Liveblogging the Religion and Bankruptcy Conference, Part II

Here for the second panel, which kicks off with Professor Haider Hamoudi’s discussion of why bankruptcy law has been relatively irrelevant to Islamic law, that is, Sharia law.  Hamoudi says:

Bankruptcy laws have been largely transplanted from the West, and there seems to be little interest in enacting Islamic bankruptcy law.  The reason is the large phenomenon of Islamic finance, which purports to be about profit-sharing.  The objection to money interest on a loan is that the West is engaged in a rapacious form of capitalism, while Islamic society is more caring.  It’s essentialy a strong position against usury.  Islamic finance laws need to share between capitalist and laborer.

A purely transplanted regime of bankruptcy makes a mockery of this profit-sharing regime.  To make sense, at the point of solvency, you would have to have a mechanism which divided property according to the profit-sharing model.

A second reason is that under the Islamic model, if you reach a situation where you cannot pay, you are not supposed to increase the time to pay and increase the interest.  You’re supposed either to forgive the loan or wait for the debtor to discharge (ribha). 

The reason that there is not very much interest in bankruptcy in Islamic law is not so much that the doctrine of bankruptcy is impossible to work through Islamic law, but that Islamic finance now has evolved into a model of “mimicry” — there is no profit-sharing any longer, but there is now the creation of various structures which replicate conventional financial transactions.  For bankruptcy, there is similar interest in mimicking Western bankruptcy structures — but those are not issues of Islamic bankruptcy so much as pragmatic and not centrally organized solutions. 

Also, the way in which Islamic finance operates is to separate itself from law entirely.  This preserves the “legal” commitment to profit-sharing (which in practice has fallen away) as a kind face-saving mechanism, while allowing the mimicking function to operate.  Islamic finance has responded by privatizing bankruptcy — choose New York bankruptcy law or English bankruptcy law, for example, that way there is no issue of worrying about its comporting with Sharia law.  The aim is to minimize the “risk” that Sharia law will affect the way the deal is handled from a legal perspective.  The result is a particular lack of appetite for Islamic bankruptcy principles.  Instead, bankruptcy is privatized and handled by the parties to the transaction.  The interest in having Sharia be a core part of the legal regime is actually quite small, and so the interest in developing “Islamic” bankruptcy is small as well (a very interesting point!).

Next is Professor Lyman Johnson on the subject of faithfulness and faithlessness in bankruptcy institutions — fiduciary duties — as well as religious understandings.  Meaningful sanctions, though, for breaching the duty of faithfulness are extremely uncommon, which allows bad actors the freedom to repeat the faithlessness.

Johnson says that bankruptcy courts should be allowed to debar faithless trustees, triggered by behavior which now escapes punishment for fiduciaries.

Three issues: (1) bankrupcy proceeding could take account of how faithless behaviors will affect companies in the future; (2) BK proceedings should have not only a single proceeding focus, but a governance focus too; (3) BK oversight in religious settings should be extremely limited.

Issue one: it is very difficult to sanction misbehaving fiduciaries.  The loyalty ambit is very narrow — “deliberate misbehavior”  under Delaware law.  Debarment relief is available under other regimes: environmental, defense, commodities futures trading, and the SEC framework (scienter).  Bar orders seek to prevent, and not merely compensate.  In bankruptcy: what underlying behavior should predicate debarment?  What standard must be met?  What concerns and objections might be raised?  For religious organizations, how might First Amendment concerns affect the situation.

Behavior: who misgoverned the organization — poor risk management.  Those who mismanage should be prevented from repeating their mistakes.  Gross negligence should be the standard for debarment.  Objections to Johnson’s approach: the primary objection would be that the BK laws have a narrow aim  — settling claims and getting out quickly.  Any sanctioning of wrongdoers that does not augment the stakeholders return is out of place.  But Johnson says that thinking of BK proceedings as stand-alone legal and social structures is a mistake. 

First Amendment: jurisprudential and jurisdictional issue.  Can secular law do things with civic organizations that it cannot do with religious organizations.  Hosanna-Tabor case only involves employees of religious organization, not non-employees, non-clergy members would be treated if they became reckless in performing their duties.  Misperformance of higher level governing officials can create harms, but the entity is not liable for governance failures. 

The third speaker, Professor Steven H. Resnicoff, discussed bankruptcy in Jewish law.  Jewish law permits interest loans.  Poverty is not a cause for shame, but it is a test and can be a punishment — for the poor and the rest of us.  Deuternonomy — “open your hand wide” to the poor person. 

Creditors under Jewish law: cannot demand payment from a debtor when the creditor knows the debtor has no means to pay.  Cannot go into a debtors home to seize collateral.  Must allow the debtor to use collateral.  Cannot take certain kinds of collateral: no seizing “the tools of the trade.”  Cannot force a debtor to work to pay off a loan.  Cannot have the debtor imprisoned — this was true for millennia, unlike in Western systems.  But if you can prove that a person has the means to pay, and is not paying, you can put him in prison.  

Question period: Professor Sharfman asked Professor Johnson about whether it’s necessary to reform bankruptcy if debarment is available outside of BK law.  He also asked whether a US trustee could fulfill the debarment function.  He gave the example of a kosher slaughterhouse in Iowa, the proprietor of which was convicted of fraud.  The entity filed for BK, and one of the conditions floated by a creditor was that no member of the proprietor’s family be permitted to be an employee any longer.  Johnson responded to the second question agreeing that this might be a useful resolution, but he wondered whether the debarment would function to prevent the proprietor to work in another position within the industry.  On the first question, Johnson raised a possible standing problem if the mechanism used to debar is state corporate law. 

Professor Movsesian asked a question about a unifying theme in all the presentations — is there a comparative advantage in Jewish and Islamic law, in that each of these traditions have hard laws addressing these questions, where the Christian tradition (per Johnson’s presentation) does not.  Professor Hamoudi responded that there is great similarity in the Islamic and Jewish traditions because of the rule-like qualities of the traditions — the substantive legal codes that each have, and Christianity does not.  Professor Johnson responded that the legal bite of opinions today can nevertheless be served by recourse to the Christian tradition.  — MOD

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