WUSTL law professor warns about tinkering with bankruptcy code


Bankruptcy expert Daniel L. Keating, JD, professor of law at Washington University in St. Louis, is warning policymakers that any tweaks to the bankruptcy code could have unintended consequences and do little to improve the system.

Keating testified recently before a hearing in Chicago about labor issues in bankruptcy proceedings.

The ABI (American Bankruptcy Institute) Commission to Study the Reform of Chapter 11 is collecting input and will prepare recommendations for Congress in coming months as it wrestles with revisions to the federal bankruptcy laws.

Keating offered a big-picture perspective on bankruptcy issues and provided several lessons learned so far that lawmakers would be wise to keep in mind as they move forward. He said:

1) You cannot effectively fix a nonbankruptcy problem with a bankruptcy solution.

2) When you create large priorities that apply only in a certain reorganization process, employers will seek to avoid that process.

3) If you make a particular employee benefit more expensive for employers, fewer employers will offer it.

4) A piecemeal liquidation can destroy even the most powerful priority.

5) A lender’s willingness to lend, both within and outside of bankruptcy, can be affected by the creation of new priorities.

“I worry that the creation of more bankruptcy-specific priorities for labor claims will end up hindering the overall effectiveness of bankruptcy as a corporate reorganization tool,” Keating told the commission members.

“And at the same time, I don’t believe that approaching these problems through the bankruptcy code will cure the true underlying disease, which is the ability of employers to make long-term promises to workers and retirees without having to provide adequate pre-funding of such promises.”

To review his full written remarks or to watch a video of the hearing (Keating’s remarks begin around the 49-minute mark), visit here.