Tracing Equity: How the Bankruptcy Code Respects State Law Entitlements

Law and economics scholars have long argued that efficiency is best served when a firm’s capital structure is arranged as a single, hierarchical value waterfall. In such a regime, claimants with seniority are made whole before the next-junior stakeholders receive anything. To implement this single waterfall approach, those scholars envision a property-based mechanism: a blanket lien on all of a firm’s assets, and therefore all of its value (including as a going-concern).  This view informs current proposals for contractual bankruptcy and relative priority. Coincident with this scholarship, lawyers, scholars, and judges have largely accepted at face value the proposition that … Read more

The Detroit Bankruptcy Blueprint

What unites Atlantic City, the Chicago Public School System, and Puerto Rico’s electric company? They are financially distressed government entities facing various legal and political barriers to using the United States bankruptcy system. Negotiations over those barriers are, in part, a referendum on the historic Detroit chapter 9 case – not just the substantive outcome, but the procedural pathway constructed by the court from the case’s inception to the finish line.

Detroit was a game changer in understanding the federal court’s influence through management decisions rather than landmark rulings after trials. According to the conventional wisdom, judges perform primarily gatekeeping … Read more

Ice Cube Bonds: Allocating the Price of Process in Chapter 11 Bankruptcy

Bankruptcy cases are as different as the types of businesses that fail, but all share an element of crisis.  The weeks and days that precede a bankruptcy filing are often chaotic.  The first days after filing may be even worse, regardless of the size of the case. Any potential rescuer, be it a lender, a supplier, or a buyer, has tremendous leverage.  The potential salvor has the power to, and often does, exact concessions in many forms: preferential treatment of prepetition debt, retroactive perfection of liens, onerous loan terms, control of the debtor after bankruptcy, or ownership of any upside … Read more

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