Unwritten Rules and the New Contract Paradigm

Abstract

In a recent essay — part of a larger book project — Douglas Baird contends that the standard accounts of the history of corporate reorganization miss an essential feature: the extent to which both current and prior practice have been governed by unwritten rules (such as full disclosure and the opportunity for each party to participate in the negotiations) that “are well-known to insiders, but largely invisible to those on the outside.” According to Professor Baird, the unwritten rules, not bankruptcy’s distribution provisions or other features of the Bankruptcy Code, are the essence of corporate reorganization.

This essay is a short response to Professor Baird’s important and largely compelling claim, written for the same symposium. After briefly describing Professor Baird’s central argument about the role of unwritten rules, my essay makes two simple points. First, what’s good for bankruptcy insiders is not always good for everyone. William Douglas and other New Deal reformers believed that insiders’ temptation to favor their own interests poisoned the entire reorganization enterprise in their era. Although the reformers’ complaints were often exaggerated, it is important to recognize the costs of a system run by insiders. Second, the essay argues that bankruptcy’s written rules — by which I mean both statutory provisions and the parties’ contracts — still matter, and they matter a lot.

Keywords: Bankruptcy process, bankruptcy rules, pre-bankruptcy contracts, post-petition contracts, distributional rules, absolute priority, restructuring support agreements