Bankruptcy for Banks: A Tribute (and Little Plea) to Jay Westbrook

For the past several years, the US Congress has been considering various versions of a legislative reform that would amend the Bankruptcy Code to facilitate the prompt reorganization of systemically important financial institutions (‘SIFIs’). The reform would adapt the ‘Single Point of Entry’ strategy devised for use under Title II of the Dodd Frank Act to bankruptcy. In each context, the assets, short term liabilities, and secured debt of the troubled SIFI would be transferred to a newly created bridge institution, leaving behind its stock and long-term debt. The newly recapitalized bridge institution would be fully solvent, and could contribute liquidity to troubled subsidiaries of the SIFI as necessary.

The proposed bankruptcy for banks legislation has passed the House on multiple occasions, and appears to have strong support in Congress. Although some bankruptcy scholars strongly support the reforms, as do I (full disclosure: I am a member of the Hoover Institution working group whose Chapter 14 proposal was a key inspiration for the proposed legislation), others have been more critical.

In my short essay, I take the opportunity of a celebration of the work and influence of Jay Westbrook to explore his and a handful of other scholars’ opposition to bankruptcy for banks. I begin the essay by surveying Jay’s wide-ranging contributions to bankruptcy scholarship. Jay’s functional analysis has had a profound effect on scholars’ understanding of key issues in domestic bankruptcy law, and Jay has been the leading scholarly figure on cross-border insolvency. After surveying Jay’s influence, I turn to the topic at hand: bankruptcy for banks. Jay has been a strong critic of the proposed reforms, arguing among other things that financial institutions need to be resolved by regulators and an administrative process, not bankruptcy. After addressing these and other objections, I ask Jay if he might reconsider his opposition if the legislation were amended to respond to several of his primary concerns.

David Skeel is the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law School.