Bankruptcy contracting reviewed

Yale Law Journal

Volumn 109, Issue 2, 1999, Pages 343-364

  Schwartz, Alan ^a  

^a NONE

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EID: 0040438199     PISSN: 00440094     EISSN: None     Source Type: Journal    
DOI: 10.2307/797492     Document Type: Review

References (44)

1. This focus animated the recent report by the National Bankruptcy Commission. See NATIONAL BANKR. REV. COMM'N, BANKRUPTCY: THE NEXT TWENTY YEARS (1997).
2. Alan Schwartz, A Contract Theory Approach to Business Bankruptcy, 107 YALE L.J. 1807 (1998).
3. 11 U.S.C. § 365(e) (1994). An ipso facto clause authorizes a party to cancel a contract if its contract partner becomes insolvent. When such clauses are illegal, the insolvent party's bankruptcy trustee can accept - that is, keep in force - a contract that the solvent party would prefer to end. My essay set out the intuition underlying the claim that § 365(e) should be repealed. For a more extensive formal treatment, see Yeon-Koo Che & Alan Schwartz, Section 365, Mandatory Bankruptcy Rules and Inefficient Continuance, 15 J.L. ECON. & ORG. 441 (1999).
4. Lynn M. LoPucki, Contract Bankruptcy: A Reply to Alan Schwartz, 109 YALE L.J. 317 (1999).
5. Professor LoPucki may disagree with the view that bankruptcy contracts are not enforceable, see id. at 333, but the authority on whom he relies states: "[C]ourts seem to accept, almost as a matter of faith, that commercial agreements waiving the right to file for bankruptcy are unenforceable," see id. at 333 n.96. According to another authority upon whom LoPucki relies, the courts' belief also is shared by bankruptcy practitioners. See id. at 334 n.97; see also Michael St. Patrick Baxter, Bankruptcy Proofing: Bankruptcy Provisions in Restructuring Agreements, 8 J. BANKR. L. & PRAC. 483, 494 (1999) ("Agreements not to file for bankruptcy are per se invalid, void as against public policy and in derogation of . . . statutory rights to declare bankruptcy, which cannot be waived.").
6. My analysis focused on the firm's relationship with its debt investors, not the relationship between the firm's managers and its equity investors. This focus was captured formally by assuming that the firm's shareholders and managers had the same preferences regarding bankruptcy procedures. The assumption often is realistic in the bankruptcy context because the shareholders and managers both commonly prefer the insolvent firm to be continued rather than liquidated.
7. In an efficient market, the best estimate of the economic parameters that will obtain tomorrow is the parameters that obtain today. This is because, in the absence of a reason to believe otherwise, a party will know that the parameters are as likely to increase as decrease; hence, the expected value of these changes is zero. If there were a reason to believe otherwise, then today's parameters would reflect this reason.
8. Professor LoPucki states: "[T]he firm could at least sometimes deceive the initial creditor as to the optimal [bribe] percentage. If the firm succeeded in its deception, the firm would be able to borrow on more favorable terms." LoPucki, supra note 4, at 325.
9. Section 530(1) of the Restatement (Second) of Torts states that "[a] representation of the maker's own intention to do or not to do a particular thing is fraudulent if he does not have that intention." RESTATEMENT (SECOND) OF TORTS § 530(1) (1977). Comment c to this provision states: The rule stated in this Section finds common application when the maker misrepresents his intention to perform an agreement made with the recipient. The intention to perform the agreement may be expressed but it is normally merely to be implied from the making of the agreement. Since a promise necessarily carries with it the implied assertion of an intention to perform it follows that a promise made without such an intention is fraudulent and actionable in deceit under the rule stated in § 525. Id. cmt. c.
10. This assumption is made so often as generally to go without saying, but I can offer a few examples. The first is from a famous early article, Sanford J. Grossman, The Informational Role of Warranties and Private Disclosure About Product Quality, 24 J.L. & ECON. 461 (1981). Professor Grossman began his analysis of the warranty contracts that sellers would offer with the statement "We restrict attention to [seller] disclosures which are truthful." Id. at 464. He went on to give an example that was meant to show that buyers would make inferences about product quality or quantity that are unfavorable to the seller when the seller is permitted to be silent or vague but cannot lie The example starts with these sentences: "Suppose the monopolist is selling boxes of apples. He can label the boxes with an exact number of apples, but if he does this then this must be the true amount under the above 'no lying' assumptions. However, he could also put no label as to the quantity . . . ." Id. at 465. A second example is from a recent paper that prefaced its analysis of what a good disclosure law would look like with the clarification: "Fraudulent disclosures are not considered." Michael J. Fishman & Kathleen M. Hagerty, Mandatory vs. Voluntary Disclosure in Markets with Informed and Uninformed Consumers 7 (Aug. 1999) (unpublished manuscript, on file with The Yale Law Journal).
11. This assumption is made so often as generally to go without saying, but I can offer a few examples. The first is from a famous early article, Sanford J. Grossman, The Informational Role of Warranties and Private Disclosure About Product Quality, 24 J.L. & ECON. 461 (1981). Professor Grossman began his analysis of the warranty contracts that sellers would offer with the statement "We restrict attention to [seller] disclosures which are truthful." Id. at 464. He went on to give an example that was meant to show that buyers would make inferences about product quality or quantity that are unfavorable to the seller when the seller is permitted to be silent or vague but cannot lie The example starts with these sentences: "Suppose the monopolist is selling boxes of apples. He can label the boxes with an exact number of apples, but if he does this then this must be the true amount under the above 'no lying' assumptions. However, he could also put no label as to the quantity . . . ." Id. at 465. A second example is from a recent paper that prefaced its analysis of what a good disclosure law would look like with the clarification: "Fraudulent disclosures are not considered." Michael J. Fishman & Kathleen M. Hagerty, Mandatory vs. Voluntary Disclosure in Markets with Informed and Uninformed Consumers 7 (Aug. 1999) (unpublished manuscript, on file with The Yale Law Journal).
12. Section 1-103 of the Uniform Commercial Code states that "[u]nless displaced by particular provisions of this Act, . . . the law relative to . . . estoppel, fraud, misrepresentation . . . bankruptcy, or other validating or invalidating cause shall supplement its provisions." U.C.C. § 1-103 (1993).
13. The bankruptcy contracts I consider are similar to most-favored-nation clauses in long-term sales contracts. In these contracts, the seller agrees with the initial buyer that if the seller offers better pricing terms to later buyers, the original contract will convert to the new terms. A seller with market power could plan to defraud the original buyer by setting the original price at an artificially high level, retaining this price in the later contracts it knows it will make, but offering later buyers favorable non-price terms - such as prompt post-sale service - that are difficult for the initial buyer to observe. In this way, the later buyers would get the deals that current conditions warrant, while the initial buyer would always pay the excessive price. An early buyer who anticipated this behavior might not agree to the contract. Despite this possibility, most-favored-nation clauses are widely used, and scholars have examined their properties on the (implicit) assumption that parties to them do not routinely commit fraud.
14. A lending agreement would require this updating notice to permit the initial creditor to calculate the current value of its loan. That value is partly a function of the creditor's expected insolvency state return.
15. See equations (4) and (5) in Alan Schwartz, Contracting About Bankruptcy, 13 J.L. ECON. & ORG. 127, 135-36 (1997), which set out the formal model from which my essay draws. These returns are also terms in my essay's E(R) equations. See Schwartz, supra note 2, at 1829-30.
16. L,R. I assumed that creditors could observe the denominator-the difference between the expected monetary return in an optimal procedure L and in a suboptimal procedure R. The initial creditor thus would know that the denominator had not changed. Hence, the firm would have to claim that the optimal bribe fraction s* had risen because the numerator had changed: That is, the difference between the private benefits the firm would receive in a suboptimal procedure R and in an optimal procedure L had widened.
17. My model assumed for convenience that the initial creditor could not verify and might not be able to observe private benefits at all, but this creditor likely can observe some elements of these benefits, such as the salaries that the debtor's managers get. Partial observability strengthens the argument made above. For example, if the firm raised the required bribe after unexpectedly increasing the managers' salaries, the initial creditor would believe it was being exploited. And if the firm raised the bribe though no observable elements of the private benefit variable had changed, this would make more plausible a creditor inference that the firm had lied when it specified the original bribe.
18. LoPucki, supra note 4, at 329.
19. The seniors could hold security or the juniors could have purchased subordinated debt.
20. 11 U.S.C. § 1129(a)(7)(A)(ii) (1994).
21. The analysis in the text reflects the only plausible reading of the quoted Bankruptcy Code sections, and there is closely analogous Supreme Court authority as well. In Dewsnup v. Timm, 502 U.S. 410 (1992), the Court recognized the need to give a secured creditor the upside return to avoid reducing the value of its claim. To understand the issue in Dewsnup, assume that, at the beginning of a bankruptcy, a secured creditor had a lien on property with a then-market value of $200. This value would be a weighted average of the values that could later obtain when the creditor had a right to foreclose (or was awarded the financial equivalent of that right). To facilitate discussion, assume that there is a one-third chance of the property being worth as much as $300 at the end of the bankruptcy procedure; a one-third chance that it will be worth $200; and a one-third chance that it will be worth $100. A junior creditor seeks to "strip the lien," under Bankruptcy Code § 506(d). Were a bankruptcy court to agree, the senior's claim in bankruptcy would be frozen at its current market value of $200, and the junior would receive $100 if the property later increased in value to $300. Stripping the lien, however, would reduce the value of the secured creditor's bankruptcy claim. It would then hold a lien worth $166.33 (2/3, × $200 + 1/3 × $100 = $166.33); for the creditor would get $200 whether the property turned out to be worth $300 or $200, and would get $100 in the remaining possible case. Put another way, the secured creditor could have recovered $200 if it were allowed to foreclose, but instead it is holding a lien that has a present value of $166.33. The Supreme Court refused to allow the lien to be stripped in this fashion, thereby ensuring that the secured creditor's bankruptcy claim equaled, on an expected basis, the current market value of the property. See id. Commentators criticized this result as a matter of statutory construction but approved of it as a matter of policy. See, e.g., ROBERT L. JORDAN ET AL., BANKRUPTCY 133 (5th ed. 1999); JAMES J. WHITE & RAYMOND T. NIMMER, BANKRUPTCY CASES AND MATERIALS 443 n.2 (3d ed. 1996). For theoretical treatments of the issue, see Barry E. Adler, Creditor Rights After Johnson and Dewsnup, 10 BANKR. DEV. J. 1 (1993-1994); 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). Regarding the example in the text, if the insolvent firm has an expected value of $110, a court would preserve the value of the seniors' claim (which often will result from holding security) by giving the seniors an interest in the reorganized firm that would return $200 if the firm were successful. This interest would have a value of $100 on an expected basis.
22. The analysis in the text reflects the only plausible reading of the quoted Bankruptcy Code sections, and there is closely analogous Supreme Court authority as well. In Dewsnup v. Timm, 502 U.S. 410 (1992), the Court recognized the need to give a secured creditor the upside return to avoid reducing the value of its claim. To understand the issue in Dewsnup, assume that, at the beginning of a bankruptcy, a secured creditor had a lien on property with a then-market value of $200. This value would be a weighted average of the values that could later obtain when the creditor had a right to foreclose (or was awarded the financial equivalent of that right). To facilitate discussion, assume that there is a one-third chance of the property being worth as much as $300 at the end of the bankruptcy procedure; a one-third chance that it will be worth $200; and a one-third chance that it will be worth $100. A junior creditor seeks to "strip the lien," under Bankruptcy Code § 506(d). Were a bankruptcy court to agree, the senior's claim in bankruptcy would be frozen at its current market value of $200, and the junior would receive $100 if the property later increased in value to $300. Stripping the lien, however, would reduce the value of the secured creditor's bankruptcy claim. It would then hold a lien worth $166.33 (2/3, × $200 + 1/3 × $100 = $166.33); for the creditor would get $200 whether the property turned out to be worth $300 or $200, and would get $100 in the remaining possible case. Put another way, the secured creditor could have recovered $200 if it were allowed to foreclose, but instead it is holding a lien that has a present value of $166.33. The Supreme Court refused to allow the lien to be stripped in this fashion, thereby ensuring that the secured creditor's bankruptcy claim equaled, on an expected basis, the current market value of the property. See id. Commentators criticized this result as a matter of statutory construction but approved of it as a matter of policy. See, e.g., ROBERT L. JORDAN ET AL., BANKRUPTCY 133 (5th ed. 1999); JAMES J. WHITE & RAYMOND T. NIMMER, BANKRUPTCY CASES AND MATERIALS 443 n.2 (3d ed. 1996). For theoretical treatments of the issue, see Barry E. Adler, Creditor Rights After Johnson and Dewsnup, 10 BANKR. DEV. J. 1 (1993-1994); 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). Regarding the example in the text, if the insolvent firm has an expected value of $110, a court would preserve the value of the seniors' claim (which often will result from holding security) by giving the seniors an interest in the reorganized firm that would return $200 if the firm were successful. This interest would have a value of $100 on an expected basis.
23. The analysis in the text reflects the only plausible reading of the quoted Bankruptcy Code sections, and there is closely analogous Supreme Court authority as well. In Dewsnup v. Timm, 502 U.S. 410 (1992), the Court recognized the need to give a secured creditor the upside return to avoid reducing the value of its claim. To understand the issue in Dewsnup, assume that, at the beginning of a bankruptcy, a secured creditor had a lien on property with a then-market value of $200. This value would be a weighted average of the values that could later obtain when the creditor had a right to foreclose (or was awarded the financial equivalent of that right). To facilitate discussion, assume that there is a one-third chance of the property being worth as much as $300 at the end of the bankruptcy procedure; a one-third chance that it will be worth $200; and a one-third chance that it will be worth $100. A junior creditor seeks to "strip the lien," under Bankruptcy Code § 506(d). Were a bankruptcy court to agree, the senior's claim in bankruptcy would be frozen at its current market value of $200, and the junior would receive $100 if the property later increased in value to $300. Stripping the lien, however, would reduce the value of the secured creditor's bankruptcy claim. It would then hold a lien worth $166.33 (2/3, × $200 + 1/3 × $100 = $166.33); for the creditor would get $200 whether the property turned out to be worth $300 or $200, and would get $100 in the remaining possible case. Put another way, the secured creditor could have recovered $200 if it were allowed to foreclose, but instead it is holding a lien that has a present value of $166.33. The Supreme Court refused to allow the lien to be stripped in this fashion, thereby ensuring that the secured creditor's bankruptcy claim equaled, on an expected basis, the current market value of the property. See id. Commentators criticized this result as a matter of statutory construction but approved of it as a matter of policy. See, e.g., ROBERT L. JORDAN ET AL., BANKRUPTCY 133 (5th ed. 1999); JAMES J. WHITE & RAYMOND T. NIMMER, BANKRUPTCY CASES AND MATERIALS 443 n.2 (3d ed. 1996). For theoretical treatments of the issue, see Barry E. Adler, Creditor Rights After Johnson and Dewsnup, 10 BANKR. DEV. J. 1 (1993-1994); 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). Regarding the example in the text, if the insolvent firm has an expected value of $110, a court would preserve the value of the seniors' claim (which often will result from holding security) by giving the seniors an interest in the reorganized firm that would return $200 if the firm were successful. This interest would have a value of $100 on an expected basis.
24. The analysis in the text reflects the only plausible reading of the quoted Bankruptcy Code sections, and there is closely analogous Supreme Court authority as well. In Dewsnup v. Timm, 502 U.S. 410 (1992), the Court recognized the need to give a secured creditor the upside return to avoid reducing the value of its claim. To understand the issue in Dewsnup, assume that, at the beginning of a bankruptcy, a secured creditor had a lien on property with a then-market value of $200. This value would be a weighted average of the values that could later obtain when the creditor had a right to foreclose (or was awarded the financial equivalent of that right). To facilitate discussion, assume that there is a one-third chance of the property being worth as much as $300 at the end of the bankruptcy procedure; a one-third chance that it will be worth $200; and a one-third chance that it will be worth $100. A junior creditor seeks to "strip the lien," under Bankruptcy Code § 506(d). Were a bankruptcy court to agree, the senior's claim in bankruptcy would be frozen at its current market value of $200, and the junior would receive $100 if the property later increased in value to $300. Stripping the lien, however, would reduce the value of the secured creditor's bankruptcy claim. It would then hold a lien worth $166.33 (2/3, × $200 + 1/3 × $100 = $166.33); for the creditor would get $200 whether the property turned out to be worth $300 or $200, and would get $100 in the remaining possible case. Put another way, the secured creditor could have recovered $200 if it were allowed to foreclose, but instead it is holding a lien that has a present value of $166.33. The Supreme Court refused to allow the lien to be stripped in this fashion, thereby ensuring that the secured creditor's bankruptcy claim equaled, on an expected basis, the current market value of the property. See id. Commentators criticized this result as a matter of statutory construction but approved of it as a matter of policy. See, e.g., ROBERT L. JORDAN ET AL., BANKRUPTCY 133 (5th ed. 1999); JAMES J. WHITE & RAYMOND T. NIMMER, BANKRUPTCY CASES AND MATERIALS 443 n.2 (3d ed. 1996). For theoretical treatments of the issue, see Barry E. Adler, Creditor Rights After Johnson and Dewsnup, 10 BANKR. DEV. J. 1 (1993-1994); 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). Regarding the example in the text, if the insolvent firm has an expected value of $110, a court would preserve the value of the seniors' claim (which often will result from holding security) by giving the seniors an interest in the reorganized firm that would return $200 if the firm were successful. This interest would have a value of $100 on an expected basis.
25. See LoPucki, supra note 4, at 327-28.
26. The statements in my essay relating to the juniors' possible preference for low return but high variance reorganizations referred to this case.
27. LoPucki, supra note 4, at 327.
28. To calculate the (approximate) value of a call option, realize that the value of the option is equivalent to an investment in the underlying asset and borrowing. Regarding the investment strategy, let an investor buy one-half the firm at its expected insolvency value of $100 and borrow $36.36. The cost of purchasing this "portfolio" would be $50 - $36.36 = $13.64. If the firm rose in value to $120, one-half the firm would be worth $60, but the investor must pay the loan off, and at a 10% interest rate this would cost him $40 ($36.36 × 1.1 = $40). Hence, his payoff would be $20. If the firm fell in value to $80, one-half the firm would be worth $40, but again the investor would have to repay $40 and so would earn nothing. If the investor instead bought a call option on the firm, he would earn $20 if the firm rose in value to $120 (recall that the exercise price is $100) but would earn nothing if the firm fell in value to $80 (because he would not exercise the option). Since the payoffs from buying the call option and from buying one-half the firm and borrowing are the same, the cost of these alternatives (in an efficient market) must be the same. Therefore, the call option would have a value of $13.64. The investor would know he should buy one-half the firm by calculating the "option delta," which reflects the sensitivity of the call price to changes in the underlying asset price. The delta here is Δ =spread of possible option prices = 20 - 0 = 1 spread of possible asset prices 120 - 80 2. The amount of the required loan L is given by solving L = ΔSu - Cu/r, where Δ is the option delta, Su is the high value of the asset, Cu is the payoff from the option when the asset increases in value, and r is the interest rate. The other option value that follows in the paragraph in text is calculated similarly. For a review of this simplified method for computing approximate option value, see RICHARD A. BREALEY & STUART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 568-77 (5th ed. 1996).
29. L. The firm could capture a portion of this surplus by sweetening the terms of its junior debt in return for that debt's agreement to sign an optimal bankruptcy contract.
30. His essay states: "[T]he conflict between junior and senior creditors would be resolved by a contract between them that maximized the value of the estate and divided the increase in value thus attained between them in such a manner that each would be better off. . . . [This contract will not be made because] creditors . . . have no means of bribing one another because they never negotiate with one another." LoPucki, supra note 4, at 329-30.
31. The ability of a firm to coordinate its lending agreements to achieve efficiency has been recognized previously. See Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311, 313-15 (1993); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL STUD. 209, 210-11 (1989).
32. The ability of a firm to coordinate its lending agreements to achieve efficiency has been recognized previously. See Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 STAN. L. REV. 311, 313-15 (1993); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL STUD. 209, 210-11 (1989).
33. Professor LoPucki raised several objections to this majority-rule proposal. See LoPucki, supra note 4, at 330. First, it was unclear how the majority should be counted. As just noted, the proposal was to permit the preferences of a majority in amount of the firm's debt to control. Second, the proposal was inconsistent with the conversion term discussed above, which would alter the bribe percentages in earlier contracts to the percentage in the firm's latest contract. It is unclear why he thinks that an inconsistency would exist. Suppose, for example, that a majority (in amount) of creditors sign the firm's renegotiation-proof contract. If the law were to provide that the preferences of a majority would control as regards bankruptcy, the contractual terms in the firm's contracts with these creditors would become required terms in the firm's contracts with the remaining creditors. Hence, the firm's credit contracts would be consistent.
34. This view is controversial. Compare Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1 (1996), with James J. White, Corporate Judgment Proofing: A Response to Lynn LoPucki's The Death of Liability, 107 YALE L.J. 1363 (1998).
35. This view is controversial. Compare Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1 (1996), with James J. White, Corporate Judgment Proofing: A Response to Lynn LoPucki's The Death of Liability, 107 YALE L.J. 1363 (1998).
36. LoPucki, supra note 4, at 339.
37. Id. at 342.
38. For analyses of nonadjusting creditors, see Lucian Ayre Bebchuk & Jesse M. Fried, The Uneasy Case for the Priority of Secured Claims in Bankruptcy, 105 YALE L.J. 857 (1996); and Ronald J. Mann, The First Shall Be Last: A Contextual Argument for Abandoning Temporal Rules of Lien Priority, 75 TEX. L. REV. 11 (1996). An argument that the case for the exploitation of relatively small creditors is poorly grounded is made in Alan Schwartz, Priority Contracts and Priority in Bankruptcy, 82 CORNELL L. REV. 1396, 1414-17 (1997).
39. For analyses of nonadjusting creditors, see Lucian Ayre Bebchuk & Jesse M. Fried, The Uneasy Case for the Priority of Secured Claims in Bankruptcy, 105 YALE L.J. 857 (1996); and Ronald J. Mann, The First Shall Be Last: A Contextual Argument for Abandoning Temporal Rules of Lien Priority, 75 TEX. L. REV. 11 (1996). An argument that the case for the exploitation of relatively small creditors is poorly grounded is made in Alan Schwartz, Priority Contracts and Priority in Bankruptcy, 82 CORNELL L. REV. 1396, 1414-17 (1997).
40. For analyses of nonadjusting creditors, see Lucian Ayre Bebchuk & Jesse M. Fried, The Uneasy Case for the Priority of Secured Claims in Bankruptcy, 105 YALE L.J. 857 (1996); and Ronald J. Mann, The First Shall Be Last: A Contextual Argument for Abandoning Temporal Rules of Lien Priority, 75 TEX. L. REV. 11 (1996). An argument that the case for the exploitation of relatively small creditors is poorly grounded is made in Alan Schwartz, Priority Contracts and Priority in Bankruptcy, 82 CORNELL L. REV. 1396, 1414-17 (1997).
41. This Response also shows that junior/senior conflict would be rare even if courts did not follow absolute priority.
42. LoPucki, supra note 4, at 336 n.114.
43. Professor LoPucki also claims that the "principal problem in attempting to apply" a contracting theory to bankruptcy "is that most creditors' interests are too small to warrant their active, knowledgeable participation" in a bankruptcy procedure. Id. at 341. A bankruptcy contract governs the state of the world in which the firm's transactions have failed. Hence, Professor LoPucki's view applies to commercial contracting generally; for many terms in commercial contracts concern what should be done if the deal goes bad. If "most" parties have too little at stake "to warrant their active, knowledgeable participation" in the legal worlds these terms create, then a large portion of commercial contracts should be regulated to ensure their fairness.
44. See Douglas G. Baird, Bankruptcy's Uncontested Axioms, 108 YALE L.J. 573 (1999).