The Chapter 11 Efficiency Fallacy

67 Pages Posted: 29 Jan 2014 Last revised: 31 Mar 2014

Date Written: February 6, 2014

Abstract

This Article challenges the persistent claim that Chapter 11’s increasing utilization of market mechanisms will help facilitate economically efficient resolutions of corporate financial distress. Using two recent case studies, I show that, in fact, these mechanisms are used by stakeholders with existing market power to take control of the restructuring process and extract rents at the expense of other constituents: creditors, equity holders, and - in the case of companies that receive governmental bailouts - taxpayers. These distortionary effects are obscured by a dominant, neoclassical legal paradigm that ignores institutional and political dynamics. I advance a new explanatory model that draws upon modern social science to capture these otherwise-unexplored forces. This new model offers a template for law reform efforts aimed at improving market equality and allocating resources in commercial restructurings more rationally, contributing to an overall increase in social welfare.

Keywords: Bankruptcy, corporate financial distress

Suggested Citation

Dick, Diane Lourdes, The Chapter 11 Efficiency Fallacy (February 6, 2014). Brigham Young University Law Review, 2014, Seattle University School of Law Research Paper No. 14-03, Available at SSRN: https://ssrn.com/abstract=2387052

Diane Lourdes Dick (Contact Author)

Seattle University School of Law ( email )

901 12th Avenue, Sullivan Hall
P.O. Box 222000
Seattle, WA n/a 98122-1090
United States

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