What justifies corporate bankruptcy law in the modern economy? For forty years, economically oriented theorists have rationalized bankruptcy as an antidote to potential coordination failures associated with a company’s financial distress. But the sophistication of financial contracting and the depth of capital markets today threaten the practical plausibility, if not the theoretical soundness, of the conventional model. This article sets out a framework for assessing bankruptcy law that accounts dynamically for changes in the technology of corporate finance. It then applies the framework to three of the most important artifacts of contemporary American bankruptcy practice and, on that basis, points toward a radically streamlined vision of the field. I contend that bankruptcy’s virtue lies in its capacity to replace ‘property rules’ that may protect investors efficiently when a company is financially healthy with ‘liability rules’ more appropriate for distress, in domains where investors are unable to arrange state-contingent toggling rules on their own. This agenda plausibly justifies two important uses of Chapter 11 – to effect prepackaged plans of reorganization and conclude going-concern sales – but casts doubt on what many suppose to be the sine qua non of bankruptcy, the automatic stay. More broadly, the analysis suggests that an ‘essential’ bankruptcy law would look very different, and do much less, than the law we know.
Buccola, Vincent SJ, Bankruptcy’s Cathedral: Property Rules, Liability Rules, and Distress (March 16, 2019). Northwestern University Law Review, forthcoming.