On Thursday night, Joe Biden and Elizabeth Warren will share a presidential debate stage for the first time in a hotly anticipated showdown between the establishment Democratic front-runner and one of his fiercest progressive challengers. Biden and Warren’s core disagreement centers on how hard the next president should push to fundamentally restructure the American economy. Warren has called for “big structural change”; Biden promises a return to normalcy.
To really understand this schism, you must consider the 36 years that then-Sen. Biden spent defending the uniquely pro-corporate laws of his home state, Delaware — laws that protect America’s biggest companies from taxes, lawsuits and accountability; fuel economic inequality; and prioritize the interests of shareholders over those of consumers, debtors and workers.
The system Biden protected affects every American: Because so many companies are registered there, Delaware is effectively the principal author and enforcer of much of the nation’s corporate law. The state boasts more corporate registrations than human residents, including two-thirds of Fortune 500 companies. Delaware is corporate America’s home base.
Like Sen. Bernie Sanders’ attacks on the “rigged economy,” Warren’s calls for change represent a direct challenge to Delaware’s special status. By taking on three key policies that have made Delaware into the corporate paradise it is today, the Massachusetts senator is calling much of Biden’s record into question.
Shareholders Come First
Warren’s first and biggest target is the notion of shareholder primacy: the idea that corporate managers’ most important legal duty is to maximize shareholders’ wealth. That means the interests of workers, families, local communities and the environment are of secondary importance to executives and board members.
“That is in part a function of Delaware corporate law,” said Kent Greenfield, a corporate and constitutional law professor at Boston College. Under Delaware law — which covers all those companies registered in the state ― shareholders must come first.
In effect, Delaware corporate law encourages companies to undercut employee pay and ship jobs overseas in order to enrich shareholders. And it locks out other stakeholders, like workers and consumers, from being considered in the corporate decision-making process.
Between 2007 and 2016, Warren noted last year, “large American companies dedicated 93% of their earnings to shareholders.”
This has other real-world consequences. When President Donald Trump pushed a massive corporate tax cut through Congress in 2017, for example, much of that money was returned to shareholders, rather than workers or other stakeholders.
As vice president, Biden criticized shareholder primacy, saying in 2016 that corporations should “embrace your obligation to workers as well as your shareholders.”
But it’s the competition between states to develop the most business-friendly corporate charters ― the competition that Delaware won ― that effectively ensures shareholder primacy across the nation. And the last time Congress moved to end that competition in the 1970s, Sen. Biden swooped in to defend Delaware’s position.
In the wake of a succession of corporate scandals and bankruptcies, the Senate held a series of hearings to examine whether the federal government, instead of the states, should issue corporate charters for large companies. These hearings were anathema to Delaware’s politicians and business community. The state was then, as now, the national leader in corporate registrations. Fees from business registrations were, and still are, a major source of funding for the state government. (Today, they account for more than one-quarter of the state’s income.) Federalizing corporate charters would also cut profits for the state’s lawyers, accountants and corporate registration companies.
As Congress mulled a possible change, Biden appeared before two different committees to vouch for prominent Delaware lawyers who were there to argue against nationalizing corporate charters and for preserving Delaware’s special position. At one hearing, he suggested that senators not attending should “take the time” to review the lawyers’ testimony “before they make final decisions.” Before another hearing, he praised the witness: “His judgment on these matters is also pretty sharp.”
Biden and Delaware won: Congress never moved to have the federal government take over issuing big corporate charters. The hearings fizzled out after Ronald Reagan took the White House and Republicans won the Senate in 1980.
Now progressives like Sanders and Warren are trying again. In 2018, Warren introduced legislation to federalize the top tier of corporate charters and thereby take away Delaware’s special place as the national writer of corporate law. Warren’s bill would require corporations with more than $1 billion in annual revenue to obtain a federal corporate charter that would require them to consider the needs of a broader array of stakeholders — employees, local communities, suppliers, the environment — when making decisions rather than solely focusing on the concerns of shareholders.
“The role that Delaware plays in determining our system of corporate governance is also, in that sense, going to be in play in the coming campaign,” said Robert Hockett, a Cornell Law School professor who advises Warren, Sanders and Rep. Alexandria Ocasio-Cortez (D-N.Y.).
Biden And Warren Clash, Round 1
The second aspect of the Delaware system that Sanders and Warren have taken aim at is its credit card industry, which Biden boosted by making it harder for Americans to discharge credit card debt in bankruptcy.
In 1981, Delaware state lawmakers, at the behest of Republican Gov. Pete du Pont, passed a sweeping financial deregulation bill designed to attract banks to the state. The bill, written by lobbyists for Chase Manhattan Bank and J.P. Morgan (then two separate companies), eliminated the state’s interest rate caps and gave special tax treatment to financial institutions. Months after the legislation passed, MBNA Corporation, one of the largest credit card issuers in the country, relocated from Maryland to Delaware.
In the decades that followed, Biden and the rest of Delaware’s congressional delegation worked hard to protect MBNA and the other financial institutions that flocked to their state.
One big problem for credit card issuers was federal bankruptcy law. As the credit card industry exploded in the 1980s and 1990s, an increasing number of Americans filed for personal bankruptcy protection ― a legal process that allows individuals to prioritize what debts they can pay off and start anew with less debt than before.
Creditors, including the credit card industry, banks and retailers, argued that people were taking advantage of the process to discharge debt they could otherwise pay. These businesses wanted the debts owed to them to be higher priority and harder to discharge.
On the other side were academics led by Warren, then a Harvard Law School professor. Warren’s research found that people filing for personal bankruptcy were generally dealing with a stroke of bad luck. They had a major medical expense, a messy divorce or a lost job. (Some of this research was — and remains — controversial.) And women made up a major proportion of those declaring bankruptcy. Warren argued that the system was a last-ditch safety net for hardworking people.
But, Senator, if you are not going to fix that problem, you can’t take away the last shred of protection from these families. Elizabeth Warren, responding to Biden at a 2005 Senate committee hearing
In the late 1990s, the credit card industry funded a massive lobbying campaign to pass federal legislation to make it harder to discharge credit card debt in personal bankruptcy. They hired President Bill Clinton’s former Treasury secretary, Lloyd Bentsen, and funded multiple questionable studies to back up their argument that fraud was causing the spike in bankruptcies.
At the same time, Congress created a National Bankruptcy Review Commission to study the problem. The commission, which Warren served as reporter and senior adviser, mainly sided with the academics against the credit card industry. But the industry’s lobbying campaign won out.
The first legislation to change the bankruptcy process in favor of creditors was pushed through the House in 1997. It went through four separate iterations before ultimately becoming law in 2005. Republicans generally backed the bills while the majority of Democrats opposed them.
That first bill passed the Senate too and almost became law ― until Biden reportedly threatened to filibuster the measure because the House had made it too friendly to creditors in conference committee. Nonetheless, he had initially voted for that bill, and afterward, he took the reins as the main Democratic voice in favor of rewriting bankruptcy law.
News reports at the time referred to Biden as “the linchpin to passage,” “the only Democratic true believer” and “possibly the bankruptcy bill’s staunchest defender.”
In 2000, President Clinton pocket-vetoed another version of the bill on the advice of first lady Hillary Clinton, whom Warren had convinced to oppose the measure. A Democratic amendment that would have prevented abortion opponents from using bankruptcy to discharge legal debt stemming from their participation in violent protests killed the 2001 bill. Finally, with a bigger Republican majority in 2005, Congress passed a bill that was signed into law by President George W. Bush. Biden was one of a minority of Senate Democrats who voted for the legislation all four times.
Today, Biden claims that his support was part of an effort to improve legislation that was ultimately going to pass with or without him. As the ranking Democrat on the Senate Judiciary Committee in 2005, he saw it as his job to work with Republicans and Democrats to solve the issue of rising personal bankruptcies. Through his actions, he helped to protect lower-income debtors, prioritize alimony and child support payments, and increase credit card disclosure, according to the Biden campaign. The former vice president has “championed the middle class for his entire career and has a proven track record of delivering on his progressive values,” said Mike Gwin, a Biden campaign spokesman.
But though he showed some distaste for creditors’ goals, Biden believed the bill was necessary and tried time and time again to pass it. He shoehorned the measure into a foreign affairs bill to get it before the Senate Foreign Relations Committee, where he was ranking member, in 2000. He cast the deciding and only Democratic vote in a 10-8 split supporting the bill in the Senate Judiciary Committee in 2001.
“I am so sick of this self-righteous sheen put on anybody who wants to tighten up bankruptcy [who] is [painted as] really anti-debtor,” Biden said at a 2001 hearing. “People are getting hurt.”
Over the years, he voted against numerous consumer-friendly amendments offered by his Democratic colleagues that would have eased the bill’s new requirements for consumers filing bankruptcy over medical debts or debts incurred while on active-duty military service. He opposed other amendments that would have put caps on credit card interest rates and penalized mortgage lenders if they had broken the Truth in Lending Act when they extended credit.
“Some of these looked like they were sympathetic to people with real issues, but they were not good public policy solutions,” a former Biden Senate aide said.
Through the many iterations of the bankruptcy bill, Warren emerged as its fiercest outside opponent. And she directly took on Biden.
The year after the 2001 bill failed, Warren wrote a 39-page article in the Harvard Women’s Law Journal arguing that politicians like Biden should be forced to pay a political price for supporting economic legislation that hurts women. Biden’s assertion that he made the bill prioritize women was misleading, Warren argued.
Biden said he moved alimony and child support up the list of priorities for payment when a person entered personal bankruptcy. Child support services professionals backed his proposal, arguing that it would “revolutionize the enforcement of support obligations against debtors in bankruptcy.”
But Warren wrote that this move was simply a sleight-of-hand, pushing alimony and child support payments above priorities that only came into play in business-related bankruptcies. The practical effects of the proposed change, she wrote, “would be either nonexistent or detrimental.”
More to the point, the latest bill’s restrictions on personal bankruptcy would fall hardest on women because it was women who made up the majority of bankruptcy filings, Warren argued. “For a million women who will go to the bankruptcy courts each year, there is no more important pending federal legislation,” she wrote.
Major women’s rights organizations, including the NOW Legal Defense and Education Fund, the National Partnership for Women and Families, and the National Women’s Law Center, opposed the bill for the same reason.
Warren and Biden finally came face to face at a Senate hearing on bankruptcy in 2005. In a now-famous exchange, he back-handedly complimented her for making “a very compelling and mildly demagogic argument.” He suggested she was targeting the wrong credit card problem by opposing the bankruptcy bill.
“Your problem with credit card companies is usury rates from your position,” Biden said. “It is not about the bankruptcy bill.”
“But, Senator, if you are not going to fix that problem, you can’t take away the last shred of protection from these families,” Warren replied.
“I got it, OK. You are very good, Professor,” Biden said to laughs from Warren and the audience.
The 2005 law did reduce the personal bankruptcy filing rate. But studies indicate the law made it harder for the country to rebound from the 2008 financial crisis, led to 250,000 additional home foreclosures and drove a 25% increase in persistent insolvency.
The pro-creditor status quo might not last forever — especially if Sanders or Warren wins the presidential election and the Democrats retake control of the Senate. The Sanders campaign announced on Sept. 5 that it would introduce a proposal to roll back parts of the 2005 law to help those with heavy medical debts. The Warren campaign has yet to release any bankruptcy-related reforms.
The Place To Go Bankrupt
The third pillar of the Delaware system that Sanders and Warren have challenged are the laws that make it a favorite place for companies to file for bankruptcy. Biden, again, has been on the other side.
In the early 2000s, Enron, an energy services firm, collapsed amid a massive corruption scandal. John Cornyn, then attorney general of Texas, pushed the company to file for bankruptcy in Houston, where it was based and where it employed 7,500 people. Instead, Enron filed for bankruptcy in Manhattan, where one of its subsidiaries was incorporated and it employed 57 people. This was possible because U.S. law allows corporations to file in any state in which they or their subsidiaries are incorporated.
In other words, companies can venue or forum shop, effectively choosing the jurisdiction most favorable to their interests in bankruptcy. And there are two favorite venues: Delaware and New York. The Los Angeles Dodgers filed for bankruptcy in Delaware. General Motors, famously of Detroit, filed for bankruptcy in Manhattan.
There is a longstanding debate in the world of corporate bankruptcy law about whether venue shopping is a problem. Some contend it makes sense to let companies go to Manhattan and Delaware where the judges have greater experience in handling large, complicated bankruptcies. But others, like Warren, argue that venue shopping allows corporations to pick their judges while creating steep burdens for employees, pensioners and other small creditors to attend out-of-town proceedings and pay the higher legal fees charged in both Delaware and Manhattan.
That’s what Enron’s employees argued. And it was why now-Sen. Cornyn, with Warren’s help, authored an amendment to the 2005 bankruptcy reform bill to ban venue shopping. At that same committee hearing, he asked her to explain her concerns about the practice.
“In the case of large corporations that can leave their home venue ― Enron, who can leave Houston, Texas, where its employees, where its pensioners, where its trade creditors reside ― and escape the obligation to make the process open to the thousands of people who are directly affected by the bankruptcy, that affects the bankruptcy system overall,” Warren said. “A fair bankruptcy system is one that retains access for the employees, for the pensioners, for the small creditors, and that means those cases need to stay home, not go to a distant location where they [the corporations] think they may get a better deal.”
Warren’s comment ― that corporations could “escape the obligation to make the process open” ― angered Biden.
“I find it outrageous such a statement,” Biden said before asking Warren if she thought Delaware courts weren’t open.
Delaware’s dominance in corporate bankruptcy cases is a side effect of its dominance in corporate charter registration. It’s also a huge cash cow for local businesses from law firms to hotels to restaurants. But to critics like Warren, it makes it easier for the little people to get screwed.
“Employees of companies like Enron literally cannot go to Delaware and hire local counsel, which the Delaware bankruptcy court requires them [to do] before they can make an appearance, and that effectively cuts thousands of small employees, pensioners and local trade creditors out of the bankruptcy process,” Warren tried to explain to Biden. “If they can’t afford it, they are not there.”
Before moving on, Biden declared that Cornyn’s amendment was going nowhere. Biden and his fellow Delaware senator, Tom Carper, threatened to withhold their votes from the bankruptcy bill if the venue shopping amendment was attached. Cornyn withdrew it under pressure from Republican leadership in order to placate the two Democrats.
That wasn’t the first time Biden had quashed an effort to stop venue shopping in corporate bankruptcy. “Most of these proposals were to remove an industry Delaware had built up and to get a piece of the action for themselves,” the former Biden Senate aide said.
“As long as Senator Joseph Biden of Delaware is in the Senate,” any possibility of venue shopping reform is “nonexistent,” Brady Williamson, the National Bankruptcy Review Commission’s chairman, observed in 2006.
When Warren won election to the Senate in 2012, she joined Cornyn as the Democratic co-sponsor on legislation to ban venue shopping. But the bill hasn’t moved in the Senate even though Biden is gone. Delaware’s current Democratic senators ― Carper and Chris Coons ― have taken his place as its biggest opponents.
“It’s another one of these ‘what’s good for Delaware and to hell with the nation,’” said Adam Levitin, a bankruptcy law professor at Georgetown University Law Center.
The Coming Debate
It’s no big surprise when senators promote their home state’s business interests. “I take it very personally when my colleague or a colleague in the Senate decides to take an action that would benefit his state only marginally but would do great damage to my state,” Biden said in 2004. “I take that very personally.”
Biden’s competitors for the Democratic presidential nomination have done it too. Sanders has supported stationing F-35 jets in Vermont, bringing jobs and dollars to his state. Warren and Sen. Amy Klobuchar (Minn.), whose states are both home to big medical device manufacturers, endorsed a bill to repeal the medical device tax included in the Affordable Care Act. And Sen. Cory Booker (N.J.), whose state is home to numerous pharmaceutical companies, voted against a proposal to lower drug prices.
What has made Biden’s parochialism so significant is that his state’s special interests are central to the structure of the U.S. — and global — economy. By putting his state first, Biden helped to build and protect the economic structure that Warren and Sanders blame for a wide range of Americans’ troubles. That is what the coming debates will be about.
CORRECTION: An earlier version of this story stated incorrectly that Biden voted against a 2005 amendment to bar wealthy bankruptcy filers from hiding assets in special asset protection trusts. He voted for it.