When Benefit Corporations File For Bankruptcy, Will Anything Be Different?
by | posted in: Bankruptcy, Corporate Governance, Fiduciary Duties, Jurisprudence | 0

By Christopher D. Hampson (University of Florida Levin College of Law)

Christopher D. Hampson

Social entrepreneurs and lawyers gave birth to the benefit corporation out of frustration with the Delaware law that governs fiduciary duties during insolvency.  The benefit corporation statutes require directors to consider general and specific public benefit alongside the interests of shareholders.  While legal scholars have grappled with whether the benefit corporation form works well to preserve social commitments, we have not yet explored fully what would happen when a benefit corporation files for bankruptcy.

I attempt to answer that question in Bankruptcy & the Benefit Corporation.  As I see it, during good times, the benefit corporation may not improve on traditional corporate forms.  After all, wise leaders can balance short-term and long-term goals and weigh the interests of shareholders against stakeholders, within the space provided by the business judgment rule.  Whether those leaders are indeed wise is probably more important than the corporate form itself.  But during bad times, the law tightens around directors, and that’s where the benefit corporation form provides extra protection for directors committed to both doing well and doing good.

My analysis of duty-based, utility-based, and character-based approaches indicates that we should want commitments to public benefit to persist into bankruptcy.  Drawing from Carl E. Schneider’s “channelling” function of law, I argue that the benefit corporation stands as a meaningful “third way” for entrepreneurs, investors, and employees, a corporate form that attracts those interested in pursuing profit while accomplishing some social goal.

When it comes to bankruptcy, some scholars are quite pessimistic about the benefit corporation’s fate.  After all, the U.S. Supreme Court has told us that the trustee in bankruptcy has a duty to maximize the value of the estate, and that duty might replace or wash out the fiduciary duties of the directors of a benefit corporation.  I am more optimistic.  The duty of the trustee in bankruptcy is famously underdefined (what kind of value?  value to whom?).   Against the Supreme Court’s vague pronouncements, 28 U.S.C. § 959 and the Butner principle suggest that state law innovations, like the benefit corporation, should control.

The remainder of the article explores the complexity of running that argument through the reticulated, multiplayer world of an insolvency case, because — well, this is bankruptcy.  Rules like adequate protection and absolute priority serve as guardrails that state law fiduciary duties cannot override.

I might be wrong, and it could be some time before we know one way or the other.  By publication, I had found one filing by a benefit corporation, Medolac Laboratories in the District of Nevada, and it didn’t raise the issues I explore in the article.  When more data comes in from benefit corporation filings, we may find out what bankruptcy courts think about the newest corporate entities to face financial distress.

The full article has been published in the American Bankruptcy Law Journal (96 Am. Bankr. L.J. 93 (2022)) and is available here.

Bankruptcy Step Zero
by | posted in: Bankruptcy Administration and Jurisdiction | 0

Authors: Douglas G. Baird and Anthony J. Casey

In RadLAX Gateway Hotel, LLC v Amalgamated Bank, the Supreme Court’s statutory interpretation focuses on an emerging theme of its bankruptcy jurisprudence: the proper domain of the bankruptcy judge. While one might expect the Court to approach that question of domain as it has for administrative agencies, that is not the approach taken. This article explores the Court’s approach to bankruptcy’s domain. In doing so, we connect three principal strands of the Court’s bankruptcy jurisprudence. The first strand, embodied in Butner v United States, centers on the idea that the bankruptcy forum must vindicate nonbankruptcy rights. The second, most recently addressed in Stern v Marshall, focuses on the limits of bankruptcy judges in deciding and issuing final judgment on the issues before them. Bankruptcy judges must limit themselves to deciding issues central to the administration of the bankruptcy process. RadLAX is the continuation of a third strand that makes it plain that the Court reads ambiguous provisions of the Bankruptcy Code to narrow the range of decisions over which the bankruptcy judge may exercise her discretion — at least when the exercise of that discretion might impact nonbankruptcy rights. The resulting bankruptcy jurisprudence is in stark contrast with the Court’s approach in administrative law. This paper attempts to make sense of this state of affairs and connect it with the realities of bankruptcy practice today.

The article is available here on SSRN.