UC Hastings Law Professor Jared Ellias and leading bankruptcy scholars from around the country have asked Congress to consider enlarging the nation’s bankruptcy system to cope with an expected flood of corporate bankruptcies.
The Large Corporate Bankruptcy Scholars COVID-19 Committee is one of four committees that make up a larger working group of scholars studying financial distress related to COVID-19. Ellias chairs the large corporate committee, which includes nearly two dozen top scholars from multiple institutions.
In a May 6 letter to House and Senate leaders, the group “strongly recommends” that Congress add capacity to the bankruptcy system “to prepare for what we fear could be a flood of large corporate bankruptcies arising out of this pandemic.”
“In particular, we urge Congress to appoint additional temporary bankruptcy judges and to increase the budgets of our existing bankruptcy courts so they can bolster their ranks with retired judges, additional clerks, and other necessary personnel that enhance the capacity of the bankruptcy system.”
Such an expansion should ideally be a nonpartisan issue, free from judicial confirmation battles, said Ellias, who serves as Faculty Director of the Center on Business Law at UC Hastings. Bankruptcy judges are appointed by a majority vote of the circuit court judges in the jurisdiction in which they sit, upon the recommendation of the judicial council, a group of court of appeals and district court judges that is chaired by the chief judge of the circuit. While it typically takes about a year to fill vacancies, that process should be accelerated now, the writers argue, before the flood of filings hits.
The scholars argue that bankruptcy law is well developed and the system, if enlarged, is capable of dealing with the financial crisis. “While no legal regime is perfect, our high-quality bankruptcy law is a key comparative advantage for the United States in this unprecedented pandemic,” the committee writes. “Additional reforms may be needed as the crisis advances, but the existing bankruptcy system proved capable of handling many crises in the past and it will likely be up to this challenge as well.”
The committee listed several economic indicators that point to a wave of bankruptcies, including predicted debt default rates, the fact that certain bonds and leveraged loans are trading below face value, and a prediction from Bank of America that another $200 billion of additional investment-grade debt could be downgraded by the end of the year.
Also, municipalities are seeing their credit ratings downgraded and the unemployment rate, a traditional leading indicator of consumer bankruptcies, will likely continue to climb (the current rate is 14.7%).
Ellias told Bloomberg Law that the country is starting to see more filings for small businesses that don’t have the resources to keep going over an extended downturn.