and then take the plunge at the last second. “Petitions in bankruptcy,” at least part of their empire to pay their debts, and if some of their Wall Street cronies had gone under, what an enlightening event it would have been. Picking through the rubble of that collapse, the public could have seen the rotten core of the business establishment. To prevent that exposure, Federal Reserve Chairman Paul Volcker stepped in. Only a few months earlier he had set guidelines that were—or so he said—intended to prevent loans to speculators. The banks who lent to the Hunts had violated those guidelines, but that didn’t bother Volcker, for he was willing to violate them, too. He went to other banks and put together a $1.1 billion loan to save the Hunts’ hides—and save the hides of their creditors. But to obtain the $1.1 billion loan, the Hunts had to pledge as collateral pieces of Placid Oil, their main holding company. Now we jump ahead to 1986. Oil prices have fallen so drastically that the Hunts cannot make payments on their loan. Once again, they try to welsh. But this time the banks move in on them and are about to foreclose. At last, hallelujah! the Hunts will have to pay for all their dirty work. No, that’s not the way things work. It was for scoundrels like the Hunts and for crises like theirs that Chapter 11 was written. So just before the banks foreclosed on them, the Hunt boys rushed into that haven, from which they continue to operate their oil business just as always- thumbing their noses at the bankruptcy judge who flatly ordered them not to risk more of their money on oil explorations—and have continued to throw their fabulous parties for rightwing politicians and shopworn socialites, celebrating' a life in which such phrases as “good faith” are only ragged pennants fluttering over the judiciary’s lemonade stand. By now you will have been struck by several startling (at least they were to me) features of the Bankruptcy Reform Act. For one thing, you will have noticed that corporations going through Chapter 11 are anything but humble in the process. They continue to act in their usual overbearing manner. And why not? After all, management in Chapter 11 doesn’t have to turn over the operation of the business to a court-appointed trustee, as used to be the rule. Oh, no. Nowadays the same old. executive gang is allowed to go on running the show, even in bankruptcy; and although there may be a trustee or judge in the wings scolding and giving advice, the business execs don’t have to pay much attention. Not if the corporation is big enough. Bigness is what counts. Bigness can get by with anything. When a corporation like LTV or Texaco or Johns-Manville comes to court and asks for Chapter 11, it is the proverbial eight-hundred-pound gorilla, and Harvey R. Miller of New York, a bankruptcy expert, supplies the punch lineofthat old chestnut: “ If the gorilla wants to dance, you dance.” Around most of the headlined bankruptcies hangs the smoke of deception, of sneakiness. Whether liquidating or reorganizing, corporations generally know they will benefit by catching their creditors off guard, giving no hint of the upcoming action. Managers stall as long as they can, write Professors Baird and Jackson, “are typically filed only moments before a secured creditor repossesses the firm’s assets or the IRS levies on them....The managers are often literally only one step ahead of the sheriff.” We should have known from the beginning that there was something phony about the reformed Code; there was certainly something suspicious about the date of its birth. The first permanent bankruptcy act, as I mentioned earlier, was passed by Congress in 1898—a year of economic panic and depression. The purpose of the act was simply to bring order into the chaos of creditor-debtor relations. And the same purpose motivated Congress when most of the significant amendments were made to that act in 1938 —once again, notice, a year of deep depression. But 1978 was very different. Here was a year of great national affluence and stability, a year when the business boom was reflected across the nation by a dramatic increase in the number of skyscrapers in all major cities (builders’ bankruptcies dropped to their lowest level in twenty-five years). Why, then, did Congress suddenly feel the need for “reforming” the Bankruptcy Code? Because (or so my paranoia tells me) corporations wanted new features in the Code that would give them more maneuverability—enough maneuverability to get around some of the demands of nonbankruptcy laws when the going got a little tough. The bankruptcy laws of 1898 and 1938 were passed to help merchants, primarily. The Bankruptcy Reform Act of 1978 was passed primarily to help big business. That is particularly the purpose of Chapter 11. Just how useful it could be was seen very soon. The new law went into effect in 1979, and three years later Johns-Manville and two other, smaller corporations (UNR Industries and Amatex Corporation) ducked into Chapter 11 to avoid being hit by billions of dollars in punitive lawsuits from workers hurt or killed by asbestos. - Here was the first. Here was the big breakthrough. It was such a shocking revelation of what wealthy corporations intended to do and could do with “reformed” bankruptcy that some innocent observers would not believe that the co-opteds of Congress had written it that way on purpose. As one scholar insisted, “Congress...did not anticipate that a healthy and solvent corporation might seek refuge from tort liability in the Bankruptcy Reform Act’s Chapter 11 reorganization provisions.” But that was exactly what Congress had intended, as proved by the fact that in the six years since Manville’s move it has made not one gesture toward rewriting Chapter 11 to include only broke or nearly-broke corporations. t is not just Chapter 11 that properly offends some legal scholars, however. It is the whole tone of the Bankruptcy Reform Act, and the Rube Goldberg world of legal favoritism in which, as Professor Eisenberg of UCLA puts it, “bankruptcy law is perceived as an area separate from the rest of the legal world” and “inadequately reflects bankruptcy law’s existence as part of a legal structure that includes other federal laws, a Constitution, and detailed treatment of debtor-creditor issues by over fifty jurisdictions.” For the first time in our history, Congress has set up special bankruptcy courts, manned by a small, ingrown group of judges and specialists, who, like priests under the Pharaohs, live isolated from the outside world. When Johns- Manville took bankruptcy in 1982, it had a net worth of $1.2 billion and was making a nice profit. It’s still in Chapter 11 and still making a nice profit. Their isolation sometimes makes them render nutty decisions, and the bankruptcy laws that they have been given to work with make them nuttier. Consider the unreality of this moderately famous case: William Kovacs operated a notorious hazardous-waste disposal business in Ohio. The state accused him of creating a massive pollution problem and a court ordered him to clean up his mess. He violated the order. So Ohio stepped in and started to clean up the mess itself, intending to charge Kovacs for the work. But Kovacs, meanwhile, had filed for Chapter 11. The bankruptcy court, backed by the U.S. Supreme Court, ruled that Ohio couldn’t collect. It seems that if Ohio had fined Kovacs, it could have collected; but.the state was asking him for a reimbursement, and that qualified as a debt, and bankruptcy law excuses debts. It’s a splitting of hairs that nonbankruptcy law would never accept. Ordinary law would let a state collect either kind of money. oes Ohio v. Kovacs make I many sense at all? It raises ^Bthe question of whether a a H i ^ ^ lawbreaker who claims bankruptcy should be treated with more consideration than a lawbreaker who doesn’t. But there are two much more fundamental questions that we should consider: First of all, yvhy should any company—solvent or insolvent, upright or shady—be given more protection, more advantages than any other company just because one claims bankruptcy and the other doesn’t? Why should we allow a separate, Elitist business category to exist, supervised by a separate, Elitist judiciary? Secondly, there is the matter of risk mentioned at the outset of this article. Risk is the essential element in the evolution of business. Risk weeds out the unfit. A/obody suggests that all businesses should be kept alive. Death should be a natural attribute of capitalism, as it is of nature. What does it really matter if LTV Steel dies? It will be good for the surviving species of steel companies. Onder its last reorganization plan, Jim and Tammy Faye’s PTL would pay off its unsecured creditors over an eight-year period. Why should they have to wait so long? Let PTL be liquidated now, dismembered, got rid of. Likewise, a fine morality tale would be played out if the Hunt brothers were forced to sell everything (not likely) to pay their debts and start over again, in the footsteps of their father, playing poker in Arkansas gambling dives. That would be a memorial to capitalism at its purest. . What I’m proposing is simply an end to this form of corporate coddling. But of course we will not end it. We are too conditioned otherwise. We are used to pampering big business in the name of employment and in the name of economic security. We would never think of forcing the Code-addicted corporations to go cold turkey, much less of withdrawing' the life support system from corporate veggies. Which is to say, as Douglas Baird has said (Law and Contemporary Problems, Vol. 50, No. 2), “We have grown too accustomed to living in a world with bankruptcy.” Our moral reflexes are shot. Robert Sherrill is a much published author and ' investigator. This story is from Spring 1988 issue of Grand Street. Ann Morgan is a Twin Cities artist. Eric Walljasper is a Twin Cities art director and cat lover. Clinton St. Quarterly—Summer, 1988 11
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