influence by government actors in the bankruptcy system is, in fact, broadly consistent with bankruptcy theory and with the structural relationship between bankruptcy law and other legal and regulatory components of the state. This relationship is subject to some basic ordering principles. Bankruptcy law constrains and adjusts other legal regimes to some extent, but it generally incorporates non-bankruptcy law and yields to government’s regulatory actions. These ordering principles reasonably extend to ad hoc government actions or “activism” in the bankruptcy system. In other words, government actors do not contravene bankruptcy policy when they employ the system to advance non-bankruptcy policies within their authority, even when doing so enables the government to take actions and achieve goals that it could not outside of the system. In some circumstances, however, the regulatory policies or concerns motivating government involvement in the bankruptcy system may be too diffuse or attenuated to justify the extent of its intervention, especially if the effect is to discourage use of the bankruptcy system.

This Article develops these claims by focusing in particular on the relationship between bankruptcy and financial regulation. Bankruptcy is part of the architecture of financial markets in a modern economy, and the influence of financial regulators on the bankruptcy system should be viewed as the product of overlapping regulatory functions, which require a logic of ordering. Such regulatory influence generally operates in the deep background, yet macro-prudential and systemic concerns will sometimes require more direct government intervention and may override the efficiency concerns or stakes of a particular bankruptcy case. This Article describes three episodes of regulatory intervention in the bankruptcy system: (1) “regulatory bankruptcy” during the 2008–09 financial crisis; (2) the efforts by the Reserve Bank of India to force some large commercial firms into India’s new insolvency system; and (3) the Chrysler bankruptcy. The ordering principles advanced in this Article generally justify the government involvement in these cases and, to some extent, in the COVID-era proposals as well. However, the degree of regulatory involvement in the bankruptcy system envisioned by some of these recent proposals may be disproportionate to, or attenuated from, their underlying regulatory goals. If so, they may fall beyond the scope of justified government involvement in the bankruptcy system.