Sunday, March 31, 2019
At the 2018 Annual Conference of the Academy of Legal Studies in Business, I spoke on a panel, New Developments in Corporate Governance, with Vincent S.J. Buccola, Gideon Mark, Josephine Sandler Nelson, and David Zaring, the organizer (thanks again, David!).
Buccola discussed governance aspects of corporate bankruptcy law in the modern economy. I was particularly intrigued by his argument that “Bankruptcy law is potentially valuable…insofar as it can toggle from property to liability rule in domains where legal or practical impediments prevent investors from arranging their own, “tailored” toggles.”
I’ve taught Corporate Bankruptcy, and in my research at the time, I was analogizing bargaining processes in the context of the recovery and resolution of clearinghouses to bargaining processes in private restructurings and formal bankruptcy filings. I wondered about the potential application of Buccola’s work within the clearinghouse context, and have been eagerly awaiting his article. I'm excited to share with readers that the wait is over! Bankruptcy’s Cathedral: Property Rules, Liability Rules, and Distress, an impressive and significant new work, is forthcoming in the Northwestern University Law Review, and also now available on SSRN. Here’s its abstract:
What justifies corporate bankruptcy law in the modern economy? For forty years, economically oriented theorists have rationalized bankruptcy as an antidote to potential coordination failures associated with a company’s financial distress. But the sophistication of financial contracting and the depth of capital markets today threaten the practical plausibility, if not the theoretical soundness, of the conventional model. This article sets out a framework for assessing bankruptcy law that accounts dynamically for changes in the technology of corporate finance. It then applies the framework to three of the most important artifacts of contemporary American bankruptcy practice and, on that basis, points toward a radically streamlined vision of the field. I contend that bankruptcy’s virtue lies in its capacity to replace “property rules” that may protect investors efficiently when a company is financially healthy with “liability rules” more appropriate for distress, in domains where investors are unable to arrange state-contingent toggling rules on their own. This agenda plausibly justifies two important uses of Chapter 11—to effect prepackaged plans of reorganization and conclude going-concern sales—but casts doubt on what many suppose to be the sine qua non of bankruptcy, the automatic stay. More broadly, the analysis suggests that an “essential” bankruptcy law would look very different, and do much less, than the law we know.