The Logic and Limits of Contract Bankruptcy

Posted: 12 Sep 2000

Date Written: 2000

Abstract

Neo-libertarian scholars prefer contract bankruptcy to corporate reorganization under chapter 11 of the Bankruptcy Code. These free market theorists contend that business bankruptcy legislation imposes net social costs - costs which voluntary contractual arrangements would avoid. Through application of a comparative institutional framework, the Article seeks to refute neo-libertarian theorists' claims that private action is preferable to business bankruptcy legislation. It finds the case for favoring contractual over legislative bankruptcy rules to be incoherent in at least three ways. First, neo-libertarian bankruptcy theorists' claim that appropriate ex ante incentives for corporate actors are best realized through private agreements confuses substance with form. A firm's incentives are more likely to be affected by the content of the bankruptcy rule than whether it is structured as legislative or contractual. Second, theorists' emphasis on the importance of individual autonomy is empty rhetoric. Many of the contractual bankruptcy resolutions offered by neo-libertarian theorists would covertly bind non-parties, a result completely contrary to principles of freedom of contract. Finally, despite assertions to the contrary, many of the proposed private-law bankruptcy substitutes would create immense decisionmaking costs, and all of the contract bankruptcy proposals would impose enforcement costs of a magnitude both substantial and comparable to the legislative rules these contracts are meant to replace. Accordingly, there is no basis for concluding that contract rules are always less expensive to implement and enforce than legislative ones.

Suggested Citation

Block-Lieb, Susan, The Logic and Limits of Contract Bankruptcy (2000). Available at SSRN: https://ssrn.com/abstract=241268

Susan Block-Lieb (Contact Author)

Fordham University School of Law ( email )

140 West 62nd Street
New York, NY 10023
United States
(212) 636-6782 (Phone)
(212) 636-6899 (Fax)

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