Bankruptcy battle - Letters - Letter to the Editor

Washington Monthly, May, 2002 by David A. Skeel, Jr.

David Cay Johnston's review of my book Debt's Dominion: A History of Bankruptcy Law in America ("Protection Racket," March 2002) lambastes me for neglecting both the "rich treasure of bankruptcy lore" that emerged from the savings and loan crisis of the 1980s and the legislative changes that "gutted partnership laws" in ways that may have contributed to misbehavior by accountants and lawyers.

The problem with Johnston's complaint is that neither the S&L crisis nor the partnership changes were caused by, or even had any direct connection to, bankruptcy. The S&L crisis was not "a rich treasure of bankruptcy lore" for the simple reason that banks and S&Ls have long been excluded from bankruptcy laws. Rather than bankruptcy, their failures were handled by the same state and federal regulators who oversee healthy banks and S&Ls.

Johnston's complaint that "readers will learn nothing about partnership law `reform"' in Debt's Dominion is also misleading. The changes he has in mind are innovations in state business law that attempt to shield accounting firm partners who weren't involved in, say, the Enron account, from the liability of partners who were. As with the S&L crisis, this simply isn't a bankruptcy scandal.

These mistakes and misleading innuendoes obscure Johnston's more useful suggestion that I should have discussed executives' success in protecting their own pay and pensions in recent bankruptcy cases, while less fortunate employees sometimes get little of either. The increasing use of executive-retention agreements can be seen as a revival of the practices--which Debt's Dominion does discuss in detail--that spurred future Supreme Court Justice William Douglas and other New Deal reformers into action against the executives and Wall Street professionals who dominated large scale corporate reorganizations during the 1930s.

I do not claim to be as elegant a writer as Johnston himself. But I do claim that Debt's Dominion explains how and why U.S. bankruptcy law developed so differently from the bankruptcy laws of other countries. I encourage readers to decide for themselves whether my historical explanation of the uniquely American response to financial distress is compelling.

DAVID A. SKEEL, Jr.
University of Pennsylvania Law School
Philadelphia, Penn.

David Cay Johnston replies: Of course regulators take over failed savings and loans, but, as Prof. Skeel must know, their corporate parents filed bankruptcy. Charles Keating's infamous Lincoln Savings & Loan, for example, was taken over by regulators, while its parent, American Continental Corp., filed Chapter II. The thrifts were looted by borrowers, who used inflated appraisals and phony financial statements to obtain funds they had no hope of paying back. Many of these borrowers then filed bankruptcy. Prof. Skeel's narrow view of what is relevant to bankruptcy law apparently keeps him from appreciating the connection between the S & L scandals and the subsequent gutting of partnership laws.