The Administrative State in Bankruptcy

Abstract

In this Essay, we study the approach of governmental entities to the bankruptcy filings of large, regulated companies. Regulated firms regularly enter Chapter 11 and seek to take actions that governmental entities might block outside of bankruptcy, undermining regulatory enforcement and oversight. As a result, governmental entities often react defensively to a bankruptcy filing, asserting that bankruptcy law does not displace their power over the regulated firm. We use case studies to demonstrate that regulators usually fare poorly when they make legalistic and defensive arguments but can advance policy goals when they embrace the opportunities that bankruptcy law creates, such as by hiring bankruptcy lawyers and participating in the bankruptcy process with the sophistication of activist investors. We show that regulators rarely do this: we hand-collect a new dataset of interactions between Chapter 11 debtors and regulators from large bankruptcy cases from 2004 to 2019, and we find evidence that regulators leverage the special powers of bankruptcy to promote their policy goals (in contrast to collecting debts) in only 3.5% of observed regulator-Chapter 11 debtor interactions.

Keywords: bankruptcy; Chapter 11; administrative state; administrative agencies; federal courts; corporate bankruptcy; corporate reorganization

JEL Classification: K22, G33