In a recent article, we argue that chapter 11 fundamentally changes the corporate-governance regime applicable to a business, but that courts and practitioners have largely failed to recognize the significance of that change. Although corporate law ordinarily is a matter of state law, the filing of a chapter 11 petition creates a federally defined “bankruptcy estate” and places the debtor’s assets under the control of a debtor in possession (“DIP”). Because the DIP and estate are creations of federal bankruptcy law, we argue that their governance should be governed by a distinct federal corporate law, applicable in bankruptcy, rather than by state corporate law.

The debtor remains a state-law entity, while the DIP acts as the federally authorized representative of the bankruptcy estate. Thus, state corporate law debtor may continue to govern the debtor, but federal bankruptcy law governs the DIP and its administration of estate property.

This distinction produces a significant difference in fiduciary obligations. Federal bankruptcy fiduciary duties extend to a broader group of beneficiaries and cannot simply be waived in the manner permitted by state corporate law.

In particular, the paper distinguishes the ordinary state-law business judgment rule from what it calls the “bankruptcy business judgment rule.” State corporate law ordinarily gives directors substantial deference and reviews challenged decisions retrospectively. Bankruptcy, by contrast, routinely requires courts to approve important transactions before they occur.

The paper contends that this ex ante review requires courts to ask whether a proposed transaction is reasonable rather than simply deferring to management’s business judgment. The resulting standard is therefore closer to a reasonableness inquiry than to the highly deferential state-law business judgment rule.

Private equity makes the distinction urgent. Private equity merges ownership and management, eliminating the key issue that state law addresses. Private equity’s layered leverage, at the general partner, fund, and portfolio-company levels, works like a near-free call option that rewards risky strategies at creditors’ expense. More than half of large 2024 bankruptcies involved PE-backed companies. The central conflict is now creditors versus a shareholder-controlled debtor, which state corporate law largely ignores.

Our central proposition, therefore, is that chapter 11 should not be understood simply as state corporate law operating inside a federal bankruptcy proceeding. It is a distinct federal corporate-governance regime designed for a fundamentally different problem: the fair administration and distribution of a federally created bankruptcy estate among competing claimants.  The same individuals may occupy roles in both the debtor and the DIP, but they are acting in different legal capacities.

Adam J. Levitin is the Carmack Waterhouse Professor of Law and Finance at Georgetown University Law Center, and Stephen J. Lubben is the Harvey Washington Wiley Chair in Corporate Governance & Business Ethics at Seton Hall Law School. This post is based on their recent article, “The Federal Corporate Law of Bankruptcy,” forthcoming in the Georgetown Law Journal and available here,