Recalibrating Consent in Bankruptcy

Abstract

In bankruptcy, business realities collide with legal rules that themselves create conflicting rights. Unsurprisingly, accommodations are made. Consent bridges gaps among conflicting legal rules and business realities, justifying pragmatic solutions to problems that could not otherwise be imposed under prevailing legal rules. Consent’s transformative power is so essential to the bankruptcy process, that resort to consent, in principle and in rhetoric, is reflexive in bankruptcy. Manufacturing consent to support practical accommodations, rather than simply mirroring prebankruptcy entitlements, is at the heart of bankruptcy law as it has evolved in the United States. Bankruptcy uses a panoply of tools to generate consent: inertia, ambiguity, proxies, relaxed standards for establishing consent, novel procedures and institutional structures, and new substantive rights. New circumstances in the twenty-first century, and the teachings of experience, require close reexamination of how consent operates in bankruptcy, including whether certain consent requirements should be further relaxed or tightened. We critique current consent standards and practices in connection with (i) home mortgage modification; (ii) the one-consenting-class rule; (iii) sale free and clear orders; (iv) third-party releases; (v) sales of substantially all assets; (vi) balloting of conflicted parties; and (vii) proxy consents by official creditors’ committees. Recently, most notoriously in the restructurings of Chrysler and General Motors, the advantages of reaching solutions by manufacturing consent rather than imposition have been too casually abandoned.

Keywords: bankruptcy, consent process, restructuring