Cost of Representation: An Argument for Permitting Pro Se Representation of Small Corporations in Bankruptcy

Abstract

Bankruptcy filings have steadily increased as the economy struggles to recover from the mortgage and financial crisis. Total filings increased 27.4 percent from fiscal year 2009 to 2010. In fiscal year 2010, 61,148 businesses filed for bankruptcy, and 13,553 filings occurred under Chapter 11. The failures and subsequent bankruptcies of massive corporations such as Lehman Brothers and General Motors have grabbed headlines. However, large businesses account for only a fraction of total bankruptcy filings. Studies of bankruptcy filings have shown that the vast majority of bankruptcy petitions are filed by small businesses. Small business bankruptcies increased 44 percent from the third quarter of 2008 to the third quarter of 2009.

If these small businesses are corporations, LLCs, partnerships or other artificial entities, they are required to appear in bankruptcy court through a licensed attorney. Even for those businesses that are able to afford such representation, the cost–relative to the firm’s assets–can be extremely high, reducing the total assets available to creditors during litigation. This Note argues that bankruptcy judges can and should be more willing to create exceptions to the rule requiring all corporations to attain representation.

Part II traces the origins and justifications for the general rule requiring that a corporation in bankruptcy be represented by an attorney. It argues that the rule is judicially created and prudential, and thus subject to exceptions when its application would be imprudent. Part III questions the universal desirability of the rule. It begins by presenting new empirical evidence showing that the traditional rule predominates in practice. However, the justifications for the rule do not exist in all cases and are particularly absent in small business bankruptcies. In these same cases, representation can be very costly, denying many corporations access to bankruptcy, and also consuming a large portion of the assets of companies that do enter bankruptcy. Part IV builds a framework of potential exceptions to the general rule. There is no simple formula that can determine which cases are appropriate, but this Note concludes by identifying factors that can assist judges in evaluating when an exception might be appropriate.