The People's Welfare and the Origins of Corporate Reorganization: The Wabash Receivership Reconsidered

Abstract

The 1884 receivership of the Wabash, St. Louis, and Pacific Railway is widely regarded as a turning point in the development of corporate insolvency law. It is said to have created a “new-fashioned receivership,” which enabled debtors to initiate and, to a great extent, control receiverships. It is said that these new-fashioned receiverships facilitated reorganization of the insolvent firm at the expense of creditors' rights. An examination of the history of railroad receiverships reveals that for decades before 1884 judges allowed managers to initiate receiverships, appointed managers as receivers, and forced creditors to accept changes in their contractual rights. Judges also refused to extend reorganization procedures to corporations outside the railroad industry, justifying their special treatment of railroads on the grounds that the foremost obligation of railroads was to serve the public. Analysis of railroad bond prices supports the conclusion that creditors' rights were not transformed by the courts in the mid-1880s.