Bankruptcy Preferences: Recalcitrant Passengers Aboard the Flight From Creditor Equality

Ultimately, any discussion of the scope and function of preference law in isolation from the larger goals of the bankruptcy system is an empty one. Moreover, meaningful discourse about the goals of a bankruptcy regime must take place against the backdrop of the larger legal framework, competing public policy considerations, and differing perceptions over the social, as well as economic, costs of bankruptcy. Should individuals and entities be permitted — indeed even encouraged — through the bankruptcy process to alter their behavior so as to avoid an outcome that would otherwise be imposed under applicable state or nonbankruptcy federal law? Correspondingly, when and why should other parties be compelled to abide by results that, but for the interposition of a bankruptcy proceeding, would not need to be countenanced? More broadly posed, what are the distributive goals that should govern the bankruptcy system and what is the optimum institutional design for achieving them? Finally, and of no less importance, how are these essential questions regarding the political economy best decided? It quickly becomes difficult to even know where to start in answering these questions. So, let us begin with a basic axiom; namely, that bankruptcy entails the balancing, not only of the competing interests of debtors and creditors, but also of competing interests among creditors. But the act of “balancing,” by definition, implies that there is some point along the spectrum, perchance equidistant from the two antipodal ends, where the fulcrum can be placed to ensure perfect equipoise. That is not, however, the kind of balancing that goes on in the bankruptcy arena, where the exercise is a normative one, not a feat of mechanical engineering. There is no point of perfect equilibrium. Hence, where the pivot is placed at any point in time will depend on those larger moral and social value judgments, where unanimity of opinion will never be achieved and that, like public policy, will tend to wax and wane over time.Specifically, as part of the Bankruptcy Reform Act of 1994, Congress created an independent commission, the National Bankruptcy Review Commission (the “NBRC”), to “investigate and study issues relating to the Bankruptcy Code; to solicit divergent views of parties concerned with the operation of the bankruptcy system; to evaluate the advisability of proposals with respect to such issues; and to prepare a report to be submitted to the President, Congress and the Chief Justice.” The NBRC’s report was to be publicly released on October 20, 1997. Fully aware of its content and general orientation, the lobby for consumer creditor providers and organizations connived to ambush the report by pressing furiously for the introduction of bipartisan legislation that largely advanced the views of the four dissenting NBRC commissioners. Their efforts were ultimately successful as it was that legislative proposal and it successors, not the NBRC Report, which dominated the conversation over the next several years, and eventually resulted in the enactment of BAPCPA. In many ways, BAPCPA was not only an anti-NBRC bill, but also a wholesale rear-guard action against the 1978 Act. Most well-known for tightening of the screws on consumer debtors, whether in the form of the means test, elimination of ride-through, or the insistence on use of retail valuation of personal property collateral in Chapters 7 and 13, BAPCPA also openly sought to limit judicial involvement, and hence judicial discretion, in several areas perceived as bearing unfavorably on creditor payouts. Receiving only slightly less attention was BAPCPA’s lopsided leaning toward preserving the contractual rights of secured creditors at the expense of their unsecured counterparts, as evinced by the above-mentioned valuation rules in section 506(a)(2); prohibition against strip down of most vehicle (and some other) loans in Chapter 13; provision for recovery of costs, charges, and fees in favor of oversecured statutory lienors; elimination of Chapter 13 property valuations on conversion to Chapter 7; and assuring that Chapter 13 plan payments are not only at least equal to the present value of allowed secured claims, but also sufficient to provide adequate protection to the holders of such claims. One might have fairly questioned, as many did, whether this was a good thing from the perspective of the larger national economy. Others might have, and did, question its fair-mindedness given that, other than the amounts owing on undersecured debts in excess of the value of the underlying collateral, unsecured claims generally consist of smaller trade debt and obligations owing to nonconsensual creditors, such as tort victims and other so-called non-adjusting creditors. Critiques of BAPCPA along these lines are well-known. But there is another related, broader, but less widely considered tension embedded not just in BAPCPA, but in bankruptcy reform legislation generally. That is the tension between the values underlying state law debt collection remedies, generally including the primacy of security, and the equality and rehabilitative objectives of a collectivized regime for dealing with default and financial distress. And here, BAPCPA seems to have signaled a decisive victory for state law in the epic battle between federal bankruptcy policy, on the one hand, and state debt collection rules and norms, on the other. The story of the degree of deference bankruptcy should afford to state law rights and entitlements is a larger one than can be told here. However, it is one that can, I believe, profitably be illustrated by examining BAPCPA’s changes to the preference and preference-related provisions of the Code. Just as the 1978 Act is widely recognized as representing the high water mark of debtor relief, it also signaled the historical apogee of the core bankruptcy principles of debtor continuation through reorganization and creditor equality, both implemented through, inter alia, the trustee’s avoiding powers, including principally the power to set aside and recover preferential transfers. And just as has been the case in the consumer arena, legislative action affecting preference liability and recovery since that time, culminating (at least to date) with BAPCPA, has been to retreat from that summit in favor of ever-increasing obeisance to the state law bargain and to the growing hegemony of a creditor competition model over a creditor cooperation model.