Bankruptcy as a National Security Risk

The US national security regime is facing a private debt problem. Since the early 2000s, the US Department of Defense (DoD) has increasingly relied on private contractors for critical national defense functions. Known as ‘defense outsourcing’, this model has shifted a majority of defense responsibilities—ranging from arms manufacturing to cyber operations—to private hands. In 2023 alone, the DoD spent USD $431.4 billion—over half of the total federal defense budget—on goods and services supplied by contractors. This privatized structure is now essential to US military capabilities, but it carries a serious risk: growing private equity ownership of the defense industry.

At the heart of this risk is the leveraged buyout (LBO) model. Between 2000 and 2022, private equity firms acquired over 1,500 defense contractors using LBOs—corporate takeovers where the acquiring company borrows funds by pledging the target company’s assets and future cash flows as collateral. These LBOs—often leveraging assets at a 9:1 debt-to-equity ratio—have turned the defense industry into one of the most indebted sectors in the US. Over 40% of defense M&A activity is now private equity-driven. The risk of financial collapse is imminent. 

Empirical data supports this concern. In 2024, private equity-owned firms accounted for 16% of all US bankruptcies—the largest share since 2010. Across industries, LBO-acquired companies are twice as likely to go bankrupt as their publicly listed counterparts. Approximately 20% of large companies acquired through LBOs fail within a decade, compared to a 2% bankruptcy rate for companies acquired through other financing methods. 

Those risks are amplified in the defense context. Given the government’s deep reliance on a small pool of specialized contractors, the financial failure of a single contractor can trigger cascading disruptions: defaults, foreclosures, bankruptcies, and ultimately—the erosion of critical defense capabilities. These failures can delay or disrupt weapons delivery, intelligence processing, or base operations. Many high-profile defense contractors, such as Intelsat (defense satellite), MD Helicopters (rotorcraft manufacturing), and Constellis (security services) have filed for bankruptcy under Chapter 11 of the US Bankruptcy Code.

In my forthcoming article in the Minnesota Law Review, I argue that the existing US legal regime is ill-equipped to confront this growing danger. Bankruptcy law (Chapter 11), designed to facilitate market-oriented debtor rehabilitation through the respect for private ordering, is fundamentally at odds with national security law—particularly the Anti-Assignment Acts—which seeks to preserve public control over critical defense operations. These two bodies of law operate independently, and both fail to address the upstream risks introduced by private equity.

The core problem is that private equity transactions escape the oversight of both regimes. The Bankruptcy Code provides only ex post remedies—measures like fraudulent transfer avoidance or preference clawbacks—after a contractor has already filed for bankruptcy. The Anti-Assignment Acts prohibit the transfer of defense contracts and claims without government consent, but do not bar the wholesale sale or restructuring of contractor ownership. This statutory gap allows private equity firms to acquire, restructure, and sell defense contractors without triggering review or accountability. In doing so, they alter the substance—though not the form—of defense contracts, introducing new parties, terms, and risks that were never contemplated in the government’s original bargain. 

Compounding this, private equity structures transactions to be ‘bankruptcy-remote’. When a portfolio company fails, the private equity owner remains insulated from liability. But when it succeeds, the private equity firm retains control and extracts profits—undisturbed by regulatory oversight. This asymmetry distorts the public-private balance in the federal procurement regime. Put differently, the current system allows private equity firms to privatize profit while socializing risk—incentivizing moral hazard and speculative financial behavior in an industry central to national security. 

This loophole reflects a legislative architecture that separates economic efficiency from public accountability. Bankruptcy law, shaped by the ‘creditor’s bargain’ theory, assumes that claim disputes are internal to the firm and its creditors. That proposition finds legal expression in the Butner rule, which mandates bankruptcy courts to respect creditors’ pre-bankruptcy contract rights and limits the courts’ power to disrupt private bargains. National security law, by contrast, imposes strict controls to protect the public interest in critical operations. But in the modern defense economy—where private equity controls the production of public goods and routinely straddles the public-private line when convenient—that separation no longer holds. 

To address this growing legal blind spot, I propose an ex ante approach to risk mitigation tailored to private equity’s role in the defense sector:

1. Mandate leverage ceilings for defense contractors to limit high-risk debt financing;
2. Create a pre-acquisition LBO review mechanism to assess and flag likely-to-fail buyouts before they proceed;
3. Amend Bankruptcy Code § 365(c) to clarify standards for assuming and assigning executory contracts, especially for the defense contracting industry;
4. Revise the Anti-Assignment Acts to make clear that the ‘operation of law’ exception does not apply to M&A transactions that effectively transfer the rights and duties of defense contracts without government consent. 

The stakes are high. Without reform, private equity will continue to exploit regulatory gaps—placing US defense infrastructure at risk for the sake of short-term financial gain. National security cannot remain collateral in speculative finance. The time for structural safeguards is now.

The author's article is available here. 

Jason Jia-Xi Wu is a New York-licensed attorney, former judicial law clerk at the US District Court, and a JD graduate of Harvard Law School.