Government Activism in Bankruptcy

36 Emory Bankruptcy Developments Journal ___

UC Hastings Research Paper Forthcoming

42 Pages Posted: 3 Mar 2021 Last revised: 2 Jun 2021

Date Written: June 1, 2021

Abstract

It is widely recognized that bankruptcy law can stymie regulatory enforcement and present challenges for governments when regulated businesses file for Chapter 11. It is less-widely understood that bankruptcy law can present governments with opportunities to advance policy goals if they are willing to adopt tactics traditionally associated with activist investors, a strategy we call “government bankruptcy activism.” The bankruptcy filings by Chrysler and General Motors in 2009 are a famous example: the government of the United States used the bankruptcy process to help both auto manufacturers resolve their financial distress while promoting the policy objectives of protecting union workers and addressing climate change. A decade later, the government of California applied its bargaining power in the Pacific Gas & Electric Company’s Chapter 11 case to protect climate policies and the victims of wildfires. These examples illustrate that, by tapping into the bankruptcy system, governments gain access to the exceptional powers that a debtor enjoys under bankruptcy law, which can complement the traditional tools of appropriations and regulation to facilitate and accelerate policy outcomes. This strategy is especially useful in times of urgency and policy paralysis, when government bankruptcy activism can provide a pathway past veto players in the political system. However, making policy through the bankruptcy system presents potential downsides as well, as it may also allow governments to evade democratic accountability and obscure the financial losses that stakeholders are forced to absorb to help fund those policy outcomes.

Keywords: bankruptcy; corporate governance; government regulation

JEL Classification: K22; G33

Suggested Citation

Ellias, Jared A. and Triantis, George G., Government Activism in Bankruptcy (June 1, 2021). 36 Emory Bankruptcy Developments Journal ___, UC Hastings Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3796367 or http://dx.doi.org/10.2139/ssrn.3796367

Jared A. Ellias (Contact Author)

UC Hastings Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

George G. Triantis

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

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