Bankruptcy's Cathedral: Property Rules, Liability Rules, and Distress

50 Pages Posted: 9 Apr 2019 Last revised: 14 Sep 2019

See all articles by Vincent S.J. Buccola

Vincent S.J. Buccola

University of Pennsylvania - The Wharton School - Legal Studies & Business Ethics Department

Date Written: March 16, 2019

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 important artifacts of contemporary American bankruptcy practice, pointing toward a radically streamlined vision of the field. Bankruptcy’s virtue, I contend, 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, bankruptcy law can do it for them. 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.

Keywords: bankruptcy, chapter 11, asset sales, 363 sales, prepackaged bankruptcies, automatic stay, creditors' bargain, bankruptcy theory, corporate reorganization, workouts

Suggested Citation

Buccola, Vincent S.J., Bankruptcy's Cathedral: Property Rules, Liability Rules, and Distress (March 16, 2019). Northwestern University Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3353848

Vincent S.J. Buccola (Contact Author)

University of Pennsylvania - The Wharton School - Legal Studies & Business Ethics Department ( email )

3730 Walnut Street
Suite 600
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://lgst.wharton.upenn.edu/profile/buccola/

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