Financial Markets in Bankruptcy Court: How Much Uncertainty Remains after BAPCPA?

Abstract

In 2005, Congress continued a tradition that can be traced back to the passage of the original Bankruptcy Reform Act. Spurred by a near crisis in the financial markets in the late 1990s, Congress passed legislation extending coverage of the parties and contracts that would be exempted from certain provisions of the Bankruptcy Code (the “Code”). In doing so, much attention was given to the fear that were a major player in the financial industry to declare bankruptcy, the counterparties to its financial contracts would be unable to exercise their contractual rights immediately. This, in turn, would lead to massive uncertainty, exposing the inherently volatile exchanges to widespread risk that could not be controlled by the contractors themselves. The amendments addressed this fear, and did so quite comprehensively. But in a few key areas, recent developments suggest they may not have gone far enough. This Note argues that three important legislative omissions will continue to expose the financial markets to substantial uncertainty and operate contrary to Congress’s intent. Part I will explain the background and purpose of the amendments. Part II will address Congress’s failure to clearly manifest its intent to use industry custom as the primary interpretive tool for ambiguous contracts. This failure has left the door open for courts to undertake the very sort of analysis the amendments were designed to prevent. Part III will show that the inability to capture all relevant financial agreements within the definition of protected netting agreements has recently led to a substantial devaluing of assets during the mortgage crisis. Part IV will show that a new provision intended to clarify the timing of damages actually has injected the Code with more uncertainty. In all three cases, this Note will suggest legislative solutions where possible, and draw attention to existing law within bankruptcy and other areas of commercial law that can be used to craft judicial solutions.