Bankruptcy
The Credit Markets Go Dark
Mirroring the recent paradigm shift in corporate equity, corporate debt is now increasingly private and concentrated in the hands of investment funds. This Article chronicles the rise of private credit—loans originated by investment funds, rather than banks—and discusses its implications, including the potential loss of information and liquidity.
Bankruptcy by Another Name
A recent essay in this Journal critiques bankruptcy for limiting the litigation system’s ability to promote noneconomic public-policy goals. This Response argues that bankruptcy can and does further these public values, and that it is reasonably easy to tweak bankruptcy law to accommodate these goals more effectively.
Against Bankruptcy: Public Litigation Values Versus the Endless Quest for Global Peace in Mass Litigation
For the first time in years, in the Purdue Pharma opioids litigation, the Court is reviewing an unorthodox bankruptcy maneuver aimed at securing global settlement. This Essay critiques corporate defendants’ increasingly common turn to bankruptcy to shut down, or avoid altogether, complex civil litigation and the public goods it generates.
Unwritten Law and the Odd Ones Out
In a new book, Douglas Baird argues that the values of reorganization professionals, more than statute or case law, define the norms of corporate bankruptcy. This Book Review shows how rule-by-reorganizers can explain Chapter 11's troubling tendency to disregard the interests of legacy creditors.
Bankruptcy Grifters
Bankruptcy grifters infiltrate the Chapter 11 process, seeking bankruptcy’s benefits for mass-tort defendants without incurring many of its costs. This Article concludes that bankruptcy should not be a procedural panacea for companies facing litigation exposure, and offers a number of potential solutions to deter non-debtor defendants from becoming bankruptcy grifters.
Mandatory Aggregation of Mass Tort Litigation in Bankruptcy
Nondebtor releases are the rotten core of the “bankruptcy grifter” phenomenon that Lindsey Simon’s article critiques. Such releases are an unconstitutional exercise of substantive common lawmaking by the federal courts, and they are not necessary for the bankruptcy process to facilitate efficient and fair aggregate settlements of mass tort litigation.
One Size Fits None: An Overdue Reform for Chapter 7 Trustees
Despite their differences, consumer and business Chapter 7 cases are administered by the same trustees under the same rules. We advance normative arguments against this one-size-fits-all approach, buttressed by novel empirical research. Two policy changes are appropriate: (1) trustee compensation should differ by case type, and (2) trustees should specialize.
COVID-19 Debt and Bankruptcy Infrastructure
The COVID induced debt spike on corporate balance sheets portends a wave of future bankruptcy cases. Congress should act now to build up a bankruptcy infrastructure by requiring that every circuit create a “business bankruptcy panel” designed to administer the Chapter 11 filing of large companies. Recent Delaware caselaw would likely enforce a corporation’s precommitment to file in one of these venues.
J. Crew, Nine West, and the Complexities of Financial Distress
The law-and-economics literature assumes that omnisciently rational “sophisticated parties” write optimal contracts, making bankruptcy law unnecessary. Two case studies, J. Crew and Nine West, illustrate the limitations of this idealized model. We argue for a theory of debt contracting based in bounded rationality that recognizes bankruptcy’s inherent complexity.
Pandemic Hope for Chapter 11 Financing
The pandemic revealed that the increasing complexity of debtors’ capital structure could supply much-needed competition in the Chapter 11 financing market, as other inside lenders increasingly challenge a debtor’s favored inside lenders. After discussing the benefits of this surprising development, the Essay identifies several impediments and offers strategies for removing them.
Shocking Business Bankruptcy Law
The intersection of major crises and financial distress generates no shortage of stock stories. This Essay offers one more: how shocks can be used opportunistically in big Chapter 11 cases to unravel bankruptcy law, and to shift the system further away from the objective of responding to overindebtedness.
Small Business Disaster Relief and Restructuring
To assist small businesses in the wake of an exogenous shock, Congress should consider implementing a system of lending that models the financing provided to small business debtors in a bankruptcy proceeding. Such a system would be more targeted, effective, and fair than traditional government loans, but less stigmatizing than bankruptcy.
Reconstructing the Bankruptcy Power: An Originalist Approach
The Bankruptcy Clause delimits Congress’s bankruptcy power, but its limits changed after ratification of the Thirteenth Amendment. Before, it enabled collective creditor remedies against merchant debtors; after, it provided relief to insolvent debtors threatened by economic oppression. Recognizing this development supplies new constitutional grounds for bankruptcy law’s “fresh start” policy.
Distorted Choice in Corporate Bankruptcy
Two new strategies—restructuring support agreements and deathtrap provisions—distort the voting process in nearly every big Chapter 11 case. Although they could be banned, this Article, the first comprehensive assessment, calls for a more nuanced approach, outlining four rules of thumb for determining whether a distortive technique should be permitted.
The Proceduralist Inversion – A Response to Skeel
This essay assesses Distorted Choice in Corporate Bankruptcy, by David Skeel. While Skeel usefully identifies how Restructuring Support Agreements (RSAs) help debtors secure support for Chapter 11 reorganizations, this essay argues that Skeel fails to appreciate that RSAs can also short-circuit the plan process, severing plan distributions from pre-bankruptcy entitlements.
Debtor’s Dilemma: The Economic Case for Ride-Through in the Bankruptcy Code
122 Yale L.J. 1594 (2013). Following the 2005 amendments to the Bankruptcy Code, a Chapter 7 debtor hoping to retain an encumbered asset such as a motor vehicle after bankruptcy faces at least five options. The Bankruptcy Code allows a debtor to redeem the asset, reaffirm the debt, or convert to a Chapter 13 proceeding. Alternatively, a creditor may simply agree to forbear on its right to repossess collateral, leaving the asset in the debtor’s possession. In certain circumstances a bankruptcy court may also impose a binding nonrecourse debt arrangement known colloquially as “backdoor ride-through.” This Note employs an economic framework to show how these retention options fall short of Chapter 7’s policy goals: a “fresh start” for debtors, adequately protected interests for secured creditors, and national uniformity of bankruptcy law. After illustrating the shortcomings of the status quo, this Note argues that enacting a statutory ride-through provision—a successor to an option available in five circuit courts of appeals before 2005—would better accord with the principles and policy underlying bankruptcy law.
Bankruptcy-Proof Finance and the Supply of Liquidity
122 Yale L.J. 460 (2012). The 2008 financial crisis has prompted widespread criticism of the bankruptcy safe harbors for repurchase agreements (repos) and derivatives, which allow a failed firm’s counterparties to enforce these contracts outside of the bankruptcy process. The emerging consensus holds that these provisions facilitated a run on the assets of troubled institutions such as Lehman Brothers, and should be curtailed to afford such firms greater protection from their counterparties. In contrast, this Note argues that proposals to roll back the safe harbors would afford little relief to already-bankrupt firms while substantially undermining the efficiency and stability of the affected markets. Exposing these contracts to bankruptcy risk would render them unsuitable for a valuable function that they serve in the financial markets: offering institutional investors a liquid store of value akin to an insured bank deposit. And it would cause the supply of capital through these instruments to fluctuate, pro-cyclically, based on perceptions of risk to the financial system. The lessons of past crises suggest that a more promising approach would give distressed firms the emergency liquidity they need to weather a panic—not a stay on their obligations once they are already in bankruptcy.
Bankruptcy, Backwards: The Problem of Quasi-Sovereign Debt
121 Yale L.J. 888 (2012). This Feature considers the debts of quasi-sovereign states in light of proposals to let them file for bankruptcy protection. States that have ceded some but not all sovereign prerogatives to a central government face distinct challenges as debtors. It is unhelpful to analyze these challenges mainly through the bankruptcy lens. State bankruptcy posits an institutional fix for a problem that remains theoretically undefined and empirically contested. I suggest a way of mapping the problem that does not work back from a solution. I highlight the implications of sovereign immunity, immortality, concurrent authority, macroeconomic policy, and democratic accountability for quasi-sovereign debt management. Along with default, fiscal transfers, and ad- hoc renegotiation, bankruptcy is one of several paths to reduce public debt overhang, but not necessarily the best path to state rehabilitation. Bankruptcy centers on coordination failures and contractual liabilities, when neither is especially salient in quasi-sovereign debt. It holds no special advantage against moral hazard from fiscal federalism and sovereign immunity. Even so, recent bankruptcy proposals have started a useful conversation joining previously disparate scholarship about credit market institutions, sovereign debt, fiscal federalism, and local government. The conversation should refocus on the problem of quasi-sovereign debt.
The Economic Logic of the Lease/Loan Distinction in Bankruptcy
120 Yale L.J. 1492 (2011). The Bankruptcy Code accords much more favorable treatment to lessors than to secured lenders, but legal scholars have yet to identify a normative justification for the disparate treatment of the two transaction types. Law-and-economics scholars have written off the lease/loan distinction as “vacuous”; meanwhile, courts and commentators alike have called on Congress to abolish the distinction entirely. This Note identifies a normative basis for the lease/loan distinction—the maximization of aggregate welfare—and explains why leases are likely to generate less deadweight loss than are secured transactions. In a secured loan, the secured lender and the borrower may be able to shift depreciation costs to the borrower’s other creditors. By allowing bankruptcy courts to alter the terms of secured loans, the Bankruptcy Code limits (but does not eliminate) the depreciation cost externalities that may arise from secured transactions. In a lease, by contrast, the lessor and the lessee internalize depreciation costs in full. Since leases do not generate depreciation cost externalities, the Bankruptcy Code does not authorize courts to alter the terms of such transactions.