Physics Informs Law: Analyzing Legal Issues that Turn on the Scale of Observation

Abstract

Payments made to creditors on the eve of a debtor’s bankruptcy raise two fundamental legal questions: how should commercial law and bankruptcy law harmonize when they intersect, and to what extent should the latter preempt the former? Superficially, the answers might appear clear. Bankruptcy law avoids preferential transfers to creditors of an insolvent debtor’s property made within ninety days prior to its bankruptcy. Under the Constitution’s Supremacy Clause, federal bankruptcy law should preempt inconsistent state commercial law governing the transfers. Under commercial law, however, most monetary transfers come from property of the debtor’s bank, not from property of the debtor. Logically, therefore, bankruptcy law should not even apply to those transfers.

Unfortunately, most courts, including the U.S. Supreme Court, hold that these transfers can be avoided as preferential because judges miss the crucial fact that the payments are not transfers of a debtor’s property. This Article argues that this extraordinary judicial failure arises because commercial and bankruptcy law have different scales of observation: the former views transactions from a detailed or “micro” perspective, whereas the latter views transactions from a broader or more “macro” perspective. This difference parallels physics, in which quantum mechanics accurately describes micro interactions in the physical world whereas classical (Newtonian and Einsteinian) physics accurately describes interactions from a more macro perspective. Just as recognizing these different scales of observation informs our understanding of the physical world, a similar recognition should inform our legal understanding. That recognition is critical; its absence is causing courts mistakenly to avoid up to billions of dollars of payments annually.