The litigation against the Dodd-Frank Act’s orderly liquidation authority continues, with an amended complaint filed last week, adding a few more states to the mix, and the deadlines with regard to the government’s motion to dismiss reset accordingly.
The revised complaint (see below) continues to assert that the authority “constitutes an exercise of Congress’s power under the Bankruptcy Clause.â€
The Bankruptcy Clause - Article I, Section 8, Clause 4 of the Constitution - is something of an oddball. After all, Congress was already granted the power to regulate interstate commerce in the clause just before, so why single out bankruptcy for separate treatment And why lump bankruptcy with nationalzation
To the extent the Bankruptcy Clause is given any thought at all, the modern conception of the clause is to assume it part of a larger Hamiltonian effort to federalize the economy: the Commerce Clause, the Bankruptcy Clause and the Contracts Clause, combined perhaps with the Supremacy Clause and the Necessary and Proper Clause, working together to provide that the most important aspects of commerce are federalized, and kept from piecemeal regulation by the states. Indeed, this conception has probably been the most common understanding for almost a century.
But is orderly liquidation authority even an exercise of Congress’ power under the Bankruptcy Clause
It’s a little unclear, because Congress did not say what power it was exercising when it enacted Dodd-Frank. Presumably, some parts are enacted under the Commerce Clause, but it is plausible that the authority comes u! nder the Bankruptcy Clause, whether Congress knew it or not. After all, there are reasons to doubt whether Congress can enact debtor-creditor law under any other part of the Constitution.
The plaintiffs then argue in Count VI of their complaint that the orderly liquidation authority is defective, because it gives so much power to the Federal Deposit Insurance Corporation and the Treasury secretary that it constitutes a nonuniform bankruptcy law, in violation of the Bankruptcy Clause’s requirements.
Here the litigation goes seriously off the rails. First, it is not at all clear that the uniformity requirement is all that powerful of a restraint. The only case where the Supreme Court has struck down a bankruptcy law on this basis involved a law that applied to a single railroad. Apparently, uniformity requires application of the la to some broader group of debtors.
After that, all bets are off. For example, the court did uphold a law that applied only to Northeastern railroads.
More generally, the Bankruptcy Code is all about providing the debtor with options. Today, an individual debtor can file under as many as four distinct chapters. During the New Deal era, the bankruptcy laws included Section 77 for railroads, Chapters X and XI for other corporations and liquidation, reorganization and composition proceedings for individuals. At this same time, Congress created the F.D.I.C. and vested it with authority over bank insolvencies - probably under the Bankruptcy Clause, whether or not the banking lawyers know it.
In Chapter 11 alone, the debtor is given broad flexibility to shape a plan that fits the debtor’s particular needs. There is no requirement that all debtors follow any specific path.
The orderly liquidation authority litigation proceeds from the faulty notion that Chapter 11 provides a on! e-size-fi! ts-all solution, whereas its quite clear that one reason Chapter 11 and its predecessors have been so successful rests in the flexible nature of the proceedings.
But it may be that the court will never have to decide this issue.
After all, it seems a bit strange to challenge the constitutionality of an insolvency provision that might never be invoked.
Complaint gainst Dodd-Frank’s orderly liquidation authority by
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethcs at Seton Hall Law School and an expert on bankruptcy.
