Railroad receiverships are suddenly relevant again. Long before the enactment of the first corporate reorganization statutes in the early 1930s, the federal courts developed a method of reorganizing financially distressed corporations, especially railroads, within the existing architecture of the equity receivership. From 1850 to 1932, these receiverships were the only way to reorganize a large American corporation. The last major railroads to go through receiverships completed the process decades ago. (1) Yet today, more than twenty years into the problem of widespread sovereign financial distress, (2) several leading scholars have begun to ask if railroad receiverships might hold important insights into sovereign debt restructuring. (3)
The analogy between the railroads of old and the sovereign nations of today rests on two key points. First, like sovereign borrowers today, early American railroads faced financial distress without the benefit of an applicable bankruptcy statute. Second, liquidation was no more an option for the railroads than it is for a sovereign nation. In this context, the development of the equity or railroad receivership seems to hold many promising lessons for reorganization of today's troubled sovereign borrowers.
This Paper takes a closer look at the analogy between railroads and countries to see if it holds beyond its superficial appeal. In particular, I examine how railroad receiverships addressed the problems of holdouts and individual creditor action--the key stumbling blocks for most approaches to sovereign debt restructuring. (4) I argue that receiverships overcame these problems in ways that could be useful for sovereign borrowers.
But the utility of receiverships should not be overstated. Railroad receiverships operated in an age when federal equity jurisdiction was at its peak. This allowed the courts to exert significant power that might not hold today. Moreover, the receiverships were essentially in rem proceedings that allowed a district court to exercise its power irrespective of the geographic dispersal of railroad bondholders. (5) This power is of limited application in the sovereign debt context, as most sovereign assets are beyond a U.S. court's in rem jurisdiction. Finally, and most importantly, a good deal of the receiverships' apparent success in dealing with holdouts resulted from the generous treatment of existing creditors. This generosity may have limited the long-run effectiveness of the receiverships. (6)
This Paper proceeds in three parts. Part I outlines the workings of railroad receiverships in general and then focuses the discussion on the ways that receiverships addressed holdouts and individual creditor actions. Part II presents the strongest case for using receiverships as the basis for a new model of sovereign debt restructuring. This "strong form" version of the analogy exceeds anything presented in the existing literature and highlights the full potential of receiverships in the sovereign debt context. Part III qualifies the analogy in Part II by discussing the limits of receiverships and the difficulties in applying to sovereign nations a tool that was developed for a set of uniquely American debtors.
In short, I am cautious about the utility of deploying railroad receiverships in the sovereign debt context. Plainly there are historical lessons awaiting application, but only selective and considered reference to the early days of corporate bankruptcy will translate into meaningful improvement of sovereign debt restructuring.
I. RAILROAD RECEIVERSHIPS
"Most of the great [American railroads] had been built by fraudulent construction companies, and if perchance a road had been honestly built, there was always an opportunity to correct this oversight by disreputable, but highly profitable, manipulation of its securities." (7) Self-dealing, combined with sprees of overbuilding, meant that railroads faced major bouts of financial distress in 1857, 1873, 1893, 1908, and, of course, the early 1930s. …