Elizabeth Warren’s Little-Known History in an Obscure but Influential Legal Organization

Warren fought her legal colleagues within the American Law Institute over bankruptcy in the 1990s, the same time the issue was heating up in Congress.

Sen. Elizabeth Warren (D-Mass.), a Democratic presidential candidate, speaks during a town hall-style campaign rally at Weeks Middle School in Des Moines, Iowa, Jan. 19, 2020. (Jordan Gale/The New York Times)
Sen. Elizabeth Warren speaks during a town hall-style campaign rally at Weeks Middle School in Des Moines, Iowa, on Jan. 19, 2020. Photo: Jordan Gale/The New York Times via Redux

The American Law Institute, which consists of 4,000 top litigators, judges, and law professors, is largely unknown to the public. Yet at the heart of the U.S. legal community, this invite-only cohort of lawyers writes rules and opinions that guide courts and legislatures across the nation.

Sen. Elizabeth Warren has played a significant role in ALI for decades, serving as a member of its leadership and ultimately as its vice president. While Warren’s record as a lawyer has been highly scrutinized on the campaign trail, her time within ALI has gone virtually unnoticed. But Warren’s battles within the organization reveal much about her politics and her political style, long before she became nationally known for spearheading the Consumer Financial Protection Bureau.

Warren remains a member of ALI and has continued to monitor the group’s activities — even weighing in on a heated debate while on the presidential campaign trail last spring.

“While I didn’t always see eye to eye with many of ALI’s decisions, I used my position inside the organization to advocate on behalf of working people and against powerful interests, even when it meant going up against my colleagues,” Warren told The Intercept in an email.

Warren’s most significant battle with her ALI colleagues centered on bankruptcy rules in the 1990s, at the same time the issue was heating up in Congress. The ideological contours of the bankruptcy wars are drawn around the question of who should bear the risk of failure in capitalism and who should be protected. One side, championed at the time by Democrats like Joe Biden in the Senate, said that banks and other lenders must be shielded from harm in bankruptcy, lest they recoil from future lending and slow the growth of the economy. The other side, represented in congressional debates by then-professor Warren, argued that banks often play a predatory role and that workers, tort victims, and other businesses owed money deserve their piece of the defunct firm’s pie. If bankruptcy laws tilted too far toward lenders, Warren warned, profit would be privatized but the risk and losses would be socialized.

This ideological battle was on display in ALI, as the organization decided to update a section of an influential legal code that concerned state bankruptcy rules.

Warren fought against a proposal that would give even more protections to so-called secured creditors, those who already had the most power in bankruptcy proceedings and could demand full debt repayment while everyone else suffered. She presented a counterproposal to her ALI colleagues that was rejected as unworkable and too radical. Steven Harris of Chicago-Kent College of Law, who opposed her alternative, remembers the battle well. “I did not think it was a good idea and I still don’t,” said Harris. “It’s sort of like a wealth tax. It may sound good as an idea, but if you have to put it into operation, then it doesn’t work.”

Warren’s worldview on bankruptcy and capitalism has put her at odds not only with Democrats like Biden, but also with many of her legal peers in fights far from public view.

One major undertaking of ALI is co-writing the Uniform Commercial Code, known to lawyers as the UCC. First published in 1952, the UCC attempts to harmonize laws around sales and commercial transactions across all 50 states. While the UCC is not law itself, states nearly always legislate UCC suggestions into law.

In the early 1990s, ALI decided that it should revisit Article 9 of the UCC, a section that governs secured transactions, including the creation, enforcement, and settling of debts. When a company goes bankrupt, its remaining assets are divided up between creditors — until the assets run out. Because of this, the priority of different creditors is very important. The lowest-priority creditors — the last people in line — are likely to end up with little or nothing.

Traditionally, some of the first people in that line are those with “secured” credit, those with the ability to repossess assets like homes or cars as payment for a debt. Secured creditors are likely to be wealthy entities like banks, which have lent money and required collateral for doing so. But a bankrupt company might owe money to other people too, like its employees, or tort victims, or plaintiffs in lawsuits that are suing the company for damages. These creditors are “unsecured” and are typically left to the back of the line.

The lead authors on the project, Harris and Charles Mooney Jr. of the University of Pennsylvania, took a view — which ultimately prevailed — that secured creditors should be entitled to as much as possible in a bankruptcy proceeding. The authors, known in ALI jargon as “reporters,” wanted to give secured creditors even more assurance that they could safely lend money. As Harris and Mooney put it, “The right to own private property is the bedrock of capitalism and an essential component of a market economy. … We believe it follows that the law should honor the transfer or retention of security interests on the same normative grounds on which it respects the alienation of property generally.”

Warren pushed for an alternative position, in which unsecured creditors would be entitled to some of a company’s assets in the event of a bankruptcy, regardless of their place in the “line.” She disagreed that a reverence for capitalism meant giving secured creditors that much power, and she was among the most vocal dissenters when ALI reviewed an early draft of the revised Article 9. The ALI director at the time, Geoffrey Hazard, asked her if she’d like to draft a different version that might better balance rights among all creditors.

On April 25, 1996, Warren submitted her proposal, which called to “limit the reach” of secured credit and allow unsecured creditors to claim 20 percent of a debtor’s assets. “This proposal requires that trade creditors, tort victims, employees and other unsecured creditors who also contribute to the life of a business have some access to the assets of that business if it unable or refuses to pay its debts,” she wrote.

The revisions that ALI ultimately adopted have since “shifted the power in every commercial relation” for the worse.

This “carve-out” idea, as it became known, was quickly blasted as radical and hotly protested by ALI attorneys, who called it an ill-thought-out, blunt instrument. Most opponents claimed that without giving maximal power to secured creditors, total credit in the economy would decline, and therefore, all businesses would suffer. Others argued that a carve-out could only make sense for bankruptcies, not for all secured transactions.

In 1997, Warren published a law review article responding to her critics, arguing that the point should not be just to expand credit as efficiently as possible regardless of all other considerations. “If the only test of any part of a commercial law system were whether it promoted or constricted credit, then our system would look very different,” she wrote. “Why not return to the days to debt servitude? Why not permit security interests in body parts?” She sarcastically warned that she was not trying to “give the current Article 9 drafters new ideas,” but instead hoped to show that “even if a security device promotes lending, there may be reasons not to support it.”

There was interest among some academics for Warren’s idea, but practicing attorneys and the majority of ALI’s Article 9 drafting committee rejected it rapidly and vigorously. Mooney argued that it failed because it was, simply, not a very good proposal. “If something is a really bad idea, it tends to not get as much support as if it’s a good idea, and this failed on the merits,” he told The Intercept.

Lynn LoPucki, a UCLA law professor and bankruptcy expert who supported Warren’s idea, said the revisions that ALI ultimately adopted have since “shifted the power in every commercial relation” for the worse. While the cards were stacked in favor of banks before these revisions, LoPucki said the new Article 9 tilted the scales toward them even more.

Even after losing the fight over Article 9, Warren has continued over the years to advocate for unsecured creditors.

In 2002, while serving as ALI’s vice president, she backed a bill introduced by Sen. Richard Durbin, D-Ill., and then-Rep. William Delahunt, D-Mass., that would have, among other things, significantly elevated unsecured creditors in the bankruptcy process. The bill sponsors said that provision was a direct response to the revised Article 9, which by then had been adopted in all 50 states. Critics argued that such a change would do far more than just restore the status quo, and a group of lawyers, which included Mooney and Harris, organized in opposition against the provision. They successfully lobbied federal lawmakers to kill it.

Throughout the next two decades, Warren continued to advocate on behalf of those who generally emerge as losers in the bankruptcy process. This past summer, she released a bill, the Stop Wall Street Looting Act, to rein in private equity. Aside from making it more costly for private-equity firms to go through bankruptcy — by putting them on the hook for the employee pensions and debt obligations of the companies they buy — her bill also would also move workers and consumers up the asset-claiming totem pole.

Another major ALI effort Warren involved herself with centered on trade. From 1995 to 2004, Warren served as a U.S. adviser to ALI’s Transnational Insolvency Project. The project, launched in 1994, was meant to develop shared bankruptcy principles for companies doing business in more than one NAFTA country.

She worked with Jay Westbrook, a friend and professor at the University of Texas School of Law, who was one of the project’s lead “reporters.” They engaged from the standpoint that during an international bankruptcy proceeding, rules should be designed to help creditors get the maximum value possible. In practice, this meant treating an international company as a single entity during liquidation, rather than selling it off country by country, piece by piece.

“When I joined the Transnational Insolvency Project as an adviser, NAFTA had already gone into effect,” Warren told The Intercept in an email. “Our goal wasn’t to support or oppose the trade deal. Instead, our goal was to ensure that there were rules in place to deal with business failures—- which, for me, required looking out for American jobs.”

Earlier this month, Warren joined a majority of Democrats in voting for the United States-Mexico-Canada Agreement, President Donald Trump’s signature trade deal, despite strong opposition to it from environmental groups. Though NAFTA had not been renegotiated for 25 years, Warren defended her vote by arguing that if she were president, the U.S. would be able to legislate improvements to the new agreement. In her campaign’s plan for trade policy, released this past summer, Warren adopted a similar logic around balancing competing business priorities as she took in her fight for Article 9. “Unlike the insiders, I don’t think ‘free trade’ deals that benefit big multinational corporations and international capital at the expense of American workers are good simply because they open up markets,” she writes. “Trade is good when it helps American workers and families — when it doesn’t, we need to change our approach.”

Warren, who moved to Harvard Law School in 1995, also consulted on bankruptcy cases during the time period she worked on the NAFTA project, earning roughly $1.5 million for outside legal work. While attorneys were encouraged to “leave their clients at the door,” ALI didn’t adopt a formal conflict of interest policy for business transactions until 2003, according to Jennifer Morinigo, ALI spokesperson. The policy was updated again in 2009.

During this time, Warren worked on only one case that directly overlapped with NAFTA, when she served as an expert witness for the U.S. Justice Department. A Canadian funeral home company was seeking $725 million from the U.S. through the investor-state dispute settlement, or ISDS, a controversial international tribunal meant to resolve trade disputes through arbitration. The company, Loewen Group, filed its claim with ISDS after being hit with a $500,000 penalty from a Mississippi-based jury. Warren was paid $90,000 for her services, according to her campaign, and, as Politico reported in 2015, she argued that the Loewen Group could have used the bankruptcy process to avoid the massive judgment, instead of seeking relief through the international tribunal. (The dispute resolved on a technicality: Loewen restructured itself as a U.S. company in 2002, becoming ineligible to use the NAFTA tribunal at all.)

As a senator, Warren would become an outspoken critic of ISDS, writing in the Washington Post that Barack Obama’s Pacific trade deal “would tilt the playing field in the United States further in favor of big national corporations” because it included the arbitration tribunals. Politico noted that there were no records of Warren raising criticisms of ISDS prior to that year, though a Warren spokesperson argued that there was no conflict between the positions she took in 2000 on behalf of the Justice Department and her present objections to ISDS.

Even amid her presidential campaign, Warren has kept a close eye on ALI’s debates. Last spring, a dispute split the group, and the presidential contender jumped in, using her new national platform to pressure members.

In May, members of this nearly century-old organization were convening for their annual conference and preparing to vote on an issue that anyone with a cellphone or a Facebook account would be familiar with: the accumulation of massive consumer contracts like user agreements, signed every day by regular people as a part of daily life.

Among ALI’s most important work are its “restatements,” which are not legally binding but highly influential. When a court or legislature confronts an undecided legal question, very often, the first thing they’ll turn to is the restatement — and, more often than not, they’ll follow ALI’s lead. In this case, ALI members were considering an unusually polarizing restatement concerning these consumer contracts. It was the culmination of a seven-year effort led by three ALI members to clarify the rights of consumers and businesses when making transactions online. “It is both irrational and infeasible for most consumers to keep up with the increasingly complex terms provided by businesses in the multiple of transactions, large and small, entered daily,” the proposed restatement said in its introduction.

But while there was consensus that yes, those long “terms of agreement” and ever-changing privacy policies are generally impossible to digest, there was also great disagreement over ALI’s proposed remedy and whether ALI should be wading into the issue at all, rather than let it play out on its own in the courts and through politics.

Consumer advocates argued that the proposal, which would redefine consumer consent, posed fundamental harm to individuals, binding them to unfair contracts in new and dangerous ways. Business groups — including the U.S. Chamber of Commerce and trade associations for bankers, telecom, and retail — also opposed the draft restatement, arguing that it would give courts newly expanded powers to alter their agreements.

Remarkably, a week before the scheduled vote, 23 state attorneys general sent a letter to ALI expressing their collective opposition to the proposed restatement and then, in another significant escalation, Warren gave a statement to the American Prospect expressing opposition to the proposal. She followed up with a tweet to her millions of followers urging the restatement to be rejected. (Warren had also privately opposed the proposed restatement more than a year before forming her presidential exploratory committee. In a letter to ALI President David Levi in December 2017, she wrote, “It would be a mistake for the ALI to proceed.”)

In the end, after hours of debate, ALI members approved just one of the proposed restatement’s nine sections. While the organization might continue the debate next year, some lawyers are hoping that the project gets shelved altogether.

In an interview with The Intercept, Oren Bar-Gill, one of the authors of the consumer contract restatement, lamented its “unfortunate politicization.” “The project has become a lightning rod for political debate in a way that’s not justified,” he said. “I think that some of the people who are most powerfully for or against it have not read and engaged with the project deeply.”

He had particular criticism for Warren, who in 2008 had co-authored a law review article with him about making credit safer. “Senator Warren and these [attorneys general] did not really engage with the project, or read the draft, which is lengthy,” he said. “Frankly, if you read all that Professor Warren wrote as a law professor, she never once adopted in her academic writing the position she took on our restatement. It became a political fight, and she joined the critics on the left.”

Others said that Warren’s public comments in the debate made sense, given her history of using tough, attention-grabbing language in public, while quietly leveraging her personal relationships behind the scenes.

“Given her career and given the topics she focuses on, it makes sense Warren would have tried to have some influence on that process,” said Deepak Gupta, a public interest attorney and ALI member, who also opposed the consumer contracts restatement. “She believes in an inside-outside strategy, and there’s nothing more inside than working the levers of the ALI.”

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