Article   |   Volume 166, Issue 7

Corporate Bankruptcy Hybridity

By
166 U. Pa. L. Rev. 1715 (2018)

December 2018












Spend a day in a busy bankruptcy court and your research agenda could be set for life. Bankruptcy is crisis management for individuals, business entities, and even governments. The entities that file for bankruptcy come in all shapes and sizes, as do their troubles. In addition to basic capital structure problems, bankruptcy dockets and courtrooms contain allegations of sexual harassment, race discrimination, systemic financial risk, First Amendment issues, toxic and defective products (medical devices, airplanes, and automobiles), global warming litigation, and pyramid schemes. This catastrophist’s dream has the potential to provoke engagement from scholars spanning the law school curriculum.

That breadth of engagement, however, is missing. In a public lecture, commercial law scholar and teacher Jay Lawrence Westbrook lamented the lack of “public interest” concerns in corporate bankruptcy scholarship. That term signals something more than the aggregation of individual rights‐based interests and arguments, to encompass the system’s broader effects—matters that cannot simply be waived by creditors when they settle their own claims. In addition, the scholarship insufficiently attends to claimants whose rights against a bankrupt company arise through pathways other than the fine print of a contract.

In short, the field of corporate bankruptcy has been redistricted to wealth maximization, voluntary lenders, and investors. Academic careers have flourished characterizing Chapter 11 as a mere corporate control transaction among investors, shuffling pieces of the company’s capital structure. Whether due to this framing, the lack of a popular alternative, or both, the redistricters tend to ignore scholarly contributions that construe the field more broadly.

This Article is an invitation to explore an alternative model: corporate bankruptcy as a public–private partnership. In this model, allocating responsibilities to private parties can improve regulatory functioning, but parties cannot redefine system goals purely for their own benefit. The application of this framework is supported by an institutional analysis of the bankruptcy system, drawing on privatization and administrative law scholarship that has received too little attention in bankruptcy debates. Scholars of the regulatory state understand that efficiency is not the exclusive objective: “the public law perspective asks not whether privatization is efficient, but whether it erodes the public law norms that these constitutional and statutory limits are designed to protect.” Private contributions to a system must be solicited and managed in ways that improve, not undermine, public regulatory objectives.

In addition to enlivening academic debates, the public–private partnership model sheds new light on real‐world problems. And problems abound. The American Bankruptcy Institute Commission on Chapter 11 recently released a report cataloging the ways in which Chapter 11 no longer functions in accordance with its original legislative mandate. The public–private partnership model not only helps diagnose shortcomings in Chapter 11 as it operates on the ground, but expands the range of options for addressing them.

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