Bankruptcy Takings

Abstract

The Takings Clause is a vital consideration in determining the treatment of secured creditors in bankruptcy. This Article will explain why the Takings Clause is relevant and why scholars engaged in the debate over secured credit must consider the constitutionality of their proposals in light of the takings issue. In Part I of the Article, I explore the ways in which current bankruptcy law provides protection and gives deference to property rights. I also discuss certain proposals that would reduce the protection given to secured parties. Part II provides an overview of takings law and discusses some of the cases in which the Supreme Court has addressed takings issues in the context of bankruptcy. In Part III of the Article, I dispute the validity of certain assumptions. Some of his conclusions were normative and, therefore, should not be the basis for assumptions about the constitutionality of proposals made in the secured credit debate. Finally, some of his reasoning has proven incorrect over time as the Supreme Court has expanded upon the meaning of the Takings Clause. Because these assumptions about the bankruptcy takings problem are faulty, the problem must be reevaluated. In Part N of this Article, I discuss the application of current takings doctrine to present bankruptcy law and to proposals made in the context of the secured credit debate. First, I look at the problem of delay for secured creditors and at lien avoidance provisions under current bankruptcy law. I conclude that the lien avoidance provisions are constitutional and that only the most extraordinary case of delay for a secured creditor could constitute a taking. Next, I consider the assertion made by several scholars, based on Professor Rogers' reasoning, that Congress could completely invalidate security interests in bankruptcy on a prospective basis. I conclude that this assertion is incorrect. Scholars are currently debating the merits of proposals that would drastically reduce the rights of secured creditors in bankruptcy without considering the takings issue at all. Some of these proposals may be unconstitutional. At minimum, they raise significant and complex issues under the Takings Clause, many of which are so fact-dependant that they will be a source of uncertainty for years to come.

Keywords: Bankruptcy, Bankruptcy Code, Bankruptcy law, Takings, Takings Clause, Fifth Amendment, Just compensation, Security interests, Secured credit, Secured finance, Secured creditor