Accepted wisdom holds that secured creditors favor liquidation of a debtor in bankruptcy even where the debtor may be more valuable as a going concern. This is false wisdom, however. Holders of senior claims can be expected to favor liquidation prior to a debtor's bankruptcy because the return on such claims are capped by the amount owed while debtor asset values fluctuate. But bankruptcy is a day of reckoning that can eliminate a creditor's exposure to value fluctuation. For this reason, we expect that modern bankruptcy practice, with the secured creditor often firmly in control, does not unduly encourage liquidation. In fact, we expect any bias to favor reorganization, which can be manipulated for the benefit of any party in control of the bankruptcy process. Our results are consistent with this hypothesis. In a broad study of US corporate bankruptcy cases, we find that secured credit is positively and significantly correlated with the reorganization of insolvent debtors.

In 1978, Dr. Elisabeth Landes and then-Professor, later-Judge Richard Posner, published The Economics of the Baby Shortage. The article openly discussed how economic analysis can address the allocation of babies available for adoption. The ideas expressed in the article were widely denounced as an inhumane commodification of children, something tolerable only in the twisted minds of academic authors. Despite the backlash, an odd thing happened in the more than four decades since Landes and Posner wrote on this topic: their ideas began to take hold. Today, almost all states in the United States permit, in some form, the contractual assignment of parental rights; that is, almost all states now permit the sale of babies. We suggest an ironic reason for the change: the modern technology of in vitro fertilization has quieted or overcome complaints about the commodification of children by moving surrogacy contracts into a long-accepted, though euphemistically labeled, realm of parental property rights in children.

Today's leading experts on the law and economics of corporate bankruptcy address fundamental issues such as the efficiency of bankruptcy, the role of creditors in the bankruptcy process, the allocation of going-concern surplus among claimants, the desirability of liquidation in the absence of such surplus, the role of contract in bankruptcy resolution, the role of derivatives in the bankruptcy process, the costs of the bankruptcy system, and the special case of financial institutions, among other topics. This book's chapters trace the historical path of both law and policy analysis.

Contractual resolution of large-enterprise corporate insolvency offers potential advantages over judicial valuation or auction, particularly in transitional economies, perhaps including China, where courts and markets may be unaccustomed to valuation of large enterprises. This is not a claim that contractual resolution is a panacea. But a contractually implemented Chameleon Equity capital structure as proposed here-like the bail-in structures adopted in Europe-could serve as an efficient tool in the transition of state-owned enterprises to privately financed entities.

Classic finance theory observes that while debt can mitigate the conflict between equity and management, its issuance creates a conflict between debt and equity. We search for evidence of this conflict in the incidence of secured debt, which can be used by financially distressed firms to finance unduly risky projects for the benefit of equity at the expense of unsecured creditors. Skeptics of the debt-equity conflict's practical importance believe that distressed-firm management avoids secured credit, which may compel equity to relinquish control of a firm. Consistent with the classic account, our controlled study shows a significant run-up of secured credit, as a proportion of assets and of liabilities, prior to bankruptcy filings of publicly traded firms. Together with recent evidence of inefficiency as firms approach bankruptcy, our results support proposals for the subordination of secured debt to nonconsensual claims and for enhanced enforcement of covenants against the issuance of secured credit.

The priority structure of debt claims against business entities is a key feature of corporate finance. The American Bankruptcy Institute’s Commission to Study Reform of Chapter 11 recently recommended that U.S. bankruptcy law grant junior, out-of-the-money creditors a distribution in the reorganization or sale of the debtor. The distribution would reflect the possibility that the value of the debtor enterprise would increase in the three years following bankruptcy. This proposed priority reallocation in favor of junior creditors was at least partly inspired by a series of legal academic articles published over the past fifteen years. In this article, we first review the insights of earlier foundational scholarship regarding the benefits of hierarchical debt contracts and then critique the more recent articles that advocate for deviations from absolute priority, including through an extension of the implicit option held by junior creditors. We suggest that the parties themselves can contract for such adjustments under the limited circumstances in which this would be desirable.

There is a debate about whether a corporate debtor's going-concern surplus over liquidation value, preserved by the bankruptcy process, should be distributed entirely to senior claims that are not paid in full or should, instead, be shared to some extent with junior claims. To protect the advantages of priority credit for debtors, this debate should be resolved in favor of the senior claims unless the junior claims are nonconsensual.

•Competition may counter freeriding for investment in class action pleadings.•Copying will not necessarily induce underinvestment in class action pleadings.•Divided award may be the most important cause of underinvestment in class action pleadings.

Over the past two decades, control over the US bankruptcy reorganization process has shifted from a debtor's pre-bankruptcy managers to holders of secured claims. The result has been increased adherence to absolute priority and a harder landing for the debtor's managers and shareholders. Because managers still make or can influence the decision whether or when to file a bankruptcy petition, we hypothesize that anticipation of bankruptcy under these new conditions will result in a delay in filing, increased leverage, increased secured debt, and a reduction of asset value for firms at the time they file. We present empirical evidence consistent with our hypotheses.

Contract is the primary means through which creditors control a firm's debt equity conflict. There is an irony here, however. Actions that may render a debtor insolvent are the events against which creditors contract. Yet when a breach of contract yields a debtor's insolvency, the debtor cannot fully satisfy its creditors. Thus, a general creditor's contractual remedy against a debtor cannot be fully effective, and anticipation of this shortcoming may increase a debtor's cost of capital. A solution to this conundrum, proposed here, would permit creditors and debtors to contract for creditor remedies against third parties other creditors, shareholders, and corporate affiliates who may have benefited from a debtor's breach, provided that the creditor gave actual or constructive notice of its right to seek such remedies. This solution would offer creditors protection akin to that now afforded contractually through secured credit and now afforded by legal rule through the laws of voidable preference and fraudulent conveyance. Because the proposed protection would be contractually based, it could be tailored to the needs of individual firms and could thus improve, and to some extent obviate the need for, the protections now provided by law.

A law school job talk for an entry-level candidate is an opportunity for the presenter to put his or her ideas before a faculty in the best possible light. A bit of give-and-take is part of the drill, but the candidate can usually expect the talk to stay more or less on course. My own first job talk, though, given at George Mason University more years ago than I'd like to admit, was attended by the thoroughly exceptional Larry Ribstein and so did not unfold in the usual way.A few minutes after I began to speak, the questions began. Most were of the kind I expected, asked to determine whether I had thought carefully about my topic, whether I had properly considered alternative arguments, whether, in general, I knew what I was talking about and could express myself competently. But then Larry, whom I had not before met, spoke. Unlike the others, Larry didn't ask about the paper, which was on insolvency risk, or my defense of its themes. Instead he honed in on a comment that I had made in passing, one only indirectly related to my thesis. If I remember correctly, the remark that caught Larry's attention was about corporate capital structure. Larry asked me one question about the comment and then, after contemplating my response, followed up with a series of others. He was, it seemed, trying to work out something in his own mind rather than connect his thoughts to my paper. I wasn't sure what was happening but I remember the feeling of relief when the questioning moved on to others.As is typical, the job talk was followed by office interviews in smaller groups, during which faculty members are free to ask about anything they wish. The candidate is usually happy to field whatever questions come his or her way. But when I entered Larry's office for my interview with him and his colleague Henry Butler, I returned immediately to the topic of my paper. If I hadn't interested Larry in the paper's central idea during the talk, I was determined to hook him during the interview. I didn't get very far. Larry had little use for the paper I wrote. (The paper was, in fact, a bust; it was never published.) He wanted to discuss my tangentially related comment on corporate capital structure. On that subject, Larry flatly told me two things: first, that based on my comment, my thinking on the issue was all wrong; second, that I needed to co-author a paper with him so we, together, could get it right. Larry was ready to set up a schedule for us to work on the paper he envisioned until Henry reminded him that this was a job interview and that maybe they should get to the task at hand.These events came rushing back to me when Henry Butler called last December and said that our close friend Larry had collapsed and was gravely ailing. And when Larry passed away the next day, I thought more about those first conversations, which offer some insights into Larry's character. …

The rules of bankruptcy reorganization in the United States permit a debtor to retain a secured claim's collateral in exchange for judicially approved compensation even over the objection of the secured creditor. An alternative would grant a secured creditor the right to recover its collateral unless satisfied with the compensation, a right often implicit in modern bankruptcy practice despite the formal rules. Either debtor or secured creditor domination of the bankruptcy process may yield inefficient continuation decisions, violations of absolute priority, and high transactions cost. As a remedy to these pitfalls, a mechanism that would mediate between debtor and creditor control and could harness the parties' information about collateral value is proposed here: junior interests would, on behalf of the debtor, propose a reorganization plan that could include a take-it-or-leave-it offer for collateral with assured liquidation of the collateral being the consequence if the secured creditor rejected the plan.

Leveraged buyouts (LBOs) have been blamed for a host of perceived economic evils, from the federal budget deficit to unemployment. In reality, LBOs are responsible for none of those evils; they are merely tools of economic organization. Such misconceptions about LBOs stem from a misunderstanding about the role of debt and the role of takeovers in the modern corporation. This paper attempts to dispel these misconceptions.

Chapter 8 Resolution Authority Viral V. Acharya, Viral V. AcharyaSearch for more papers by this authorBarry Adler, Barry AdlerSearch for more papers by this authorMatthew Richardson, Matthew RichardsonSearch for more papers by this authorNouriel Roubini, Nouriel RoubiniSearch for more papers by this author Viral V. Acharya, Viral V. AcharyaSearch for more papers by this authorBarry Adler, Barry AdlerSearch for more papers by this authorMatthew Richardson, Matthew RichardsonSearch for more papers by this authorNouriel Roubini, Nouriel RoubiniSearch for more papers by this author Viral V. Acharya, Viral V. AcharyaSearch for more papers by this authorThomas F. Cooley, Thomas F. CooleySearch for more papers by this authorMatthew Richardson, Matthew RichardsonSearch for more papers by this authorIngo Walter, Ingo WalterSearch for more papers by this author Book Author(s):Viral V. Acharya, Viral V. AcharyaSearch for more papers by this authorThomas F. Cooley, Thomas F. CooleySearch for more papers by this authorMatthew Richardson, Matthew RichardsonSearch for more papers by this authorIngo Walter, Ingo WalterSearch for more papers by this author First published: 29 November 2011 https://doi.org/10.1002/9781118258231.ch8Citations: 2 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Summary This chapter contains sections titled: Overview The Financial Crisis of 2007 to 2009 The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Looking Forward: What if a LCFI Fails? Receivership, Bankruptcy, Living Wills, and Forbearance Summary Notes References Citing Literature Regulating Wall Street: The Dodd‐Frank Act and the New Architecture of Global Finance RelatedInformation