October 2, 2010

The Bankruptcy Squeegee Guys

Kudos to Katy Porter for dropping a dime on the Justice Department for its indefensible decision to chime in on the side of the creditors before the Supreme Court in the MBNA case. Katy's post offers a crisp summary of the issue—it's a dispute over a fine point of interpretation in a bankruptcy statute. But the real point is the meta-issue, on which let me cut to the chase: the government has no dog in his fight, and so no good motivation spending its limited resources trying to to work the ref.

Except one—speculative, but I'm sure she's right: the US Trustee (an arm of Justice) wants it. For the past five years, the US Trustee has taken as its mission the task of policing debtors (and their attorneys) in bankruptcy cases. Making a Supreme Court argument that creditors could perfectly well make themselves—and at their expense—is fully in consistent with the role the US Trustee has assigned to itself.

A bit of background. For a long time, the US Trustee was an agency in search of a mission. Congress created the US Trustee in 1978 as a compromise on the issue of how to supervise bankruptcy cases. The deal was to leave case management in the hands of private parties with the US Trustee as a kind of supervisor.

Except from day one, it was clear that nobody knew quite what the US Trustee was supposed to supervise, and how. For years, they satisfied themselves with a lot of glorified paper-shuffling, helping to weed the dormant cases out of sclerotic dockets, for example. They did play a small role in policing attorney's fees and blowing the whistle on some of the more egregious instances of attorney misbehavior. They'd weigh in on the bigger, more visible, public company cases—but these were typically the cases where their participation was least needed, the relevant interests being so well protected

Along came the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Urk!). For those who haven't been keeping score—BAPCPA was a miscellaneous grab-bag of amendments to the Bankruptcy Code mostly designed to make life more difficult or expensive for individual debtors trying to get the protection of bankruptcy. It was shambolically drafted and only semi-coherent but just in passing I'd have to note that a lot of the substance made good sense: for a generation, bankruptcy had indeed functioned as kind of a debtor's playground and a bit more balance in the system was not the End of Western Civilization as we Knew It.

But some time during this process, behind some Steelcase desk on Mass. Avenue, the light dawned: beat up on debtors and you will not offend the powerful in Congress. Nor, of course, the creditors who might have supposed they would have to do their own work, and on their own dime. Anyway, coming out of the box, the newly transmogrified US Trustee presented itself—more or less unasked—not in a striped shirt with a whistle, but as the boy in blue with the badge. In some respects they make me think of the squeegee men who used to pop up unasked in Manhattan to clean your car windows. Okay, the comparison is not exact: in this case the customer is perfectly happy to have his window cleaned, especially since it is not he who will have to pay for it.

Again, before I get carried away—there is nothing intrinsically wrong with the goal of policing debtor misbehavior. Laws are laws and deals are deals. And as I've already said, I'm somewhat more tolerant than many of my bomb-throwing pals of some of the substantive innovations of the 2005 Act. But I'm remembering what Woodrow Wilson once said about Congress: Congress may do the right thing but never because it is the right thing. Something similar may be said of the bureaucracy. The US Trustee's campaign against debtors has far less to do with any question of substantive right than it does with institutional survival. The Justice Department should stop being the enabler here. It should abandon its position in the MBNA case and devote its resources to a more worthwhile or product—like, perhaps, the abolition or at least the severe scaling-back of the US Trustee.

Cross-posted at Underbelly.