Document Type

Article

Publication Title

Vanderbilt Law Review

Abstract

Part I newly defines bankruptcy law in its essence as any law, from whatever source, that governs or permits insupportable obligations. Where such obligations are necessarily inconsistent, the law provides a resolution. This is bankruptcy law. Another common conception of bankruptcy law, one that I accept here, is as relief provided to an overburdened individual debtor. To the extent that law provides such relief, even where contract does not and where a debtor could otherwise satisfy all her obligations, the law permits an obligation to go unsatisfied. This too is bankruptcy law at a basic level. Part II questions whether there are any other basic elements of bankruptcy law. The discussion suggests that no extensive set of special procedural rules, traditionally understood as bankruptcy law, is necessary or desirable given alternatives to debt as a form of obligation. The objective here is to greatly diminish what Jackson described as the logic and limits of bankruptcy, which he viewed primarily as a process of debt relief. The gain from such an approach is that potentially superior alternatives to bankruptcy as process emerge as a means to address financial distress in the absence of debt. The next part of the Article, Part III, further disaggregates the accepted notion of "bankruptcy law" and moves to another set of issues commonly referred to as bankruptcy issues. When investors provide capital in the form of debt, the Bankruptcy Code governs the distribution of assets in bad-state outcomes. As Part II demonstrates, were business investment, typically in a corporation, to take some other form, the bankruptcy process would be unnecessary or irrelevant. Still, social welfare depends importantly on investment incentives that are based on anticipation of distributions in bad-state outcomes. Analysis of these incentives and distributions is important, and such analysis is offered, even as isolated from bankruptcy as a process. The analysis concentrates on two topics that I have addressed in prior work-the absolute priority rule and the accelerated resolution of financial distress. The debate about what is commonly called absolute priority turns largely on whether holders of junior claims or interests should receive any return from an insolvent debtor if holders of senior claims are not paid in full. Anticipation of a payment to juniors, even where high-priority claims are not fully satisfied, can in some cases lead the juniors to behave as better agents for investors collectively, while in other circumstances the effect can be quite the opposite. This tradeoff, though contentious, is well established. Relatively neglected, by contrast, is the role of accelerated resolution of financial distress, which has the potential to cut the Gordian knot and provide the benefits of absolute priority deviations with few of the potential costs. Analysis of these topics reveals that the prospect of financial distress as a consequence of fixed obligations can be fundamental to an optimal capital structure even though debt itself is not. Other matters of corporate debtors as well as the treatment of individual debtors are left for the larger project of which this Article is a part.

First Page

1661

Volume

55

Publication Date

2002

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