Unwritten Law and the Odd Ones Out

Abstract

To understand the logic of corporate reorganization, one should start not with the Bankruptcy Code, nor with Supreme Court precedents, but with the lawyers, judges, and financiers for whom corporate distress is life. That is the premise of Douglas Baird’s new book, The Unwritten Law of Corporate Reorganization. Reorganizers comprise a more or less cohesive subculture oriented around the value of preserving going concerns. Having mastered the art of ignoring or interpreting away “written law” inconsistent with their core commitments, the reorganizers themselves set the terms of engagement. With characteristic subtlety, Baird leverages this insight to account for a variety of persistent norms and tensions of reorganization practice not attributable to statute or judicial precedent.

This Book Review develops a pathology seemingly inherent in the world Baird so artfully draws. It explains why bankruptcy courts in such a world can be expected to validate innovative but legally dubious transactions that divert value from so-called legacy creditors and toward incumbent managers and their allies. The upshot is that, under rule by reorganizers, one should expect the law to become increasingly biased against creditors poorly positioned to make new investments in the reorganizing business. And in fact, such a bias helps to explain many of the most contentious developments in the last twenty years of Chapter 11 practice, from critical vendor payments and roll-ups to rights-offering backstop fees. Whether anything useful can be done about the pathology is another question. Potential reforms, to the extent they have bite, risk squandering what are real advantages of expertise. In any case, Baird’s account of unwritten law yields a framework for making sense of an otherwise puzzling and troubling tendency of bankruptcy law.

Keywords: bankruptcy, corporate reorganization, restructuring, chapter 11