Out of the Past: Railroads & Sovereign Debt Restructuring

By Lubben, Stephen J. | Georgetown Journal of International Law, Summer 2004 | Go to article overview

Out of the Past: Railroads & Sovereign Debt Restructuring


Lubben, Stephen J., Georgetown Journal of International Law


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. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Out of the Past: Railroads & Sovereign Debt Restructuring
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.