Academic journal article Journal of Corporation Law

The Janus Faces of Reorganization Law

Academic journal article Journal of Corporation Law

The Janus Faces of Reorganization Law

Article excerpt

I.Introduction

The Supreme Court's most recent foray jnto the world of corporate reorganization, in Czyzewski v. Jevic Holding Corporation, reveals as much about the conceptual underpinnings of modern bankruptcy law as any case has done in decades.2 At stake in Jevic was the legality of a recent innovation in bankruptcy practice-the so-called "structured dismissal"3-when used to sidestep rules of distributional priority that govern liquidations and plans of reorganization. The Bankruptcy Code appears on its face to vest bankruptcy judges with the power to order these dismissals, but the Court condemned them on the ground that priority norms, being central to bankruptcy, must not be subverted absent clear permission from Congress.4 Neither the Court's judgment in the case nor its logic came as a surprise to seasoned observers. At the same time, however, the Court struck a different note with respect to techniques debtors routinely use to pay low-priority claims early in a case.5 These techniques lack clear textual warrant and can undermine priorities as surely as a structured dismissal can, yet Jevic went out of its way to distinguish and seemingly bless them.6 The contrast in attitude toward economically similar transactions is remarkable. At least as puzzling is just how unremarkable the contrast seemed to students of bankruptcy. What this state of affairs says about the structure of reorganization law, and what we ought to make of it, are the subjects of this essay.

More specifically, this essay seeks to do two things-to characterize and elaborate on a doctrinal tension Jevic exposes and to advance a claim about this tension's significance for bankruptcy policy. The doctrinal observation is that reorganization law is two-faced. Jevic's holding and dictum were unsurprising because two rival interpretive paradigms have come to shape judicial understanding of the Bankruptcy Code. By this I do not mean simply that the Code is a result of uncomfortable compromises between legislative coalitions with distinctive viewpoints (although of course it is). Nor do I mean that different judges understand bankruptcy's animating aims differently (although perhaps they do). I mean rather that what appear to be two very different sets of assumptions and values, two conflicting frameworks, coexist with relative purity within the body of orthodox doctrine- and that their conflict is mediated by a kind of truce. One paradigm orients interpretation during the early stages of a reorganization case; the other orients interpretation at its conclusion. The two paradigms are defined by their radically opposed positions on the inevitable trade-off between the value of discretion, on one hand, and the sanctity of entitlements, on the other. Early in a bankruptcy case, ambiguity in the Code is understood to vest the debtor, under judicial supervision, with authority to use the estate's property as it sees fit in a bid to preserve the going concern, irrespective of the implications for distributional priorities. I call this the discretion paradigm. At bankruptcy's close, on the contrary, ambiguity in the Code is understood to vindicate creditors' distributional priorities, irrespective of their effect on the estate's value as a whole. I call this the entitlement paradigm.

Jevic did not create the order of divided rule. That has developed over a quarter century or more. Rather, Jevic at once reflects and deepens the prevailing order. As we shall see, the decision's rationale depends on fidelity to a particular distributional scheme- "absolute priority"-over and above what the Bankruptcy Code's plain text demands.7 Indeed, a straightforward textual analysis would have yielded a judgment going the other way. The Court's opinion reads naturally only if one first posits the normative primacy of distributional entitlements. But Jevic confines its own logic to the end of a bankruptcy case, disclaiming any negative implications for the legality of critical vendor orders and other, similar staples of modern bankruptcy practice whose textual authority is dubious and whose effect on distribution can be profound. …

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