Was it Immoral for American Airlines to File for Bankruptcy?

Gerard Arpey, the former chief executive of American Airlines, was recently described in a New York Times online op-ed by Gordon College president Michael Lindsay as refusing to put the airline in bankruptcy for moral reasons. When the company decided to file for bankruptcy, he stepped down. “He split with his employer of 30 years,” as Lindsay put it, “out of a belief that bankruptcy was morally wrong, and that he could not, in good conscience, lead an organization that followed this familiar path.” In my view, Mr. Arpey’s stance is admirable, but it also is mistaken.

Arpey’s commitment to honoring American’s promises to its employees has a deep biblical pedigree. Proverbs emphasizes the importance of promise-keeping, and the Psalms condemn those who borrow and do not repay. Yet the Bible also offers forgiveness for those who fail to honor their obligations. It is not accidental that when Jesus talks about the forgiveness of sins, his illustrations often involve the forgiveness of debt. “Forgive us our debts,” he taught us to pray, “as we forgive our debtors.”

Is it possible to put these seemingly inconsistent ideas together? I think it is. It seems to me that the biblical principle that we should keep our promises suggests that it is never appropriate to use bankruptcy to discharge obligations if they realistically can be honored. Our yes should be yes, and our no should be no. But if honoring the obligations becomes impossible, it is altogether appropriate for an individual or corporation to seek relief. There are very practical benefits to this scriptural pattern: relieving a debtor’s obligations may make everyone better off, since employees and other creditors may get little or nothing if a debtor collapses under the burden of its debt.

One of the remarkable attributes of American bankruptcy—for a corporation like American Airlines this means the reorganization provisions in Chapter 11—is the extent to which it fits the biblical pattern. It has long been designed to offer a fresh start. I think there are clear historical reasons for these biblical echoes, but that is a story for another day.

If Arpey believed that bankruptcy wasn’t necessary, and that American Airlines still could make good on all of its obligations, his stance would be fully consistent with the principles I’ve described. American had a great deal of cash (over $4 billion, by some reports) when it filed for bankruptcy, for instance, which might suggest that American had not yet reached the point at which bankruptcy is appropriate. But if Arpey is arguing that bankruptcy is never acceptable, I don’t think this is consistent with biblical teaching.

As Lindsay notes, there is a great deal about Arpey that is worthy of emulation. According to the New York Times op-ed, he had no severance package when he stepped down, and his company stock will likely be worthless. His story certainly is a refreshing change from the things Americans have come to expect from the so-called “1%.” The only thing that strikes a false chord is his insistence that bankruptcy is always immoral.

David A. Skeel is S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law School and author of The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences (Wiley, 2011), and Debt’s Dominion: A History of Bankruptcy Law in America (Princeton, 2001).