Bankruptcy's Equity Canon

Abstract

The Bankruptcy Code constrains bankruptcy courts’ equitable powers, yet bankruptcy courts have often used those powers in ways that go beyond the Code’s text. This conflict creates tensions between various bankruptcy goals. The Code provides ex ante certainty and contains substantive policy choices, which equity threatens to compromise by allowing bankruptcy judges to override the text. Without equity, however, bankruptcy proceedings would provide parties with occasions to gain positional advantages in bankruptcy, thereby allowing them to unilaterally capture value at those other parties’ expense. Drawing on insights from equity theory, this Essay identifies a role that equity can play to balance these interests. This Essay proposes an “equity canon” for bankruptcy courts to use when interpreting the Bankruptcy Code: judges should interpret unclear provisions by disregarding interpretations that would lead to inequitable outcomes. Equity theorists have illuminated equity’s role in combating opportunistic evasions of the law that cannot be identified and prevented ex ante. This is particularly important in bankruptcy. While bankruptcy proceedings are designed to maximize the estate’s value, parties nonetheless have incentives to capture value for themselves. Bankruptcy courts can use the equity canon to combat parties’ opportunistic exploitation of the Code while respecting the Code’s primacy.