Bankruptcy as Property Law
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Description
What must bankruptcy law be? As it turns out this question has a simple answer. There is exactly one function bankruptcy law must serve. It must govern mutually insupportable obligations. Or, one might say, any law that governs mutually insupportable obligations is bankruptcy law. That is, bankruptcy law is property law. To understand this claim, consider first what almost anyone would see as a typical bankruptcy setting. A borrower arrives on hard times, unable to repay her debts in full and with liabilities that exceed her assets. Her creditors seek to collect, but cannot get blood from a stone, so not all of them will succeed; i.e., the debtor is insolvent. There are many things that bankruptcy law could do in response to this debtor’s financial crisis. The law could, for example, stay the creditors’ individual collection efforts in favor of a collective process and discharge the debtor from her obligations, in whole or in part. Indeed American bankruptcy law does each of these things for individual and corporate debtors. But the law needn’t do either. There is only one thing bankruptcy law must do, if there is to be law at all in this situation: it must decide which of the creditors, if any, gets the debtor’s assets. Put another way, because creditors of an insolvent debtor have conflicting claims against assets, bankruptcy law must establish which of the creditors has a superior interest in those assets. This is a function of property law too. This point has been overlooked because bankruptcy law has become associated so closely with process – the substitution of collectivization for unilateral creditor collection – and because, except through its provision of process, Congress has largely deferred to state law on questions of property rights. But whether the federal government or the states provide the rules, there must be some way to determine who prevails when claims conflict; such determination is the essence of bankruptcy law and it is also property law. The first part of this chapter explores this theme further and describes how process myopia has led Congress to overlook an important opportunity for reform of bankruptcy entitlement: priority for tort claims. The second part of this chapter shifts perspective. Just as it has not been universally understood that the question of insolvency, a standard bankruptcy law topic, is truly a property law topic, it has also been less than fully understood that other basic law doctrines reflect insolvency concerns. This idea is briefly expounded below.
Source Publication
Research Handbook on the Economics of Property Law
Source Editors/Authors
Kenneth Ayotte, Henry E. Smith
Publication Date
2011
Recommended Citation
Adler, Barry E., "Bankruptcy as Property Law" (2011). Faculty Chapters. 11.
https://gretchen.law.nyu.edu/fac-chapt/11
