Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statutory Regime
109 Pages Posted: 4 May 2005
Date Written: February 12, 2006
Bankruptcy is a statutory system, yet it is replete with practices for which there is no direct authorization in the Bankruptcy Code. This article argues that the authorization for judicial creation of bankruptcy law beyond the provisions of the Code has been misidentified as the equity powers of bankruptcy courts. This misidentification has led courts to place inappropriate statutory and historical limitations on non-Code practices because of discomfort with unguided equitable discretion.
Both the statutory and historic limitations are problematic. The statutory authorization for the bankruptcy courts' equitable powers appears to have been repealed by what one judge has called one of the clumsiest acts of Congress. The statutory section to which courts now look, 11 U.S.C. § 105(a), is inapplicable, and its use as a framework for evaluating non-Code practices has led to questionable decisions. Likewise, the historic limitations of the pre-Code practices doctrine are unsatisfactory and have produced contradictory Supreme Court decisions.
Instead, this article argues that non-Code practices are better thought of as a federal common law of bankruptcy. Federal common law is judge-made law that depends on precedent and judicially-devised tests rather than unpredictable discretion or rigid application of statute. Viewing non-Code practices as federal common law would lead to more predictable and consistent decisions without sacrificing the judicial flexibility necessary to facilitate corporate reorganizations.
Keywords: Bankruptcy, equity, court of equity, equitable powers, federal common law, pre-Code practices, non-debtor releases, Bildisco, Ahlers, Grupo Mexicano, Capital Factors, K-Mart, Butner, critical vendors, first day orders, substantive consolidation, equitable subordination, chanelling injunction
JEL Classification: G33, K10, K19, K20, K29, K30, K39, K40, K41, K49
Suggested Citation: Suggested Citation