Unbundling Business Bankruptcy Law

60 Pages Posted: 4 Oct 2022 Last revised: 7 Sep 2023

See all articles by Melissa B. Jacoby

Melissa B. Jacoby

University of North Carolina School of Law

Date Written: September 6, 2023

Abstract

Every contract in America contains an invisible exception: different enforcement rules apply if a party files for bankruptcy. Overriding state contract law, chapter 11 of the federal Bankruptcy Code gives bankrupt companies enormous flexibility to decide what to do with its pending contracts. Congress provided this controversial tool to chapter 11 debtors to increase the odds that a company can reorganize. To promote this objective while also preventing abuse and protecting stakeholders, Congress embedded this tool and others in an integrated package deal, including creditor voting. The tool was not meant as a standalone benefit for solvent private parties to pluck from the process for their own benefit, like an apple from a tree.

In recent decades, the chapter 11 package deal has been unbundled in practice, typically on grounds of economic urgency. While scholars and policymakers have attended to the quick going-concern sales of companies featured in unbundled bankruptcies, they have not sufficiently explored the challenges associated with a contract-intensive business.

To help fill that gap, this article illustrates how the ad hoc procedures used to manage quick sales of contract-intensive businesses can undercut two major chapter 11 objectives: maximizing economic value and fair distribution. They amount to a wholesale delegation of a substantial federal bankruptcy entitlement to a solvent third party. In addition to the impact on economic value and distribution, this article also explores a Constitutional problem with this practice: it arguably exceeds the scope of the federal bankruptcy power.

Keywords: contracts, bankruptcy, corporate reorganization, chapter 11, mergers and acquisition, constitution, secured transactions

JEL Classification: G33, G34, K12, K22

Suggested Citation

Jacoby, Melissa B., Unbundling Business Bankruptcy Law (September 6, 2023). 101 North Carolina Law Review 1703 (2023), UNC Legal Studies Research Paper No. 4228060, Available at SSRN: https://ssrn.com/abstract=4228060 or http://dx.doi.org/10.2139/ssrn.4228060

Melissa B. Jacoby (Contact Author)

University of North Carolina School of Law ( email )

Van Hecke-Wettach Hall, 160 Ridge Road
CB #3380
Chapel Hill, NC 27599-3380
United States

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