We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
CHAPTER 11'S RENEGOTIATION FRAMEWORK AND THE PURPOSE OF CORPORATE BANKRUPTCY.
- Authors
Casey, Anthony J.
- Abstract
A fundamental question for corporate bankruptcy law is why it exists in the first place. Why are there special rules that apply only in financial distress? The conventional law-and-economics answer-- known as the Creditors' Bargain Theory--identifies two core purposes of bankruptcy law: recreating a hypothetical ex ante bargain and respecting creditors' nonbankruptcy entitlements. This Article challenges the Creditors' Bargain Theory and presents an alternative: The sole purpose of corporate bankruptcy law is to solve the incomplete contracting problem that accompanies financial distress. Because financial distress is difficult to contract over, relationships involving a distressed firm are governed by incomplete contracts that allow parties to hold each other up. All distressed firms face this same value-destroying hold-up problem, and so pressure arises for a uniform solution. The purpose of corporate bankruptcy law is to provide that solution. In the United States, Chapter 11 of the Bankruptcy Code implements this purpose in the form of a framework for ex post renegotiation of incomplete contracts. This framework imposes judicial oversight and allocates bargaining power to minimize hold up among those with interests in a distressed firm. In a sense, it puts in place guardrails that give the parties room to bargain while keeping them from engaging in extreme forms of hold up. While this framework is not based on any hypothetical ex ante bargain and gives no special deference to nonbankruptcy entitlements, it is the fundamental attribute of Chapter 11.
- Subjects
UNITED States; CORPORATE bankruptcy lawsuits; FINANCIAL crises; COLLECTIVE bargaining; GUARDRAILS on roads
- Publication
Columbia Law Review, 2020, Vol 120, Issue 7, p1709
- ISSN
0010-1958
- Publication type
Article