Crystals and Mud in Bankruptcy Law: Judicial Competence and Statutory Design
Edward J. Janger
Brooklyn Law School
Arizona Law Review, Vol. 43, No. 3, 2001
Stanford/Yale Jr. Faculty Forum Paper No. 01-09
This article challenges widely held beliefs about the relationship between judicial competence and statutory drafting strategies as they apply to the Bankruptcy Code. The stakes are high because bankruptcy reform is on the horizon, and both Congress and law and economics scholars frequently cite the limited capacity of bankruptcy judges as a principal basis for limiting the goals of bankruptcy law and curbing judicial discretion. This article argues that the legislative and scholarly push for statutory precision turns on a misunderstanding of the relevance of judicial competence to the choice between crystalline and muddy rules (rules versus standards), and in particular on a failure to appreciate the particular benefits of muddy rules in bankruptcy.
The argument proceeds in two stages. First, I develop a theory of judicial role which proceeds from the assumption that bankruptcy judges are capable of identifying bankruptcy abuse, in the form of inefficient non-cooperative behavior. Under such a view, muddy statutory rules allow a judge to examine and prevent abusive behavior, and force the parties to bargain in the shadow of a judicial decision. I then relax the assumption of judicial competence, and show, paradoxically, that this does not reduce the desirability of muddy rules. Even if judges are incompetent, muddy rules increase the cost of non-cooperative behavior and help to resolve the collective action problem inherent in bankruptcy cases.
On the one hand, this result suggests that proponents of crystalline bankruptcy rules cannot rely solely on neutral observations about information asymmetries and institutional impediments. They must instead, if they are being candid, base their arguments on less genteel and less palatable allegations of judicial bias. On the other hand, this result underlines the importance of impartial judging in the face of imperfect information and uncertainty.
Number of Pages in PDF File: 69
Keywords: Bankruptcy, jurisprudence, law and economics, contracts
Date posted: March 20, 2001