abstract. To understand the logic of corporate reorganization, one should start not with the Bankruptcy Code, nor with Supreme Court precedents, but with the lawyers, judges, and financi- ers for whom corporate distress is life. That is the premise of Douglas G. Baird’s new book, The Unwritten Law of Corporate Reorganizations. Reorganizers comprise a more or less cohesive subculture oriented around the value of preserving going concerns. Having mastered the art of ignoring or interpreting away “written law” inconsistent with their core commitments, it is the reorganizers themselves who set the terms of engagement. With characteristic subtlety, Baird leverages this insight to account for—almost to celebrate—a variety of persistent norms and tensions of reorganization practice not attributable to statute or judicial precedent.

This Book Review develops a pathology seemingly inherent in the world Baird so artfully draws. It explains why bankruptcy courts in such a world can be expected to validate innovative but legally dubious transactions that divert value from so-called legacy creditors and toward incumbent managers and their allies. The upshot is that, under rule by reorganizers, one should expect the law to become increasingly biased against creditors poorly positioned to make new investments in the reorganizing business. And in fact, such a bias helps to explain many of the most contentious developments in the last twenty years of Chapter 11 practice, from critical vendor payments and roll-ups to rights-offering backstop fees. Whether anything useful can be done about the pathology is another question. Potential reforms, to the extent they have bite, risk squandering what are real advantages of expertise. In any case, Baird’s account of unwritten law yields a framework for making sense of an otherwise puzzling and troubling tendency of bankruptcy law.

author. Associate Professor, The Wharton School of the University of Pennsylvania. For helpful criticism and guidance, I thank Douglas Baird, Allison Buccola, Steve Buccola, Tony Casey, Matt Caulfield, Jared Ellias, Adam Levitin, Stephen Lubben, Josh Macey, David Skeel, and participants at a workshop at Wharton.

Introduction

In the spring of 1916, Paul Cravath, namesake of the storied law firm and one of the nation’s leading railroad lawyers, addressed the New York bar on the topic of corporate reorganization. A recent decision of the Supreme Court threatened to unsettle what had become a lucrative practice on Wall Street.1 Many in the audience were no doubt eager to hear the great man’s account of the state of play. Cravath began, however, with a striking caveat. He did not have much to say about reorganization in general, he warned. To treat the subject in a systematic fashion would be as hopeless as “for a poet to tell how to write poetry.”2 It was not that Cravath thought he lacked the necessary analytic or expressive powers of abstraction. He was not a modest man. Rather he thought the systematic approach ill-suited to the field. “One cannot formulate many rules or refer to many precedents which will serve as a guide to the reorganizer,” he explained.3 Circumstances were too various. The most a savvy audience could wish for was what Cravath called “a series of practical suggestions based upon experience.”4

The folly of imagining reorganization law to be a set of articulable rules is no mere prefatory warning, but the organizing theme of Douglas G. Baird’s new book, The Unwritten Law of Corporate Reorganizations.5 To the uninitiated, it might seem a doubtful thesis. Cravath preceded the era of codification. In his day, the freewheeling courts of equity superintended reorganization.6 Variability was to be expected. Now, though, a century later, title 11 of the United States Code runs more than 300 small-print, dual-column pages. The Federal Rules of Bankruptcy Procedure run another 150 pages, and the volumes of judicial guidance grow apace. One might have supposed that the excess verbiage available to the modern bar would have made reorganization more explicable. Hardly so.

As Baird tells it, much of what matters most in corporate reorganization still is not in print. An intelligent generalist who read only the orthodox legal materials, however assiduously, would find even standard practice baffling.7 The book’s unifying insight explains why: reorganizers have created a world in which ordinary assumptions about the relationship between text and custom are inverted. In the world of corporate reorganization, ostensibly binding statutes, rules, and judicial opinions embellish practical norms rather than the other way around. What is essential to reorganization law, then, is not the Bankruptcy Code, much less any distributional principles it frames, but rather the commitments of the lawyers and judges who specialize in distress.8 Baird withholds judgment of the world he conjures, but it is fair to say that he emphasizes its virtues.

My principal aim in this Book Review is to draw out the dark side of Baird’s account of “unwritten law.” The nub of the problem is that it can be expected to subordinate the interests of so-called legacy creditors to the interests of incumbent managers and their allies. I argue that the values of what I will call “reorganization culture” are apt to yield a process of norm development biased against creditors who cannot offer new investment. What is more, such a bias in fact describes the history of innovation in Chapter 11, and I suggest that Baird’s account goes a long way toward explaining a troubling and otherwise puzzling tendency. Exposing the dark side of unwritten law does not resolve any important normative questions. But I hope it will illuminate the law as it stands, as well as the stakes of meaningful reform.

The Book Review has two parts. Part I lays out the normative logic of the world Baird so vividly illustrates. Baird identifies a surprising variety of persistent, unwritten norms widely shared by reorganizers and indicates their importance to practice.9 He likewise shows that many written rules have less bite than commentators often suppose.10 But the relationship between written and unwritten law, as such, remains implicit. By making the schema explicit, I hope both to open the door to critical appraisal and to help the casual reader see how the book’s elements hang together—to see why, for example, a conceptual analysis of absolute priority11 belongs in the same work as a commentary on the plight of national merchandisers in the late nineteenth century.12

That logic of unwritten law begins and ends with an insular and self-propagating subculture comprising the investors, bankers, and especially lawyers (including judges) who specialize in corporate distress. On Baird’s telling, the values of reorganization culture antedate modern bankruptcy legislation. Its values, like the values of any culture, are complex, multidimensional, and contested. They are therefore impossible to state definitively: they are not only unwritten, but unwriteable.13

Although the culture is ultimately irreducible, it is oriented unmistakably toward a forward-looking commercial imperative. In a world rife with asymmetric information and holdup threats, the law on the ground must protect the ability of professionals to coalesce around deals that preserve enterprise value.14 Fidelity to statute, rule, and appellate decision is secondary. Textual authorities that leave the bargaining environment intact are folded into practice, even when they modify substantially the terms of the deals likely to be struck. But an ostensible authority that gets in the way of value-conserving bargains altogether may be read implausibly narrowly (to neuter its charge) or ignored outright. The primacy of unwritten law does not, then, mean that the Bankruptcy Code is irrelevant. It means only that, as Baird has put it elsewhere, the way the Code operates in practice "cannot be easily reconciled with conventional understandings of how statutes are supposed to work.”15 Reorganization culture acts as a Procrustean bed, stretching or deforming written law as needed to make it fit with reorganizers’ core commitments.

Part II links the culture’s normative structure to a generic problem in reorganization practice: bankruptcy law encourages and validates practical innovations that tend to subordinate claims of right brought by legacy creditors. The odd ones out, so to speak, are not only well-known “marks” such as pensioners and tort and environmental claimants, whose interests are always “on the table” in reorganization talks, but all creditors poorly situated to provide new investment: landlords whose property is no longer useful to the business, vendors whose goods and services are easily replaced, financial creditors unable to provide new capital. Commentators have long debated the propriety of various techniques in Chapter 11 by which the interests of legacy creditors, seemingly safeguarded by Bankruptcy Code protections, can be undermined.16 But the literature has not generally understood the problem as such, even less its connection to reorganization law’s peculiar normative structure.

The problem comes down to motive and opportunity. Incumbent managers will always have reason to shortchange legacy creditors, whatever the legal system. From a forward-looking perspective, legacy creditors are mere rentiers. Their investments are sunk. They cannot contribute to prospective surplus. Consequently, it is in the interest of a debtor’s managers to distribute as little value as possible to them and as much as possible to allies and investors whose new or continued support might help the business thrive. One of the functions of reorganization statutes is to police this motive, and the Bankruptcy Code in particular does so in a variety of ways.17 Reorganization culture, by undermining relevant features of the written law, gives managers and their allies opportunity. Ironically, the blame lies with reorganizers’ desire to achieve commercially sensible results in specific cases. This desire explains not only reorganization culture’s insistence on contextual or case-specific norms, but also the poor treatment of legacy creditors, for incumbent managers will always be the masters of local context.

To notice a perverse tendency of unwritten law is not, of course, sufficient to condemn it. For that a better alternative is needed. The Unwritten Law is largely interested in the charm and stout good sense of reorganization culture. It is worth remembering as well, however, that there are drawbacks to a world in which the law consists of “a series of practical suggestions based upon experience.”