The Bankruptcy Partition
46 Pages Posted: 14 Feb 2018 Last revised: 27 Apr 2018
Date Written: January 5, 2018
The central ambition of Chapter 11 is to vindicate the hypothetical bargain creditors would strike among themselves before the fact if they had the opportunity to do so. When investors gather to invest in a common venture, their focus is on maximizing the value of that venture, rather than maximizing their total wealth as a group. The creditors’ bargain is similarly focused on the bankruptcy estate, something that is partitioned from the other interests of the creditors. The ambition of bankruptcy law is to put in place a process that maximizes its value.
Many current bankruptcy debates — from critical vendor orders to the Supreme Court’s decision last year in Jevic — begin with bankruptcy’s distributional rules and questions about how much discretion a judge should have in applying them. It is a mistake, however, to focus on distributional questions without first identifying the bankruptcy partition and ensuring it is properly policed. What appear to be distributional disputes are more often debates about the demarcation of the bankruptcy partition and the best way to police it.
Once the dynamics of establishing and policing the bankruptcy partition are taken into account, there is little room for departures from bankruptcy’s distributional rules. There might be a few rare cases in which maximizing the value of the estate requires it, but these inhabit an exceedingly narrow domain so small and so hard to navigate that they are sensibly handled with a per se rule that prohibits them.
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