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The Creditor in Possession
A hallmark of United States bankruptcy law has been the principle that a debtor should be provided with an opportunity to use the bankruptcy to get a “fresh start.” That principle, initially applicable to individuals, was carried forward as an underlying premise of business reorganizations and coupled with the belief that reorganizations preserved going concern values. The value of reorganization as compared with liquidation in cases of major business failures was first realized in connection with the reorganization of railroads during the latter part of the 19th century that continued into the 20th century. In the context of the current economic environment, the underlying premise of railroad reorganizations of preserving going concern value may no longer be viable.
Background
Railroad reorganizations, initially, were not predicated upon a bankruptcy statute. Federal courts exercised their equity jurisdiction to prevent dismemberment of the railroad; appoint a receiver(s); oversee the operations of the entire railroad system across state and federal district lines; enable interim financing through sale of receivers' certificates; and allow the negotiation and implementation of a plan of reorganization; all for the purpose of providing the railroad with a fresh start and enhancing value for the economic stakeholders. As the U.S. moved into the 20th century and the dire economic consequences of the Great Depression of 1929 began to emerge, the railroad equity receivership became the paradigm for saving the economic foundation of the U.S. industrial complex. The basic principles were codified by the enactment of the emergency legislation of 1933 that added sections 77 (railroad reorganization) and 77b (business reorganizations) to the Bankruptcy Act of 1898 and then by the more comprehensive Chandler Act of 1938. Between 1938 and the enactment of the Bankruptcy Reform Act of 1978 (BRA), the principles of debtor protection, rehabilitation and reorganization under court supervision permeated U.S. law. The use of Chapter 11 expanded as a primary reorganization vehicle for private and public corporations and other business entities. With judicial support and consequently adopted federal rules of bankruptcy procedure, Chapter 11 provided a debtor with injunctive protection against creditor actions and unlimited exclusivity as to the proposal of a plan, among other benefits.
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