Debt abides: A prolegomena for any future chapter 11

American Bankruptcy Law Journal

Volumn 78, Issue 4, 2004, Pages 427-455

  Ayer, John D ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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EID: 80054815356     PISSN: 00279048     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (53)

1. See Adam Smith, The Wealth of Nations (1776), reprinted in 3 Glasgow Edition of the Works of Adam Smith 9-11 (1976).
2. See generally Douglas A. Irwin, Against the Tide: Intellectual Arguments for Free Trade (1996).
3. On the East India Company, see John Keay, Honorable Company (1993).On the relation of debt and the state
4. see James Macdonald, A Free Nation Deep in Debt: The Financial Roots of Democracy (2003) (giving a more general and somewhat programmatic account).
5. Referring in general to the complex ideas that came to be settled about the time of the Treaty of Westphalia in 1648. A good summary is 3 S. E. Finer, The History of Government 1261-1307 (1997).
6. The idea is so deeply rooted in Western legal thought that it is hard to see it as contingent. But see Richard Pipes, The Russian Revolution 561 (1990) (showing how the Bolsheviks in power turned the unspoken presupposition of the traditional state system against those who relied on them).
7. See also Benedict Anderson, Imagined Communities (1983, rev. ed. 1991) (painting an influential and provocative sketch);
8. Noel Ascherson, The Black Sea (1995) (containing a stimulating collection of insights and anecdotes, though oddly misnamed).
9. A logical extension is the question whether we should simply dispense with borders? For a full exploration, see Kevin R. Johnson, Open Borders?, 51 UCLA L. Rev. 193 (2003).
10. See Richard Falk, Human Rights, Foreign Policy (2004) at 18-28.
11. See generally Peter W. Singer, Corporate Warriors: The Rise of the Privatized Military Industry (2003);
12. Eugene B. Smith, The Hew Condottieri and U.S. Policy: The Privatization of Conflict and Its Implications, Parameters, Winter 2002-03 (discussing the privatization of armies).
13. In May of 2004, British Foreign Secretary Jack Straw appeared on a BBC phone-in show. He received an e-mail from U.S. Secretary of State Colin Powell suggesting that he might himself make a call, but thought better of it because it would have meant giving the whole world his e-mail address. British Broadcasting Corporation, Powell's Plot to Put Straw on Spot (May 12, 2004), at www.news.bbc.co.uk/l/hi/uk-0politics/3708279.stm (last visited Aug. 2, 2004).
14. Literature on this "new cosmopolitanism" explodes at a rate too fast to keep up with here. A trenchant (and skeptical) summary can be found in Samuel Huntington, America's Dead Soul, The National Interest, Spring 2004, at 5-18.
15. See generally Martha Nussbaum et al., For Love of Country: Debating the Limits of Patriotism (1996).
16. The Locus Classicus on contracting out is Ronald Coase, The TJature of the Firm, 4 Economica 386 (1937).
17. My colleague Anupam Chander has speculated in conversation that the purpose of "the firm" in the new world may be solely to hold the rights to intellectual property. See James Dale Davidson & William Rees-Mogg, The Sovereign Individual (1997) (extending this theory towards the point of parody).
18. Rees-Mogg (and indeed, most modern critics of the state) speaks from a tradition that might be called "conservative/libertarian," but it hardly needs to be so restricted. For a "left critique" of state power, see James C. Scott, Seeing Like a State (1998).
19. For a theory of the predatory state, see Fred S. McChesney, Money for Nothing (1997).
20. On the history of the idea of the market Jerry Muller is eccentric in coverage, but admirable in exposition, especially on Smith, Hegel and Hayek. Muller is especially helpful insofar as he is a student of German conservatism and so can sketch a persuasive picture of what the market theoreticians were fighting against. Oddly enough, he pays no attention to the "marginal revolution" in economics-no discussion of Jevons, Walras or (the most notable exception) Menger- nor (perhaps less surprising) does he offer any account of the growth of "contract as an organizing category in law," particularly in law school curricu-lums. Jerry Z. Muller, The Mind and the Market (2002).
21. It was not, really. Marx, Hegel and a hundred others had made the point before him. But he drove it home with a particularity that has earned him the credit. See Karl Polanyi, The Great Transformation (1943).
22. Muller, supra note 12 (summarizing critiques from Lukacs, Marcuse and others). Hegel remains perhaps the shrewdest critique (although sympathetic) of the nature and limitations of the market. Georg W. F. Hegel, Philosophy of Right (Allen W. Wood, trans., Cambridge Univ. Press 1991) (1821).
23. A sophisticated modern critique (with too much emphasis on some special cases) is Amy Chua, World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability (2004).
24. By "bankruptcy" in this paper, I mean what the term has most often come to mean in the literature of corporate finance: The transfer of control that occurs when the equity owners of an enterprise can no longer service the debt. That is to say, I follow convention in embracing a definition that excludes perhaps ninety-seven percent of all cases filed under the current Bankruptcy Code. For statistics on bankruptcy filings, see American Bankruptcy Institute, Bankruptcy Filing Statistics- Annual U.S. Filings, at http://www.abiworld.org/Content/NavigationMenu/Online-Resources/ Bankruptcy-Statistics/ABI-Bank-ruptcy-Statistics.htm (last visited Aug. 2, 2004).
25. Compare Barry E. Adler, Bankruptcy Primitives, 12 AM. BANKR. INST. L. REV. 219 (2004)
26. with Douglas Baird & Robert Rasmussen, Bankruptcy's Uncontested Axioms, 108 Yale L.J. 573 (1998) (differing approaches to the matter of bankruptcy definition).
27. F. W. Maitland, The Forms of Action at Common Law, Lecture II (A. H. Chayton & W. J. Whittaker eds., Cambridge Univ. Press 1909), available at http://www.fordham.edu/halsall/basis/maitland-formsofaction/html (last visited Aug. 2, 2004) (discussing "owe and own").
28. A full presentation would require attention to issues that are now of only historical interest. For example, do we want two "reorganization" chapters or one? What is the role of the Securities and Exchange Commission? How, generally, does Chapter 11 fit into the "New Deal framework" of investment regulation? For an account of this history, limited and distorted but still suggestive, see generally Eric Posner, The Political Economy of the Bankruptcy Reform Act of 1978, 96 Mich. L. Rev. 47 (1997).
29. This presentation bears a strong resemblance to the sketch set forth in John D. Ayer & Michael Bernstein, Bankruptcy in Practice 128 (2001).
30. Thucydides, History of the Peloponnesian War 47-48 (Rex Warner trans., Penguin Books 1972).
31. Pride of place here goes to Peter Bernstein. Peter Bernstein, Against the Odds (1996);
32. Peter Bernstein, Capital Ideas (1992).
33. More concise and only slightly more technical is Elroy Dimson & Massoud Mussavian, Three Centuries of Asset Pricing, London Business School Accounting Subject Area (Jan. 5, 2000) at http:www//ssrn.com/abstract=203108 (last visited Aug. 2, 2004)
34. (offering extensive citations to flesh out this brief account, including a reference to their own collection, Elroy Dimson & Massoud Mussavian, Foundations of Finance (1999)).
35. "Behold, the fool saith, 'Put not all thine eggs in one basket' - which is but a manner of saying, 'Scatter your money and your attention;' but the wise man saith, 'Put all your eggs in the one basket and -WATCH THAT BASKET.'" Mark Twain, Pudd'nhead Wilson 163 (Malcolm Bradbury ed., Penguin Books 1986) (1894). Twain's own dreadful record as an investor is perhaps enough to serve as a caution against too much reliance on his investment advice.
36. Classic references on the junk bond revolution are Daniel Fischel, Payback (1995)
37. and Connie Bruck, Predator's Ball (1988).
38. We note in passing another thread that need not detain us here. This is the "Efficient Capital Market Hypothesis" ("ECMH"), which suggests that the market, at any point in time, may already have impounded all information that might affect the price of a security. ECMH has generated a huge literature of its own, but it does not seem to affect our story directly. It may be that increased inquiry into the issue of market efficiency helped to generate the vast increase in liquidity that has affected the bankruptcy market (along with so many other markets), but there is little or no direct evidence on the point. Suffice it to say that major securities markets are probably somewhat efficient, but not completely so. See generally Andrei Shleifer, Inefficient Markets (2000).
39. Note also the presence of "Grossman's Paradox," which holds that the market will be efficient if and only if one or more investors believe it not to be so. Sanford J. Grossman, On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information, 31 Journal of Flnance 573-585 (1977).
40. MM indifference is important enough in itself, but it is at least as important for its style. Specifically, MM offer a remarkable instance of finance analysis aping the style of the hard sciences: Specify some simplifying assumptions, reason how the market should behave under these assumptions and then ask whether the world meets the model. It is easy to travesty by making it a case of "if the facts do not fit the theory, change the facts." But this misses the point: MM do not believe in a "perfect" market any more than physicists believe in a friction-free universe. But each may be a convenience for purposes of analysis. Peter Bernstein says that MM "tried to run their experiment with clean test tubes." Peter Bernstein, Capital Ideas 176 (1992).
41. The Chicago Board of Trade Options Exchange opened in 1973, the same year as the publication of the original Black-Scholes paper. These two events must have some relation to one another, although it is not clear just what. See Donald MacKenzie, Long-Term Capital Management and the Sociology of Arbitrage, 32 Economy and Society 349-380 (2003) (exploring the sophisticated relationship between these two events).
42. An admirable textbook is Robert K. Dixit & Robert S. Pindyck, Investment Under Uncertainty (1994).
43. See, e.g., Mark Blaug, Was There a Marginal Revolution?
44. G.L.S. Shackle, Marginalism: The Harvest, THE MARGINAL REVOLUTION IN ECONOMICS (Collison R. Black et al. eds., 1973)- Indeed it is probably only a mild stretch to say that everything in (micro)economics from 1870 to 1950 was a set of games played with first-semester calculus.
45. Hilary Rosenberg, The Vulture Investors (Wiley rev. ed. 2000) (1992).
46. Douglas Baird, The Hew Face of Chapter 11,12 Am. Bankr. Inst. L. Rev. 69 (2004) (providing an excellent summary);
47. see also David A. Skeel, Creditor s Ball: The 'New' Hew Corporate Governance in Chapter 11,152 U. PA. L. REV. 917 (2003);
48. Douglas Baird & Ronald Rasmussen, The End of Bankruptcy, 55 Stan. L. Rev. 751 (2002).
49. Cf.John D. Ayer, The Hew Baird, 12 Am. Bankr. Inst. L. Rev. 101 (2004).
50. See generally George W. Kuney, Misinterpreting Bankruptcy Code Section 363(f) and Undermining the Chapter 11 Process, 76 Am. Bankr. L.J. 235 (2002);
51. George W. Kuney, Further Misinterpretation of Bankruptcy Code Section 363(f), 76 Am. Bankr. L. J. 289 (2002).
52. See generally Douglas Baird, Security Interests Reconsidered, 80 Va. L. Rev. 2249 (1994).
53. One criticism of "contractification" seems indisputable: We are always being told that we are further down the road to a world of contract than it turns out we in fact are. An irony of the law school curriculum is that every Anglo-American law student for more than a century now has begun his or her law student career with a "Contracts" course, as if "contract" were a useful organizing principle. Yet almost any thoughtful Contracts teacher (or student) will recognize that "contract" is a residual category that governs only the deals left behind when specialized subsets of contract law hive off and undertake to govern themselves. "A cucumber," said Samuel Johnson, "should be well sliced and soaked in vinegar and pepper and then thrown away, as good for nothing." James Boswell, Journal of a Tour to the Hebrides with Samuel Johnson (Penguin Books 1984) (1786).