Bankruptcy's Uncontested Axioms

Yale Law Journal

Volumn 108, Issue 3, 1998, Pages 573-599

  Baird, Douglas G ^a  

^a NONE

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EID: 0009803745     PISSN: 00440094     EISSN: None     Source Type: Journal    
DOI: 10.2307/797497     Document Type: Review

References (134)

1. Indeed, some of the most acerbic debates in bankruptcy scholarship have centered around the wealth effects of the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 101-1330 (1994), on shareholders, a question that is ultimately a factual one. See Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043, 1054-77 (1992) (examining empirically the validity of the theoretical analysis of court-supervised reorganizations); Elizabeth Warren, The Untenable Case for Repeal of Chapter 11, 102 YALE L.J. 437, 479 (1992) ("Credible empirical data, more than anything else scholars bring to the table, can drastically change the terms of a debate.").
2. Indeed, some of the most acerbic debates in bankruptcy scholarship have centered around the wealth effects of the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 101-1330 (1994), on shareholders, a question that is ultimately a factual one. See Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043, 1054-77 (1992) (examining empirically the validity of the theoretical analysis of court-supervised reorganizations); Elizabeth Warren, The Untenable Case for Repeal of Chapter 11, 102 YALE L.J. 437, 479 (1992) ("Credible empirical data, more than anything else scholars bring to the table, can drastically change the terms of a debate.").
3. The massive studies of the reorganization of publicly traded firms by Lynn M. LoPucki and William C. Whitford are among the most important. See Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125 (1990); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Lynn M. LoPucki & William C. Whitford, Patterns in the Reorganization of Large, Publicly Held Companies, 78 CORNELL L. REV. 597 (1993). For important work on the costs of corporate reorganizations, see Gregor Andrade & Steven N. Kaplan, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, 53 J. FIN. 1443 (1998); Steven N. Kaplan, Federated's Acquisition and Bankruptcy: Lessons and Implications, 72 WASH. U. L.Q. 1103 (1994); and Vojislav Maksimovic & Gordon Phillips, Asset Efficiency and Reallocation Decisions of Bankrupt Firms, 53 J. FIN. 1495 (1998). Comparative work has also been done. See, e.g., Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence from Japan, 23 J. LEGAL STUD. 111 (1994); Timothy C.G. Fisher & Jocelyn Martel, The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data, 11 J.L. ECON. & ORG. 112 (1995).
4. The massive studies of the reorganization of publicly traded firms by Lynn M. LoPucki and William C. Whitford are among the most important. See Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125 (1990); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Lynn M. LoPucki & William C. Whitford, Patterns in the Reorganization of Large, Publicly Held Companies, 78 CORNELL L. REV. 597 (1993). For important work on the costs of corporate reorganizations, see Gregor Andrade & Steven N. Kaplan, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, 53 J. FIN. 1443 (1998); Steven N. Kaplan, Federated's Acquisition and Bankruptcy: Lessons and Implications, 72 WASH. U. L.Q. 1103 (1994); and Vojislav Maksimovic & Gordon Phillips, Asset Efficiency and Reallocation Decisions of Bankrupt Firms, 53 J. FIN. 1495 (1998). Comparative work has also been done. See, e.g., Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence from Japan, 23 J. LEGAL STUD. 111 (1994); Timothy C.G. Fisher & Jocelyn Martel, The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data, 11 J.L. ECON. & ORG. 112 (1995).
5. The massive studies of the reorganization of publicly traded firms by Lynn M. LoPucki and William C. Whitford are among the most important. See Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125 (1990); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Lynn M. LoPucki & William C. Whitford, Patterns in the Reorganization of Large, Publicly Held Companies, 78 CORNELL L. REV. 597 (1993). For important work on the costs of corporate reorganizations, see Gregor Andrade & Steven N. Kaplan, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, 53 J. FIN. 1443 (1998); Steven N. Kaplan, Federated's Acquisition and Bankruptcy: Lessons and Implications, 72 WASH. U. L.Q. 1103 (1994); and Vojislav Maksimovic & Gordon Phillips, Asset Efficiency and Reallocation Decisions of Bankrupt Firms, 53 J. FIN. 1495 (1998). Comparative work has also been done. See, e.g., Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence from Japan, 23 J. LEGAL STUD. 111 (1994); Timothy C.G. Fisher & Jocelyn Martel, The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data, 11 J.L. ECON. & ORG. 112 (1995).
6. The massive studies of the reorganization of publicly traded firms by Lynn M. LoPucki and William C. Whitford are among the most important. See Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125 (1990); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Lynn M. LoPucki & William C. Whitford, Patterns in the Reorganization of Large, Publicly Held Companies, 78 CORNELL L. REV. 597 (1993). For important work on the costs of corporate reorganizations, see Gregor Andrade & Steven N. Kaplan, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, 53 J. FIN. 1443 (1998); Steven N. Kaplan, Federated's Acquisition and Bankruptcy: Lessons and Implications, 72 WASH. U. L.Q. 1103 (1994); and Vojislav Maksimovic & Gordon Phillips, Asset Efficiency and Reallocation Decisions of Bankrupt Firms, 53 J. FIN. 1495 (1998). Comparative work has also been done. See, e.g., Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence from Japan, 23 J. LEGAL STUD. 111 (1994); Timothy C.G. Fisher & Jocelyn Martel, The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data, 11 J.L. ECON. & ORG. 112 (1995).
7. The massive studies of the reorganization of publicly traded firms by Lynn M. LoPucki and William C. Whitford are among the most important. See Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125 (1990); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Lynn M. LoPucki & William C. Whitford, Patterns in the Reorganization of Large, Publicly Held Companies, 78 CORNELL L. REV. 597 (1993). For important work on the costs of corporate reorganizations, see Gregor Andrade & Steven N. Kaplan, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, 53 J. FIN. 1443 (1998); Steven N. Kaplan, Federated's Acquisition and Bankruptcy: Lessons and Implications, 72 WASH. U. L.Q. 1103 (1994); and Vojislav Maksimovic & Gordon Phillips, Asset Efficiency and Reallocation Decisions of Bankrupt Firms, 53 J. FIN. 1495 (1998). Comparative work has also been done. See, e.g., Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence from Japan, 23 J. LEGAL STUD. 111 (1994); Timothy C.G. Fisher & Jocelyn Martel, The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data, 11 J.L. ECON. & ORG. 112 (1995).
8. The massive studies of the reorganization of publicly traded firms by Lynn M. LoPucki and William C. Whitford are among the most important. See Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125 (1990); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Lynn M. LoPucki & William C. Whitford, Patterns in the Reorganization of Large, Publicly Held Companies, 78 CORNELL L. REV. 597 (1993). For important work on the costs of corporate reorganizations, see Gregor Andrade & Steven N. Kaplan, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, 53 J. FIN. 1443 (1998); Steven N. Kaplan, Federated's Acquisition and Bankruptcy: Lessons and Implications, 72 WASH. U. L.Q. 1103 (1994); and Vojislav Maksimovic & Gordon Phillips, Asset Efficiency and Reallocation Decisions of Bankrupt Firms, 53 J. FIN. 1495 (1998). Comparative work has also been done. See, e.g., Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence from Japan, 23 J. LEGAL STUD. 111 (1994); Timothy C.G. Fisher & Jocelyn Martel, The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data, 11 J.L. ECON. & ORG. 112 (1995).
9. The massive studies of the reorganization of publicly traded firms by Lynn M. LoPucki and William C. Whitford are among the most important. See Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125 (1990); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Lynn M. LoPucki & William C. Whitford, Patterns in the Reorganization of Large, Publicly Held Companies, 78 CORNELL L. REV. 597 (1993). For important work on the costs of corporate reorganizations, see Gregor Andrade & Steven N. Kaplan, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, 53 J. FIN. 1443 (1998); Steven N. Kaplan, Federated's Acquisition and Bankruptcy: Lessons and Implications, 72 WASH. U. L.Q. 1103 (1994); and Vojislav Maksimovic & Gordon Phillips, Asset Efficiency and Reallocation Decisions of Bankrupt Firms, 53 J. FIN. 1495 (1998). Comparative work has also been done. See, e.g., Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence from Japan, 23 J. LEGAL STUD. 111 (1994); Timothy C.G. Fisher & Jocelyn Martel, The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data, 11 J.L. ECON. & ORG. 112 (1995).
10. The massive studies of the reorganization of publicly traded firms by Lynn M. LoPucki and William C. Whitford are among the most important. See Lynn M. LoPucki & William C. Whitford, Bargaining over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. PA. L. REV. 125 (1990); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669 (1993); Lynn M. LoPucki & William C. Whitford, Patterns in the Reorganization of Large, Publicly Held Companies, 78 CORNELL L. REV. 597 (1993). For important work on the costs of corporate reorganizations, see Gregor Andrade & Steven N. Kaplan, How Costly Is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed, 53 J. FIN. 1443 (1998); Steven N. Kaplan, Federated's Acquisition and Bankruptcy: Lessons and Implications, 72 WASH. U. L.Q. 1103 (1994); and Vojislav Maksimovic & Gordon Phillips, Asset Efficiency and Reallocation Decisions of Bankrupt Firms, 53 J. FIN. 1495 (1998). Comparative work has also been done. See, e.g., Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence from Japan, 23 J. LEGAL STUD. 111 (1994); Timothy C.G. Fisher & Jocelyn Martel, The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data, 11 J.L. ECON. & ORG. 112 (1995).
11. For an account of what empirical research has shown us, see William C. Whitford, What's Right About Chapter 11, 72 WASH. U. L.Q. 1379 (1994). count myself among those whose work has changed in the wake of such efforts. For example, Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285 (1990), showed me that the direct costs of bankruptcy were lower than I (and many others) had thought. This affected how I thought about Chapter 11 and its alternatives. Compare Douglas G. Baird, The Uneasy Case for Corporate Reorganizations, 15 J. LEGAL STUD. 127, 141 (1986) (recognizing that the direct costs of bankruptcy are high relative to corporate control transactions, such as initial public offerings), with Douglas G. Baird, Revisiting Auctions in Chapter 11, 36 J.L. & ECON. 633, 641-42 (1993) (acknowledging that the direct costs of bankruptcy are low). Many other scholars have of course, made use of empirical data in their work. See, e.g., Barry E. Adler, A Theory of Corporate Insolvency, 72 N.Y.U. L. REV. 343, 380-82 (1997); Eisenberg & Tagashira, supra note 2, at 120-54; Ronald J. Mann, Explaining the Pattern of Secured Credit, 110 HARV. L. REV. 625, 675-80 (1997).
12. For an account of what empirical research has shown us, see William C. Whitford, What's Right About Chapter 11, 72 WASH. U. L.Q. 1379 (1994). I count myself among those whose work has changed in the wake of such efforts. For example, Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285 (1990), showed me that the direct costs of bankruptcy were lower than I (and many others) had thought. This affected how I thought about Chapter 11 and its alternatives. Compare Douglas G. Baird, The Uneasy Case for Corporate Reorganizations, 15 J. LEGAL STUD. 127, 141 (1986) (recognizing that the direct costs of bankruptcy are high relative to corporate control transactions, such as initial public offerings), with Douglas G. Baird, Revisiting Auctions in Chapter 11, 36 J.L. & ECON. 633, 641-42 (1993) (acknowledging that the direct costs of bankruptcy are low). Many other scholars have of course, made use of empirical data in their work. See, e.g., Barry E. Adler, A Theory of Corporate Insolvency, 72 N.Y.U. L. REV. 343, 380-82 (1997); Eisenberg & Tagashira, supra note 2, at 120-54; Ronald J. Mann, Explaining the Pattern of Secured Credit, 110 HARV. L. REV. 625, 675-80 (1997).
13. For an account of what empirical research has shown us, see William C. Whitford, What's Right About Chapter 11, 72 WASH. U. L.Q. 1379 (1994). count myself among those whose work has changed in the wake of such efforts. For example, Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285 (1990), showed me that the direct costs of bankruptcy were lower than I (and many others) had thought. This affected how I thought about Chapter 11 and its alternatives. Compare Douglas G. Baird, The Uneasy Case for Corporate Reorganizations, 15 J. LEGAL STUD. 127, 141 (1986) (recognizing that the direct costs of bankruptcy are high relative to corporate control transactions, such as initial public offerings), with Douglas G. Baird, Revisiting Auctions in Chapter 11, 36 J.L. & ECON. 633, 641-42 (1993) (acknowledging that the direct costs of bankruptcy are low). Many other scholars have of course, made use of empirical data in their work. See, e.g., Barry E. Adler, A Theory of Corporate Insolvency, 72 N.Y.U. L. REV. 343, 380-82 (1997); Eisenberg & Tagashira, supra note 2, at 120-54; Ronald J. Mann, Explaining the Pattern of Secured Credit, 110 HARV. L. REV. 625, 675-80 (1997).
14. For an account of what empirical research has shown us, see William C. Whitford, What's Right About Chapter 11, 72 WASH. U. L.Q. 1379 (1994). count myself among those whose work has changed in the wake of such efforts. For example, Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285 (1990), showed me that the direct costs of bankruptcy were lower than I (and many others) had thought. This affected how I thought about Chapter 11 and its alternatives. Compare Douglas G. Baird, The Uneasy Case for Corporate Reorganizations, 15 J. LEGAL STUD. 127, 141 (1986) (recognizing that the direct costs of bankruptcy are high relative to corporate control transactions, such as initial public offerings), with Douglas G. Baird, Revisiting Auctions in Chapter 11, 36 J.L. & ECON. 633, 641-42 (1993) (acknowledging that the direct costs of bankruptcy are low). Many other scholars have of course, made use of empirical data in their work. See, e.g., Barry E. Adler, A Theory of Corporate Insolvency, 72 N.Y.U. L. REV. 343, 380-82 (1997); Eisenberg & Tagashira, supra note 2, at 120-54; Ronald J. Mann, Explaining the Pattern of Secured Credit, 110 HARV. L. REV. 625, 675-80 (1997).
15. For an account of what empirical research has shown us, see William C. Whitford, What's Right About Chapter 11, 72 WASH. U. L.Q. 1379 (1994). count myself among those whose work has changed in the wake of such efforts. For example, Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285 (1990), showed me that the direct costs of bankruptcy were lower than I (and many others) had thought. This affected how I thought about Chapter 11 and its alternatives. Compare Douglas G. Baird, The Uneasy Case for Corporate Reorganizations, 15 J. LEGAL STUD. 127, 141 (1986) (recognizing that the direct costs of bankruptcy are high relative to corporate control transactions, such as initial public offerings), with Douglas G. Baird, Revisiting Auctions in Chapter 11, 36 J.L. & ECON. 633, 641-42 (1993) (acknowledging that the direct costs of bankruptcy are low). Many other scholars have of course, made use of empirical data in their work. See, e.g., Barry E. Adler, A Theory of Corporate Insolvency, 72 N.Y.U. L. REV. 343, 380-82 (1997); Eisenberg & Tagashira, supra note 2, at 120-54; Ronald J. Mann, Explaining the Pattern of Secured Credit, 110 HARV. L. REV. 625, 675-80 (1997).
16. For an account of what empirical research has shown us, see William C. Whitford, What's Right About Chapter 11, 72 WASH. U. L.Q. 1379 (1994). count myself among those whose work has changed in the wake of such efforts. For example, Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. FIN. ECON. 285 (1990), showed me that the direct costs of bankruptcy were lower than I (and many others) had thought. This affected how I thought about Chapter 11 and its alternatives. Compare Douglas G. Baird, The Uneasy Case for Corporate Reorganizations, 15 J. LEGAL STUD. 127, 141 (1986) (recognizing that the direct costs of bankruptcy are high relative to corporate control transactions, such as initial public offerings), with Douglas G. Baird, Revisiting Auctions in Chapter 11, 36 J.L. & ECON. 633, 641-42 (1993) (acknowledging that the direct costs of bankruptcy are low). Many other scholars have of course, made use of empirical data in their work. See, e.g., Barry E. Adler, A Theory of Corporate Insolvency, 72 N.Y.U. L. REV. 343, 380-82 (1997); Eisenberg & Tagashira, supra note 2, at 120-54; Ronald J. Mann, Explaining the Pattern of Secured Credit, 110 HARV. L. REV. 625, 675-80 (1997).
17. The virtues of consistency and completeness are comparative only. Even in systems as simple as ordinary arithmetic, one cannot have a set of axioms that is both consistent and complete. See KURT GÖDEL, ON FORMALLY UNDECIDABLE PROPOSITIONS OF PRINCIPIA MATHEMATICA AND RELATED SYSTEMS 70 (B. Meltzer trans., Oliver & Boyd 1962) (1931).
18. A good example is matrix algebra. It defines multiplication in a way that makes it easier to solve many important problems in linear algebra. See G. HADLEY, LINEAR ALGEBRA 64-65 (1961). Other definitions of multiplication are possible, but they are not as useful.
19. See, e.g., Donald R. Korobkin, Rehabilitating Values: A Jurisprudence of Bankruptcy, 91 COLUM. L. REV. 717, 722-25 (1991).
20. I think of myself as a "law and economics" scholar, but I am not sure that "law and economics" is the best label for my approach - although it is not a bad one. I am, I think, perhaps more of an instrumentalist. I want to understand how changes in the law affect the way people behave. Will a change make people more likely to invest in new businesses? Will a change benefit those who work at this firm? How will it affect workers elsewhere? Will the firm take account of the harm its activities cause to others? If policymakers make this change in bankruptcy law, what changes should they make in the law elsewhere? These kinds of questions do not admit of precise answers. Often we can talk in general only about the kind of effect, not its magnitude. Frequently the best that legal scholars can do in advising policymakers is to tell them why a particular law will not (or may not) have an effect they think it will have. The consumer bankruptcy legislation recently debated in Congress provides a good example. The provisions of the various bills that came close to being enacted in 1998, in the aggregate, sharply curtail the ability of individual debtors to discharge debt in bankruptcy. See Bankruptcy Reform Act of 1998, H.R. 3150, 105th Cong. (1998); Consumer Bankruptcy Reform Act of 1997, S. 1301, 105th Cong. (1998). Advocates of the bills suggest that these changes will reduce the number of bankruptcy filings, of which there are now more than a million per year. See, e.g., 144 CONG. REC. S9917-18 (daily ed. Sept. 3, 1998) (statement of Sen. Grassley). Bankruptcy filings, however, are affected most by the amount of debt individuals carry relative to their annual income. See, e.g., The Increase in Personal Bankruptcy and the Crisis in Consumer Credit: Hearing Before the Subcomm. on Admin. Oversight and the Courts of the Senate Comm. on the Judiciary, 105th Cong. 32, 39-44 (1997) (statement of Kim Kowalewski, Chief, Financial and General Macroeconomic Analysis Unit, Congressional Budget Office). The higher this ratio, the more likely individuals will be unable to pay their debts if they encounter economic misfortune. These changes, by making bankruptcy less attractive, may make people less inclined to borrow. Everything else being equal, this will tend to reduce the number of defaults and the number of bankruptcy filings. But these same changes will also make lenders more likely to extend credit. They will lend more money and thus increase the ratio of debt to annual income, the number of defaults, and the number of bankruptcy filings. Unless there is some reason to think that the first effect will dominate the second (and there is not), a policymaker who wants to reduce the number of bankruptcy filings should hesitate before supporting this legislation.
21. See NATIONAL BANKR. REVIEW COMM'N, BANKRUPTCY: THE NEXT TWENTY YEARS (1997).
22. See, e.g., KAREN GROSS, FAILURE AND FORGIVENESS: REBALANCING THE BANKRUPTCY SYSTEM 248-49 (1997); Korobkin, supra note 6, at 722-25; Elizabeth Warren, Bankruptcy Policy, 54 U. CHI. L. REV. 775, 795-97 (1987); Elizabeth Warren & Jay Lawrence Westbrook, Searching for Reorganization Realities, 72 WASH. U. L.Q. 1257, 1265-86 (1994); Whitford, supra note 3, at 1381 n.6.
23. See, e.g., KAREN GROSS, FAILURE AND FORGIVENESS: REBALANCING THE BANKRUPTCY SYSTEM 248-49 (1997); Korobkin, supra note 6, at 722-25; Elizabeth Warren, Bankruptcy Policy, 54 U. CHI. L. REV. 775, 795-97 (1987); Elizabeth Warren & Jay Lawrence Westbrook, Searching for Reorganization Realities, 72 WASH. U. L.Q. 1257, 1265-86 (1994); Whitford, supra note 3, at 1381 n.6.
24. See, e.g., KAREN GROSS, FAILURE AND FORGIVENESS: REBALANCING THE BANKRUPTCY SYSTEM 248-49 (1997); Korobkin, supra note 6, at 722-25; Elizabeth Warren, Bankruptcy Policy, 54 U. CHI. L. REV. 775, 795-97 (1987); Elizabeth Warren & Jay Lawrence Westbrook, Searching for Reorganization Realities, 72 WASH. U. L.Q. 1257, 1265-86 (1994); Whitford, supra note 3, at 1381 n.6.
25. See, e.g., Samuel L. Bufford, What Is Right About Bankruptcy Law and Wrong About Its Critics, 72 WASH. U. L.Q. 829 (1994); Harvey R. Miller, The Changing Face of Chapter 11: A Reemergence of the Bankruptcy Judge as Producer, Director, and Sometimes Star of the Reorganization Passion Play, 69 AM. BANKR. L.J. 431 (1995) [hereinafter Miller, Changing Face]; Harvey R. Miller, Harvey's Outburst: A Rejoinder to Professor White's Comment, 69 AM. BANKR. L.J. 481 (1995) [hereinafter Miller, Harvey's Outburst].
26. See, e.g., Samuel L. Bufford, What Is Right About Bankruptcy Law and Wrong About Its Critics, 72 WASH. U. L.Q. 829 (1994); Harvey R. Miller, The Changing Face of Chapter 11: A Reemergence of the Bankruptcy Judge as Producer, Director, and Sometimes Star of the Reorganization Passion Play, 69 AM. BANKR. L.J. 431 (1995) [hereinafter Miller, Changing Face]; Harvey R. Miller, Harvey's Outburst: A Rejoinder to Professor White's Comment, 69 AM. BANKR. L.J. 481 (1995) [hereinafter Miller, Harvey's Outburst].
27. See, e.g., Samuel L. Bufford, What Is Right About Bankruptcy Law and Wrong About Its Critics, 72 WASH. U. L.Q. 829 (1994); Harvey R. Miller, The Changing Face of Chapter 11: A Reemergence of the Bankruptcy Judge as Producer, Director, and Sometimes Star of the Reorganization Passion Play, 69 AM. BANKR. L.J. 431 (1995) [hereinafter Miller, Changing Face]; Harvey R. Miller, Harvey's Outburst: A Rejoinder to Professor White's Comment, 69 AM. BANKR. L.J. 481 (1995) [hereinafter Miller, Harvey's Outburst].
28. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
29. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
30. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
31. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
32. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
33. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
34. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
35. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
36. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
37. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
38. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
39. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
40. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
41. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
42. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
43. Work done by members of this group includes THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW (1986); Barry E. Adler, Finance's Theoretical Divide and the Proper Role of Insolvency Rules, 67 S. CAL. L. REV. 1107 (1994); Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311 (1993); James W. Bowers, Groping and Coping in the Shadow of Murphy's Law: Bankruptcy Theory and the Elementary Economics of Failure, 88 MICH. L. REV. 2097 (1990); Frank Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. FIN. ECON. 411 (1990); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989); Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992); Randal C. Picker, Voluntary Petitions and the Creditors' Bargain, 61 U. CIN. L. REV. 519 (1992); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 WASH. U. L.Q. 1159 (1994); George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 VAND. L. REV. 901 (1993); and Michelle J. White, Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, 10 J.L. ECON. & ORG. 268 (1994). Major scholars who belong to this group, but whose principal work has been outside of corporate reorganizations, include Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 HARV. L. REV. 775 (1988); Robert C. Clark, The Interdisciplinary Study of Legal Evolution, 90 YALE L.J. 1238 (1981); Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527 (1983); and Alan Schwartz, Bankruptcy Workouts and Debt Contracts, 36 J.L. & ECON. 595 (1993). As I have noted above, much of my work fits squarely in this camp. See, e.g., Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).
44. See Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors' Bargain, 91 YALE L.J. 857, 907 (1982).
45. See Douglas G. Baird, A World Without Bankruptcy, 50 J.L. & CONTEMP. PROBS. 173, 183-85 (1987).
46. One must be cautious, however, about extending the analogy to mathematics too far. First, ideas in law never have the hard-edged quality of a proposition in formal logic. See John Stick, Can Nihilism Be Pragmatic?, 100 HARV. L. REV. 332, 366 n.146 (1986). Second, and as important, the axioms themselves turn on the domain of the problem being addressed. The domain of this Essay - corporate reorganizations - is not the same as the domain of all the cases in Chapter 11. Corporate reorganizations can occur in Chapter 7 and outside of bankruptcy court altogether. More importantly, Chapter 11 includes defunct firms that are liquidating and single-asset real estate ventures that have no ongoing operations to speak of, as well as filings by individuals. One might argue that my focus on troubled firms rather than everyone in a certain legal proceeding is symptomatic of my instrumentalist bias.
47. The "sole owner" paradigm is set out in Douglas G. Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 U. CHI. L. REV. 97 (1984).
48. See GROSS, supra note 9, at 235-43; Korobkin, supra note 6, at 766-68.
49. See, e.g., DOUGLAS G. BAIRD, THE ELEMENTS OF BANKRUPTCY 64 (rev. ed. 1993).
50. See Robert K. Rasmussen, Debtor's Choice: A Menu Approach to Corporate Bankruptcy, 71 TEX. L. REV. 51, 81-82 (1992) [hereinafter Rasmussen, Debtor's Choice]; Robert K. Rasmussen, An Essay on Optimal Bankruptcy Rules and Social Justice, 1994 U. ILL. L. REV. 1, 42; Alan Schwartz, A Contract Theory Approach to Business Bankruptcy, 107 YALE L.J. 1807, 1814-20 (1998).
51. See Robert K. Rasmussen, Debtor's Choice: A Menu Approach to Corporate Bankruptcy, 71 TEX. L. REV. 51, 81-82 (1992) [hereinafter Rasmussen, Debtor's Choice]; Robert K. Rasmussen, An Essay on Optimal Bankruptcy Rules and Social Justice, 1994 U. ILL. L. REV. 1, 42; Alan Schwartz, A Contract Theory Approach to Business Bankruptcy, 107 YALE L.J. 1807, 1814-20 (1998).
52. See Robert K. Rasmussen, Debtor's Choice: A Menu Approach to Corporate Bankruptcy, 71 TEX. L. REV. 51, 81-82 (1992) [hereinafter Rasmussen, Debtor's Choice]; Robert K. Rasmussen, An Essay on Optimal Bankruptcy Rules and Social Justice, 1994 U. ILL. L. REV. 1, 42; Alan Schwartz, A Contract Theory Approach to Business Bankruptcy, 107 YALE L.J. 1807, 1814-20 (1998).
53. For two expositions of the idea of bankruptcy as a closed system in which a balance must be struck after taking account of all interests, see GROSS, supra note 9, at 235-43; and Warren, supra note 9, at 796.
54. See, e.g., Whitford, supra note 3, at 1383.
55. See GROSS, supra note 9, at 238-39.
56. See Baird, supra note 11, at 824-28; Rasmussen, supra note 11, at 1162-65.
57. See Baird & Jackson, supra note 15, at 102.
58. See, e.g., Korobkin, supra note 6, at 722 (describing bankruptcy as a kind of "group therapy," or "a system with varied contours and dimensions, having the distinct function of facilitating the expression and recognition of those diverse values important in dealing with financial distress"); Warren, supra note 9, at 811 ("I have offered a dirty, complex, elastic, interconnected view of bankruptcy from which I can neither predict outcomes nor even necessarily fully articulate all the factors relevant to a policy decision."); Warren & Westbrook, supra note 9, at 1260 (describing Bebchuk's model of corporate reorganization as "speculation without reference to reality").
59. See Miller, Changing Face, supra note 10, at 433-40, 464-65.
60. In describing the debtor in possession this way, I am echoing the words of Henry Friendly. See Otte v. Manufacturers Hanover Commercial Corp. (In re Texlon Corp.), 596 F.2d 1092, 1098 (2d Cir. 1979) ("The debtor in possession is hardly neutral. Its interest is in its own survival, even at the expense of equal treatment of creditors, and close relations with a lending institution tend to prevent the exploration of other available courses in which a more objective receiver or trustee would engage.").
61. The distinction between financial and economic distress has become commonplace among economists. See, e.g., Andrade & Kaplan, supra note 2, at 1444.
62. Two high-profile Chapter 11 cases of the 1980s are conspicuous examples. See Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636 (2d Cir. 1988); Committee of Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239 (4th Cir. 1987).
63. Indeed, railroads in the country at the turn of the last century are a paradigmatic example of financial distress. In 1893 alone, 27,000 miles of track in the United States went into receivership - more than existed in all of Britain at that time. See ALFRED D. CHANDLER, JR., SCALE AND SCOPE: THE DYNAMICS OF INDUSTRIAL CAPITALISM 53 (1990); STUART DAGGETT, RAILROAD REORGANIZATION at v (Augustus M. Kelley Publishers 1967) (1908).
64. Indeed, railroads in the country at the turn of the last century are a paradigmatic example of financial distress. In 1893 alone, 27,000 miles of track in the United States went into receivership - more than existed in all of Britain at that time. See ALFRED D. CHANDLER, JR., SCALE AND SCOPE: THE DYNAMICS OF INDUSTRIAL CAPITALISM 53 (1990); STUART DAGGETT, RAILROAD REORGANIZATION at v (Augustus M. Kelley Publishers 1967) (1908).
65. This tension among creditors and other investors (including shareholders) and its connection to financial distress are explored in Baird & Jackson, supra note 15, at 101-09.
66. The Modigliani-Miller irrelevance propositions illustrate that conflating a firm's economic position and its financial position is a tricky undertaking, because it is difficult to connect questions of how assets are used with questions of how they are financed. These propositions demonstrate that, at first approximation, a change in a firm's capital structure has no effect on the value of the firm as a whole. See Franco Modigliani & Merton H. Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, 48 AM. ECON. REV. 261 (1958); see also Merton H. Miller, The Modigliani-Miller Propositions After Thirty Years, 2 J. ECON. PERSP. 99 (1988) (describing the development of the literature over the 30 years since the propositions were first articulated). Consider two firms in the same business with the same assets and workers. One has a sole owner and no creditors, while the other has many shareholders and multiple tiers of debt. Under specified assumptions, the value of the two firms is the same. Capital structure does not affect a firm's value. One cannot affect the value of a firm by changing the amount or type of debt it holds. Financial distress is a problem of capital structures, while economic distress is a problem of asset deployment. The two can be connected only if the Modigliani-Miller irrelevance propositions do not hold.
67. The Modigliani-Miller irrelevance propositions illustrate that conflating a firm's economic position and its financial position is a tricky undertaking, because it is difficult to connect questions of how assets are used with questions of how they are financed. These propositions demonstrate that, at first approximation, a change in a firm's capital structure has no effect on the value of the firm as a whole. See Franco Modigliani & Merton H. Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, 48 AM. ECON. REV. 261 (1958); see also Merton H. Miller, The Modigliani-Miller Propositions After Thirty Years, 2 J. ECON. PERSP. 99 (1988) (describing the development of the literature over the 30 years since the propositions were first articulated). Consider two firms in the same business with the same assets and workers. One has a sole owner and no creditors, while the other has many shareholders and multiple tiers of debt. Under specified assumptions, the value of the two firms is the same. Capital structure does not affect a firm's value. One cannot affect the value of a firm by changing the amount or type of debt it holds. Financial distress is a problem of capital structures, while economic distress is a problem of asset deployment. The two can be connected only if the Modigliani-Miller irrelevance propositions do not hold.
68. See, e.g., Korobkin, supra note 6, at 745 (noting that a corporation is not "merely a pool of assets" but "a moral, political, and social actor").
69. See, e.g., GROSS, supra note 9, at 14-24.
70. As noted, Chapter 11 contains many cases that do not involve ongoing firms. See supra note 14 and accompanying text. Among the most common of these cases is the small business that has already shut its doors or will do so shortly. Even in its best days, it had only a few employees beyond the owner and the owner's immediate family. The problems of this failed firm cannot be separated from the financial or other difficulties of its owner. As a group, traditionalists tend to believe that existing law - and in particular Chapter 11 - does a good job of sorting out rights in such cases. See Bufford, supra note 10, at 833. Proceduralists do not deny the importance of such cases, but few have focused much attention on them.
71. See Baird & Jackson, supra note 15, at 101-09.
72. See Bufford, supra note 10, at 833-34; Elizabeth Warren, Bankruptcy Policymaking in an Imperfect World, 92 MICH. L. REV. 336, 373-77 (1993).
73. This issue is now before the Supreme Court. See In re 203 N. LaSalle St. Partnership, 126 F.3d 955 (7th Cir. 1997), cert. granted sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 118 S. Ct. 1674 (1998). The problem grows out of a series of Supreme Court cases that have together given shape to the law of corporate reorganizations. The three most important are Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), Kansas City Railway Co. v. Central Union Trust Co., 271 U.S. 445 (1926), and Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). The Supreme Court did not reach the issue in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988). The Ninth Circuit held that the new value exception rule existed in Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). The Supreme Court granted certiorari but later dismissed the case as moot after the parties settled. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 (1994). Cases that discuss, but do not resolve, the question of whether the new value exception survived include In re Snyder, 967 F.2d 1126, 1128-31 (7th Cir. 1992), Travelers Insurance Co. v. Bryson Properties (In re Bryson Properties), 961 F.2d 496, 503-04 (4th Cir. 1992), and Kham & Note's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360-62 (7th Cir. 1990). A comprehensive review of the new value exception can be found in J. Ronald Trost et al., Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, SB37 ALI-ABA 595 (1997). The academic literature on the new value exception is large and growing. See, e.g., BAIRD, supra note 17, at 259-66; Charles W. Adams, New Capital for Bankruptcy Reorganizations: It's the Amount That Counts, 89 NW. U. L. REV. 411 (1995); John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991); Walter W. Miller, Jr., Bankruptcy's New Value Exception: No Longer a Necessity, 77 B.U. L. REV. 975 (1997); Elizabeth Warren, A Theory of Absolute Priority, 1991 ANN. SURVEY AM. L. 9; James J. White, Absolute Priority and New Value, 8 COOLEY L. REV. 1 (1991).
74. This issue is now before the Supreme Court. See In re 203 N. LaSalle St. Partnership, 126 F.3d 955 (7th Cir. 1997), cert. granted sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 118 S. Ct. 1674 (1998). The problem grows out of a series of Supreme Court cases that have together given shape to the law of corporate reorganizations. The three most important are Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), Kansas City Railway Co. v. Central Union Trust Co., 271 U.S. 445 (1926), and Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). The Supreme Court did not reach the issue in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988). The Ninth Circuit held that the new value exception rule existed in Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). The Supreme Court granted certiorari but later dismissed the case as moot after the parties settled. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 (1994). Cases that discuss, but do not resolve, the question of whether the new value exception survived include In re Snyder, 967 F.2d 1126, 1128-31 (7th Cir. 1992), Travelers Insurance Co. v. Bryson Properties (In re Bryson Properties), 961 F.2d 496, 503-04 (4th Cir. 1992), and Kham & Note's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360-62 (7th Cir. 1990). A comprehensive review of the new value exception can be found in J. Ronald Trost et al., Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, SB37 ALI-ABA 595 (1997). The academic literature on the new value exception is large and growing. See, e.g., BAIRD, supra note 17, at 259-66; Charles W. Adams, New Capital for Bankruptcy Reorganizations: It's the Amount That Counts, 89 NW. U. L. REV. 411 (1995); John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991); Walter W. Miller, Jr., Bankruptcy's New Value Exception: No Longer a Necessity, 77 B.U. L. REV. 975 (1997); Elizabeth Warren, A Theory of Absolute Priority, 1991 ANN. SURVEY AM. L. 9; James J. White, Absolute Priority and New Value, 8 COOLEY L. REV. 1 (1991).
75. This issue is now before the Supreme Court. See In re 203 N. LaSalle St. Partnership, 126 F.3d 955 (7th Cir. 1997), cert. granted sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 118 S. Ct. 1674 (1998). The problem grows out of a series of Supreme Court cases that have together given shape to the law of corporate reorganizations. The three most important are Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), Kansas City Railway Co. v. Central Union Trust Co., 271 U.S. 445 (1926), and Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). The Supreme Court did not reach the issue in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988). The Ninth Circuit held that the new value exception rule existed in Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). The Supreme Court granted certiorari but later dismissed the case as moot after the parties settled. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 (1994). Cases that discuss, but do not resolve, the question of whether the new value exception survived include In re Snyder, 967 F.2d 1126, 1128-31 (7th Cir. 1992), Travelers Insurance Co. v. Bryson Properties (In re Bryson Properties), 961 F.2d 496, 503-04 (4th Cir. 1992), and Kham & Note's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360-62 (7th Cir. 1990). A comprehensive review of the new value exception can be found in J. Ronald Trost et al., Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, SB37 ALI-ABA 595 (1997). The academic literature on the new value exception is large and growing. See, e.g., BAIRD, supra note 17, at 259-66; Charles W. Adams, New Capital for Bankruptcy Reorganizations: It's the Amount That Counts, 89 NW. U. L. REV. 411 (1995); John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991); Walter W. Miller, Jr., Bankruptcy's New Value Exception: No Longer a Necessity, 77 B.U. L. REV. 975 (1997); Elizabeth Warren, A Theory of Absolute Priority, 1991 ANN. SURVEY AM. L. 9; James J. White, Absolute Priority and New Value, 8 COOLEY L. REV. 1 (1991).
76. This issue is now before the Supreme Court. See In re 203 N. LaSalle St. Partnership, 126 F.3d 955 (7th Cir. 1997), cert. granted sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 118 S. Ct. 1674 (1998). The problem grows out of a series of Supreme Court cases that have together given shape to the law of corporate reorganizations. The three most important are Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), Kansas City Railway Co. v. Central Union Trust Co., 271 U.S. 445 (1926), and Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). The Supreme Court did not reach the issue in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988). The Ninth Circuit held that the new value exception rule existed in Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). The Supreme Court granted certiorari but later dismissed the case as moot after the parties settled. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 (1994). Cases that discuss, but do not resolve, the question of whether the new value exception survived include In re Snyder, 967 F.2d 1126, 1128-31 (7th Cir. 1992), Travelers Insurance Co. v. Bryson Properties (In re Bryson Properties), 961 F.2d 496, 503-04 (4th Cir. 1992), and Kham & Note's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360-62 (7th Cir. 1990). A comprehensive review of the new value exception can be found in J. Ronald Trost et al., Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, SB37 ALI-ABA 595 (1997). The academic literature on the new value exception is large and growing. See, e.g., BAIRD, supra note 17, at 259-66; Charles W. Adams, New Capital for Bankruptcy Reorganizations: It's the Amount That Counts, 89 NW. U. L. REV. 411 (1995); John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991); Walter W. Miller, Jr., Bankruptcy's New Value Exception: No Longer a Necessity, 77 B.U. L. REV. 975 (1997); Elizabeth Warren, A Theory of Absolute Priority, 1991 ANN. SURVEY AM. L. 9; James J. White, Absolute Priority and New Value, 8 COOLEY L. REV. 1 (1991).
77. This issue is now before the Supreme Court. See In re 203 N. LaSalle St. Partnership, 126 F.3d 955 (7th Cir. 1997), cert. granted sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 118 S. Ct. 1674 (1998). The problem grows out of a series of Supreme Court cases that have together given shape to the law of corporate reorganizations. The three most important are Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), Kansas City Railway Co. v. Central Union Trust Co., 271 U.S. 445 (1926), and Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). The Supreme Court did not reach the issue in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988). The Ninth Circuit held that the new value exception rule existed in Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). The Supreme Court granted certiorari but later dismissed the case as moot after the parties settled. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 (1994). Cases that discuss, but do not resolve, the question of whether the new value exception survived include In re Snyder, 967 F.2d 1126, 1128-31 (7th Cir. 1992), Travelers Insurance Co. v. Bryson Properties (In re Bryson Properties), 961 F.2d 496, 503-04 (4th Cir. 1992), and Kham & Note's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360-62 (7th Cir. 1990). A comprehensive review of the new value exception can be found in J. Ronald Trost et al., Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, SB37 ALI-ABA 595 (1997). The academic literature on the new value exception is large and growing. See, e.g., BAIRD, supra note 17, at 259-66; Charles W. Adams, New Capital for Bankruptcy Reorganizations: It's the Amount That Counts, 89 NW. U. L. REV. 411 (1995); John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991); Walter W. Miller, Jr., Bankruptcy's New Value Exception: No Longer a Necessity, 77 B.U. L. REV. 975 (1997); Elizabeth Warren, A Theory of Absolute Priority, 1991 ANN. SURVEY AM. L. 9; James J. White, Absolute Priority and New Value, 8 COOLEY L. REV. 1 (1991).
78. This issue is now before the Supreme Court. See In re 203 N. LaSalle St. Partnership, 126 F.3d 955 (7th Cir. 1997), cert. granted sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 118 S. Ct. 1674 (1998). The problem grows out of a series of Supreme Court cases that have together given shape to the law of corporate reorganizations. The three most important are Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), Kansas City Railway Co. v. Central Union Trust Co., 271 U.S. 445 (1926), and Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). The Supreme Court did not reach the issue in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988). The Ninth Circuit held that the new value exception rule existed in Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). The Supreme Court granted certiorari but later dismissed the case as moot after the parties settled. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 (1994). Cases that discuss, but do not resolve, the question of whether the new value exception survived include In re Snyder, 967 F.2d 1126, 1128-31 (7th Cir. 1992), Travelers Insurance Co. v. Bryson Properties (In re Bryson Properties), 961 F.2d 496, 503-04 (4th Cir. 1992), and Kham & Note's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360-62 (7th Cir. 1990). A comprehensive review of the new value exception can be found in J. Ronald Trost et al., Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, SB37 ALI-ABA 595 (1997). The academic literature on the new value exception is large and growing. See, e.g., BAIRD, supra note 17, at 259-66; Charles W. Adams, New Capital for Bankruptcy Reorganizations: It's the Amount That Counts, 89 NW. U. L. REV. 411 (1995); John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991); Walter W. Miller, Jr., Bankruptcy's New Value Exception: No Longer a Necessity, 77 B.U. L. REV. 975 (1997); Elizabeth Warren, A Theory of Absolute Priority, 1991 ANN. SURVEY AM. L. 9; James J. White, Absolute Priority and New Value, 8 COOLEY L. REV. 1 (1991).
79. This issue is now before the Supreme Court. See In re 203 N. LaSalle St. Partnership, 126 F.3d 955 (7th Cir. 1997), cert. granted sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 118 S. Ct. 1674 (1998). The problem grows out of a series of Supreme Court cases that have together given shape to the law of corporate reorganizations. The three most important are Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), Kansas City Railway Co. v. Central Union Trust Co., 271 U.S. 445 (1926), and Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). The Supreme Court did not reach the issue in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988). The Ninth Circuit held that the new value exception rule existed in Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). The Supreme Court granted certiorari but later dismissed the case as moot after the parties settled. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 (1994). Cases that discuss, but do not resolve, the question of whether the new value exception survived include In re Snyder, 967 F.2d 1126, 1128-31 (7th Cir. 1992), Travelers Insurance Co. v. Bryson Properties (In re Bryson Properties), 961 F.2d 496, 503-04 (4th Cir. 1992), and Kham & Note's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360-62 (7th Cir. 1990). A comprehensive review of the new value exception can be found in J. Ronald Trost et al., Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, SB37 ALI-ABA 595 (1997). The academic literature on the new value exception is large and growing. See, e.g., BAIRD, supra note 17, at 259-66; Charles W. Adams, New Capital for Bankruptcy Reorganizations: It's the Amount That Counts, 89 NW. U. L. REV. 411 (1995); John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991); Walter W. Miller, Jr., Bankruptcy's New Value Exception: No Longer a Necessity, 77 B.U. L. REV. 975 (1997); Elizabeth Warren, A Theory of Absolute Priority, 1991 ANN. SURVEY AM. L. 9; James J. White, Absolute Priority and New Value, 8 COOLEY L. REV. 1 (1991).
80. This issue is now before the Supreme Court. See In re 203 N. LaSalle St. Partnership, 126 F.3d 955 (7th Cir. 1997), cert. granted sub nom. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. Partnership, 118 S. Ct. 1674 (1998). The problem grows out of a series of Supreme Court cases that have together given shape to the law of corporate reorganizations. The three most important are Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), Kansas City Railway Co. v. Central Union Trust Co., 271 U.S. 445 (1926), and Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913). The Supreme Court did not reach the issue in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n.3 (1988). The Ninth Circuit held that the new value exception rule existed in Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 907 (9th Cir. 1993). The Supreme Court granted certiorari but later dismissed the case as moot after the parties settled. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 20 (1994). Cases that discuss, but do not resolve, the question of whether the new value exception survived include In re Snyder, 967 F.2d 1126, 1128-31 (7th Cir. 1992), Travelers Insurance Co. v. Bryson Properties (In re Bryson Properties), 961 F.2d 496, 503-04 (4th Cir. 1992), and Kham & Note's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360-62 (7th Cir. 1990). A comprehensive review of the new value exception can be found in J. Ronald Trost et al., Survey of the New Value Exception to the Absolute Priority Rule and the Preliminary Problem of Classification, SB37 ALI-ABA 595 (1997). The academic literature on the new value exception is large and growing. See, e.g., BAIRD, supra note 17, at 259-66; Charles W. Adams, New Capital for Bankruptcy Reorganizations: It's the Amount That Counts, 89 NW. U. L. REV. 411 (1995); John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963 (1989); Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. REV. 738 (1988); Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991); Walter W. Miller, Jr., Bankruptcy's New Value Exception: No Longer a Necessity, 77 B.U. L. REV. 975 (1997); Elizabeth Warren, A Theory of Absolute Priority, 1991 ANN. SURVEY AM. L. 9; James J. White, Absolute Priority and New Value, 8 COOLEY L. REV. 1 (1991).
81. See, e.g., GROSS, supra note 9, at 129 ("[R]ehabilitation is facilitated by curtailing creditors' options and is justified because debtor rehabilitation trumps creditor choice."); see also Bufford, supra note 10, at 848 (noting that one of the essential purposes of Chapter 11, as well as other aspects of bankruptcy law, is "to provide an economic safety net for an economic system under stress").
82. Another example is the debate about whether opportunity cost should be treated as a component of adequate protection under 11 U.S.C. § 362 (1994). Compare Baird & Jackson, supra note 15, at 129 (arguing it should), with Warren, supra note 9, at 808-11 (arguing it should not). This narrow issue was resolved in the traditionalists' favor in United Savings Ass'n v. Timbers of Inwood Forest Associates, 484 U.S. 365 (1988).
83. See Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1342-46 (1990); Amos Tversky & Daniel Kahneman, Availability: A Heuristic for Judging Frequency and Probability, 5 COGNITIVE PSYCHOL. 207, 208 (1973); Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases, 185 SCIENCE 1124, 1127-28 (1974). This cognitive bias makes people feel that flying in an airplane is more dangerous than driving a car. Airplane crashes are more vivid and visible than automobile crashes. The same bias makes individuals more aware of Chernobyl and Three Mile Island than the countless coal mine accidents that have led to greater loss of life. There is an irony here. Cognitive biases such as these frequently underpin critiques of economic models and their dependence on individuals to act rationally. These same cognitive biases in this context make policymakers less likely to take seriously the claims of economically oriented bankruptcy scholars.
84. See Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1342-46 (1990); Amos Tversky & Daniel Kahneman, Availability: A Heuristic for Judging Frequency and Probability, 5 COGNITIVE PSYCHOL. 207, 208 (1973); Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases, 185 SCIENCE 1124, 1127-28 (1974). This cognitive bias makes people feel that flying in an airplane is more dangerous than driving a car. Airplane crashes are more vivid and visible than automobile crashes. The same bias makes individuals more aware of Chernobyl and Three Mile Island than the countless coal mine accidents that have led to greater loss of life. There is an irony here. Cognitive biases such as these frequently underpin critiques of economic models and their dependence on individuals to act rationally. These same cognitive biases in this context make policymakers less likely to take seriously the claims of economically oriented bankruptcy scholars.
85. See Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. POL. ECON. 1325, 1342-46 (1990); Amos Tversky & Daniel Kahneman, Availability: A Heuristic for Judging Frequency and Probability, 5 COGNITIVE PSYCHOL. 207, 208 (1973); Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases, 185 SCIENCE 1124, 1127-28 (1974). This cognitive bias makes people feel that flying in an airplane is more dangerous than driving a car. Airplane crashes are more vivid and visible than automobile crashes. The same bias makes individuals more aware of Chernobyl and Three Mile Island than the countless coal mine accidents that have led to greater loss of life. There is an irony here. Cognitive biases such as these frequently underpin critiques of economic models and their dependence on individuals to act rationally. These same cognitive biases in this context make policymakers less likely to take seriously the claims of economically oriented bankruptcy scholars.
86. Cf. Daniel Kahneman & Amos Tversky, Choices, Values, and Frames, 39 AM. PSYCHOL. 341, 342 (1984) (noting findings of loss aversion).
87. For a discussion of the various requirements courts have imposed on new value plans, see Trost et al., supra note 37, at 645-65. For two examples of cases in which courts found the value proposed to be insufficient, see In re Applied Safety, Inc., 200 B.R. 576, 590-91 (Bankr. E.D. Pa. 1996); and In re Graphic Communications, 200 B.R. 143, 151 (Bankr. E.D. Mich. 1996).
88. See Trost et al., supra note 37, at 666-67.
89. Harvey Miller makes the point this way: Chapter 11 is not a perfect or wholly efficient process or institution, but neither are law schools or the capital markets which are so admired by the efficiency obsessed academics. These same academics don't dirty their hands in the surgery, distress, and human pain that is a part of every business failure and properly initiated Chapter 11 case. Miller, Harvey's Outburst, supra note 10, at 482. Other traditionalists look at the proceduralists in the same way. See, e.g., Warren & Westbrook, supra note 9, at 1260 (characterizing the work of Bebchuk and its progeny as a "form of speculation without reference to reality").
90. Although some proceduralists believe that the law should interfere relatively little with the free market as a general matter, not all do. One can think that many substantive policies ought to check market forces without thinking that there should be particular substantive policies in bankruptcy. Indeed, the proceduralists occupy a variety of points along the political spectrum, as do the traditionalists. It would be flatly wrong to assume that proceduralists are on the right of the political spectrum and traditionalists on the left.
91. For example, when Congress passed a plant-closing law several years ago, its scope was quite modest, requiring principally only advance notice. See Worker Adjustment and Retraining Notification Act, 29 U.S.C. §§ 2101-09 (1994).
92. See, e.g., GROSS, supra note 9, at 235-50. To the proceduralists, however, the idea of "balance" misses the point. If the rules are clear entering into a transaction, creditors can decide whether to lend and at what rate. If they do not like U.S. bankruptcy laws, they can invest their capital overseas or in riskless treasury bills. As long as the rules are not changed midstream, they make a competitive return on their capital regardless of the bankruptcy laws. Sophisticated creditors can take any bankruptcy policy, however inane, and adjust to it, provided it applies only prospectively. If the rule is spelled out in advance, favoring creditors in a bankruptcy regime does not, at first approximation, increase their profits or improve their welfare.
93. For recent work showing how hard it is to identify these benefits, see Lucian Arye Bebchuk & Jesse M. Fried, The Uneasy Case for the Priority of Secured Claims in Bankruptcy, 105 YALE L.J. 857, 913-23 (1996).
94. See, e.g., Thomas H. Jackson & Anthony T. Kronman, Secured Financing and Priorities Among Creditors, 88 YALE L.J. 1143, 1144 (1979) (concluding that "the analytic justification for many of [U.C.C.] Article 9's most important priority rules remains obscure"); Saul Levmore, Monitors and Freeriders in Commercial and Corporate Settings, 92 YALE L.J. 49, 52 (1982) ("The existence of secured financing might seem counterintuitive at first . . . ."); Alan Schwartz, Security Interests and Bankruptcy Priorities: A Review of Current Theories, 10 J. LEGAL STUD. 1, 37 (1981) (arguing that "no plausible showing that secured debt actually increases welfare exists"); René M. Stulz & Herb Johnson, An Analysis of Secured Debt, 14 J. FIN. ECON. 501, 501 (1985) (noting that the current literature lacks convincing explanations for the use of security).
95. See, e.g., Thomas H. Jackson & Anthony T. Kronman, Secured Financing and Priorities Among Creditors, 88 YALE L.J. 1143, 1144 (1979) (concluding that "the analytic justification for many of [U.C.C.] Article 9's most important priority rules remains obscure"); Saul Levmore, Monitors and Freeriders in Commercial and Corporate Settings, 92 YALE L.J. 49, 52 (1982) ("The existence of secured financing might seem counterintuitive at first . . . ."); Alan Schwartz, Security Interests and Bankruptcy Priorities: A Review of Current Theories, 10 J. LEGAL STUD. 1, 37 (1981) (arguing that "no plausible showing that secured debt actually increases welfare exists"); René M. Stulz & Herb Johnson, An Analysis of Secured Debt, 14 J. FIN. ECON. 501, 501 (1985) (noting that the current literature lacks convincing explanations for the use of security).
96. See, e.g., Thomas H. Jackson & Anthony T. Kronman, Secured Financing and Priorities Among Creditors, 88 YALE L.J. 1143, 1144 (1979) (concluding that "the analytic justification for many of [U.C.C.] Article 9's most important priority rules remains obscure"); Saul Levmore, Monitors and Freeriders in Commercial and Corporate Settings, 92 YALE L.J. 49, 52 (1982) ("The existence of secured financing might seem counterintuitive at first . . . ."); Alan Schwartz, Security Interests and Bankruptcy Priorities: A Review of Current Theories, 10 J. LEGAL STUD. 1, 37 (1981) (arguing that "no plausible showing that secured debt actually increases welfare exists"); René M. Stulz & Herb Johnson, An Analysis of Secured Debt, 14 J. FIN. ECON. 501, 501 (1985) (noting that the current literature lacks convincing explanations for the use of security).
97. See, e.g., Thomas H. Jackson & Anthony T. Kronman, Secured Financing and Priorities Among Creditors, 88 YALE L.J. 1143, 1144 (1979) (concluding that "the analytic justification for many of [U.C.C.] Article 9's most important priority rules remains obscure"); Saul Levmore, Monitors and Freeriders in Commercial and Corporate Settings, 92 YALE L.J. 49, 52 (1982) ("The existence of secured financing might seem counterintuitive at first . . . ."); Alan Schwartz, Security Interests and Bankruptcy Priorities: A Review of Current Theories, 10 J. LEGAL STUD. 1, 37 (1981) (arguing that "no plausible showing that secured debt actually increases welfare exists"); René M. Stulz & Herb Johnson, An Analysis of Secured Debt, 14 J. FIN. ECON. 501, 501 (1985) (noting that the current literature lacks convincing explanations for the use of security).
98. Donald Korobkin is one traditionalist scholar who has confronted this challenge squarely. See Korobkin, supra note 6, at 789 (describing bankruptcy law as "creating conditions for a discourse in which values of participants may be rehabilitated into a coherent and informed vision of what the enterprise shall exist to do"). In contrast to mine, Korobkin's view of what bankruptcy should be is decidedly noninstrumentalist.
99. See, e.g., Worker Adjustment and Retraining Notification Act of 1988, 29 U.S.C. §§ 2101-09 (1994) (requiring notice prior to plant closings or mass layoffs).
100. The phrase was used in United States v. Trans-Missouri Freight Ass'n, 166 U.S. 290, 323 (1897). The Supreme Court last used this expression in United States v. Von's Grocery Co., 384 U.S. 270, 274 (1966).
101. See, e.g., S.J. Leibowitz & Stephen E. Margolis, Should Technology Choice Be a Concern of Antitrust Policy?, 9 HARV. J.L. & TECH. 283, 286-88, 290-95 (1996); Mark A. Lemley, Antitrust and the Internet Standardization Problem, 28 CONN. L. REV. 1041, 1045-1049 (1996); John E. Lopatka & William H. Page, Microsoft, Monopolization, and Network Externalities: Some Uses and Abuses of Economic Theory in Antitrust Decision Making, 40 ANTITRUST BULL. 317 (1995).
102. See, e.g., S.J. Leibowitz & Stephen E. Margolis, Should Technology Choice Be a Concern of Antitrust Policy?, 9 HARV. J.L. & TECH. 283, 286-88, 290-95 (1996); Mark A. Lemley, Antitrust and the Internet Standardization Problem, 28 CONN. L. REV. 1041, 1045-1049 (1996); John E. Lopatka & William H. Page, Microsoft, Monopolization, and Network Externalities: Some Uses and Abuses of Economic Theory in Antitrust Decision Making, 40 ANTITRUST BULL. 317 (1995).
103. See, e.g., S.J. Leibowitz & Stephen E. Margolis, Should Technology Choice Be a Concern of Antitrust Policy?, 9 HARV. J.L. & TECH. 283, 286-88, 290-95 (1996); Mark A. Lemley, Antitrust and the Internet Standardization Problem, 28 CONN. L. REV. 1041, 1045-1049 (1996); John E. Lopatka & William H. Page, Microsoft, Monopolization, and Network Externalities: Some Uses and Abuses of Economic Theory in Antitrust Decision Making, 40 ANTITRUST BULL. 317 (1995).
104. E. Norman Veasey, Chief Justice of the Delaware Supreme Court, describes it in this way: "Although the contract analogy - like the other analogies - is imperfect, it comes reasonably close to a working hypothesis. I think courts might consider using as a point of departure - but not necessarily a controlling principle - what they perceive to be the investors' reasonable contractual expectations." E. Norman Veasey, An Economic Rationale for Judicial Decisionmaking in Corporate Law 4 (Mar. 1998) (unpublished manuscript, on file with The Yale Law Journal) (internal citation omitted).
105. 350 F.2d 445 (D.C. Cir. 1965) (refusing to enforce a contract where an element of unconscionability was present at the time the contract was entered into). For an example of a casebook that has dropped Williams as a principal case, see JOHN P. DAWSON ET AL., CONTRACTS: CASES AND COMMENT 692-93 (7th ed. 1998). The casebook does, however, include a brief summary and extract from Judge Wright's famous opinion. See id. 56. The cross-collateralization of household goods that was at issue in Williams is now an unfair trade practice under FTC Credit Practices Rule, 16 C.F.R. § 444.2(a)(4) (1998).
106. See CASS R. SUNSTEIN, FREE MARKETS AND SOCIAL JUSTICE 298-317 (1997).
107. The basic idea is a straightforward one: If there are two different legal regimes, parties will invest considerable energy in finding the legal regime that most favors them. A rule that applies only in bankruptcy necessarily invites some parties to resolve the issue someplace else. Resources are wasted in the battle over where the fight takes place. More importantly, when the non-bankruptcy forum is actually used, any substantive policy put in place only in the bankruptcy forum will be irrelevant. For a discussion of the problem of forum shopping, see Baird, supra note 11, at 824-28. It is worth pointing out that this concern about forum shopping comes in both a strong and a weak form. Some proceduralists think that a different substantive rule in corporate bankruptcy requires a rationale peculiarly linked to the bankruptcy process itself. See, e.g., id. Others believe that creating such policies imposes a cost that must be taken into account like any other cost. See, e.g., Rasmussen, Debtor's Choice, supra note 18, at 81-83.
108. As Warren and Westbrook observe, We enjoy thinking about reality. We find great satisfaction in struggling to impose some coherence upon its unruly facts. We relish being utterly surprised . . . . We find it exhilarating to bring fact and theory together to speculate about the power of law to affect the world we observe. By contrast, we find reading purely theoretical articles rather like playing anagrams. Warren & Westbrook, supra note 9, at 1262-63.
109. See, e.g., Warren, supra note 9, at 812 ("Although he purports to avoid difficult normative questions and he ignores empirical issues, Baird's conclusions are nonetheless driven by normative values and empirical assumptions. By hiding these values and assumptions, Baird simply makes the debate a shadow game that offers little real illumination.").
110. See Warren & Westbrook, supra note 9, at 1269 ("Our science is at the early stage of observation, description, and classification - not at the later stage of refined experiments testing ever narrower hypotheses . . . .").
111. THURMAN W. ARNOLD, THE FOLKLORE OF CAPITALISM 230 (1937).
112. See Korobkin, supra note 6, at 770-72.
113. See GROSS, supra note 9, at 238; Warren, supra note 36, at 351-52.
114. See 11 U.S.C. § 1122 (1994).
115. See, e.g., In re 500 Fifth Ave. Assocs., 148 B.R. 1010, 1019 (Bankr. S.D.N.Y. 1993) ("That GECC's secured claim may drive the manner in which it casts its unsecured deficiency claim . . . is no reason to separately classify GECC's deficiency claim. Such a rationale improperly focuses on the motives and agenda of the claim holder rather than on the nature of the underlying claim."). The claim of the principal lender for the unsecured portion of the debt is a general claim against the debtor that has the same legal attributes as the claims of trade creditors and must therefore be put in the same class. Some courts have allowed general claims to be put in different classes, but these courts have typically faced the claims of creditors whose nonlegal interests were much different from those courts encounter in the typical one-asset case. See, e.g., In re Jersey City Med. Ctr., 817 F.2d 1055 (3d Cir. 1987) (separating claims of physicians, medical malpractice victims, employee benefit plan participants, and trade creditors); Teamsters Nat'l Freight Indus. Negotiating Comm. v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581 (6th Cir. 1986) (affirming the separation of claims of collective bargaining unit members). Everyone agrees that unsecured claims cannot be put into separate classes solely to satisfy 11 U.S.C. § 1129(a)(10), and in many one-asset cases little else seems to be happening. Some courts, however, have found other explanations and have allowed the separate classification of the claims of trade creditors in single-asset real estate cases because, for example, the trade creditors' rights against the general partners were different from those of the principal lender. See, e.g., In re 222 Liberty Assocs., 108 B.R. 971, 989-90 (Bankr. E.D. Pa. 1990).
116. See 11 U.S.C. § 1126(c).
117. See id. § 1129(a)(10).
118. NATIONAL BANKR. REVIEW COMM'N, supra note 8, § 2.4.16, at 578-82.
119. 11 U.S.C. § 1129(b)(1).
120. See, e.g., GUIDO CALABRESI, THE COSTS OF ACCIDENTS: A LEGAL AND ECONOMIC ANALYSIS 26 (1970) ("I take it as axiomatic that the principal function of accident law is to reduce the sum of the costs of accidents and the costs of avoiding accidents.").
121. See, e.g., WAYNE R. LAFAVE & AUSTIN W. SCOTT, JR., CRIMINAL LAW § 1.1(b), at 3 (2d ed. 1986) (suggesting that lawyers "conceive of punishment for violation of the criminal law as a device for preventing such conduct - by deterring prospective offenders by threat of punishment and by preventing repetition by incapacitating and if possible reforming those who have already committed crimes").
122. E. Allan Farnsworth has argued in this vein. He observes: From the perspective of society as a whole, the function of the law of contracts might have been seen as furthering the general economic good by encouraging parties to enter into such productive transactions. From the perspective of the parties themselves, the function might have been viewed more narrowly as aiding them in planning for the future by protecting their expectations. 1 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 1.3, at 10 (2d ed. 1998).
123. Most unconscionability cases involve problems of both procedural and substantive unconscionability. See 1 id. § 4.28, at 560-61. Plaintiffs typically prevail only when the circumstances surrounding the original bargain involve a level of advantage-taking and misrepresentation that borders on fraud and misrepresentation. Any case in bankruptcy whose facts parallel those in the typical case under U.C.C. § 2-302 (1989) is likely to be one in which a lender liability action exists. Moreover, most unconscionability cases involve consumers, not merchants or corporate entities. See 1 id. § 4.28, at 563-65.
124. See Douglas G. Baird, The Reorganization of Closely Held Firms and the "Opt Out" Problem, 72 WASH. U. L.Q. 913, 926 (1994); Bufford, supra note 10, at 834-35.
125. See Warren, supra note 1, at 440-43.
126. For examples of such empirical research, see sources cited supra note 3.
127. Warren & Westbrook, supra note 9, at 1287. Proceduralists would respond by pointing to examples of their work that have been shaped by empirical studies. See sources cited supra note 3.
128. See, e.g., Whitford, supra note 3, at 1405 (arguing that studies of specific Chapter 11 cases "point to the most basic truth about Chapter 11 - it is a highly flexible procedure capable of many different uses").
129. For an analysis of bankruptcy through the lens of public choice, see Eric A. Posner, The Political Economy of the Bankruptcy Reform Act of 1978, 96 MICH. L. REV. 47 (1997).
130. The insolvency legislation of the 1930s is one of several conspicuous examples. See, e.g., Frazier-Lemke Act of 1934, Pub. L. No. 73-486, 48 Stat. 1289 (1934) (expired 1949).
131. In addition to resolving disputes among creditors, a Chapter 11 plan of reorganization is a complete recapitalization of the firm. Its marketplace equivalent is an offering of all the debt and equity of the firm at the same time. For publicly traded firms in Chapter 11 in the 1980s, these costs ranged between 0.9% and 7.0% of the book value of the assets before the filing of the bankruptcy petition. The average was 2.8%. See Weiss, supra note 3, at 289; Michelle J. White, Bankruptcy Liquidation and Reorganization, in HANDBOOK OF MODERN FINANCE 35-34 (Dennis E. Logue ed., 1984) (noting that the costs of a representative sample of all firms that successfully reorganized were only 3%). By contrast, the direct cash costs of initial public offerings for amounts greater than $10 million were approximately 10%. See Jay R. Ritter, The Costs of Going Public, 19 J. FIN. ECON. 269, 272 (1987). Some of these cash outlays, however, may have been rents captured by investment bankers and not social costs.
132. In addition to resolving disputes among creditors, a Chapter 11 plan of reorganization is a complete recapitalization of the firm. Its marketplace equivalent is an offering of all the debt and equity of the firm at the same time. For publicly traded firms in Chapter 11 in the 1980s, these costs ranged between 0.9% and 7.0% of the book value of the assets before the filing of the bankruptcy petition. The average was 2.8%. See Weiss, supra note 3, at 289; Michelle J. White, Bankruptcy Liquidation and Reorganization, in HANDBOOK OF MODERN FINANCE 35-34 (Dennis E. Logue ed., 1984) (noting that the costs of a representative sample of all firms that successfully reorganized were only 3%). By contrast, the direct cash costs of initial public offerings for amounts greater than $10 million were approximately 10%. See Jay R. Ritter, The Costs of Going Public, 19 J. FIN. ECON. 269, 272 (1987). Some of these cash outlays, however, may have been rents captured by investment bankers and not social costs.
133. Walter J. Blum, The Law and Language of Corporate Reorganization, 17 U. CHI. L. REV. 565 (1950). Blum observed: Renegotiation through reorganization . . . may be the least unsatisfactory adjustment to economic instability. This perhaps is the most persuasive justification for our system of corporate reorganization. But the effects and accomplishments of the system should not be overstated. At most the system results in what is thought by many to be a more equitable way of adjusting rights among those who have a financial interest in distressed companies. Beyond this its demonstrable reach is almost negligible. . . . In the end its most significant aspect for society as a whole may be a negative one: The junior interests who are relieved by it from the judgments of the market are rescued without the direct disbursement of public funds for their benefit. Id. at 602-03.
134. Here I am, of course, invoking Ronald Coase, who in turn invoked Frank H. Knight. R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 43 (1960) ("[P]roblems of welfare economics must ultimately dissolve into a study of aesthetics and morals.").