The bankruptcy system is not well-designed for a complete economic shutdown, according to a Wall Street Journal commentary by Profs. David Skeel of the University of Pennsylvania Carey Law School and Kenneth Ayotte of the UC Berkeley School of Law. Corporate reorganization depends on experienced lawyers and judges to manage its complexity, and these professionals are in limited supply. The system could easily be overwhelmed if entire industries file for bankruptcy. Absent federal assistance, corporate debtors might also be unable to obtain the funding they need to maintain their operations and protect current jobs during the case. By providing cash to companies that suddenly have no liquidity, Mnuchin may enable some to avoid bankruptcy altogether. Treasury could also adapt its administration of chapter 11 to suit the current crisis, much as the government helped transform auto companies into the “arsenal of democracy” during World War II. Mnuchin could encourage some companies to file “pre-packaged” bankruptcies that write down only the company’s largest obligations and can be approved by a bankruptcy judge in as few as 30 days. With larger companies, Mnuchin could make bankruptcy a condition of receiving a federal loan. Because bankruptcy enables an “automatic stay” on a company’s debt payments, it would provide more relief than a loan or grant outside bankruptcy. Temporary debt relief would buy companies time to sell assets and minimize their need for taxpayer support. Unfortunately, a curious provision in the CARES Act discourages regulators from making loans to “medium sized” companies with between 500 and 10,000 employees if they are in bankruptcy. Ideally, this provision would be removed or replaced with new language that allows loans to any company in bankruptcy. But as it stands, the provision wouldn’t prevent a loan followed by a subsequent pre-packaged bankruptcy.
*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.