Beyond Options

Handbook on Corporate Bankruptcy, B. Adler ed.

Columbia Law and Economics Working Paper No. 551

17 Pages Posted: 26 Oct 2016 Last revised: 13 Jan 2022

See all articles by Anthony J. Casey

Anthony J. Casey

University of Chicago Law School

Edward R. Morrison

Columbia Law School

Date Written: October 19, 2016


Scholars and policymakers now debate reforms that would prevent a bankruptcy filing from being a moment that forces valuation of the firm, crystallization of claims against it, and elimination of junior stakeholders’ interest in future appreciation in firm value. These reforms have many names, ranging from Relative Priority to Redemption Option Value. Much of the debate centers on the extent to which reform would protect the non-bankruptcy options of junior stakeholders, or harm the non-bankruptcy options of senior lenders. We argue that this focus on options misplaced. Protecting options is neither necessary nor sufficient for advancing the goal of a well-functioning bankruptcy system. What is needed is a regime that cashes out the rights of junior stakeholders with minimal judicial involvement. To illustrate, we propose an “automatic bankruptcy procedure” that gives senior creditors an option to restructure the firm’s debt or sell its assets at any time after a contractual default. Under this procedure, restructuring occurs in bankruptcy, but sales do not. Sales are either subject to warrants (which give junior stakeholders a claim on future appreciation) or are subject to judicial appraisal (which forces senior lenders to compensate junior stakeholders if the sale price was too low). Our proposal can be seen as an effort to design a formalized restructuring procedure that borrows from traditional state law governing corporate-control transactions. We show that this procedure minimizes core problems of current law — fire sales that harm junior stakeholders, delay that harms senior lenders, and the uncertainties generated by judicial valuation, which are exploited by all parties.

Keywords: Reorganization, Chapter 11, Absolute Priority, Relative Priority, Options, Bankruptcy

JEL Classification: K20, K22, G32, G33

Suggested Citation

Casey, Anthony Joseph and Morrison, Edward R., Beyond Options (October 19, 2016). Handbook on Corporate Bankruptcy, B. Adler ed., Columbia Law and Economics Working Paper No. 551, Available at SSRN: or

Anthony Joseph Casey

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773.702.9578 (Phone)


Edward R. Morrison (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

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