1932
0
  1. Home
  2. A-Z Publications
  3. Annual Review of Law and Social Science
  4. Volume 19, 2023
  5. Article

Annual Review of Law and Social Science

Volume 19, 2023

Bankruptcy Law's Knowns and Unknowns

Abstract

In 1978, Congress created a new federal bankruptcy law that has since become a key part of the American capital markets. I examine how large companies and their investors contract to make bankruptcy more or less likely, how distressed firms negotiate with creditors outside of bankruptcy, and how companies plan for a Chapter 11 filing and navigate the bankruptcy system. I also survey the strategic moves, ranging from litigation to financing, that activist investors deploy to improve their bargaining power and earn higher returns. The American bankruptcy system is evolving constantly, and prevailing accounts of bankruptcy law quickly become stale, creating a constant need for new empirical research to establish a foundation for policy making.

Keyword(s): bankruptcy, Chapter 11, corporate law, corporate reorganization
Loading

Article metrics loading...

/content/journals/10.1146/annurev-lawsocsci-111522-085910
2023-10-05
2024-04-30
Loading full text...

Full text loading...

/deliver/fulltext/lawsocsci/19/1/annurev-lawsocsci-111522-085910.html?itemId=/content/journals/10.1146/annurev-lawsocsci-111522-085910&mimeType=html&fmt=ahah

Literature Cited

  1. Adler BE, Capkun V. 2019. Debt-equity conflict and the incidence of secured credit. J. Law Econ. 62:551–78
     [Google Scholar]
  2. Adler BE, Capkun V, Weiss LA. 2013. Value destruction in the new era of Chapter 11. J. Law Econ. Org. 29:461–83
     [Google Scholar]
  3. Aghion P, Bolton P. 1992. An incomplete contracts approach to financial contracting. Rev. Econ. Stud. 59:473–94
     [Google Scholar]
  4. Altman EI, Karlin B. 2009. The re-emergence of distressed exchanges in corporate restructurings. J. Credit Risk 5:243–55
     [Google Scholar]
  5. Antill S. 2022. Do the right firms survive bankruptcy?. J. Financ. Econ. 144:523–46
     [Google Scholar]
  6. Ayotte KM. 2020. Disagreement and capital structure complexity. J. Legal Stud. 49:1–32
     [Google Scholar]
  7. Ayotte KM, Casey AJ, Skeel DA Jr. 2017. Bankruptcy on the side. Northwest. Univ. Law Rev. 112:255–311
     [Google Scholar]
  8. Ayotte KM, Ellias JA. 2022. Bankruptcy process for sale. Yale J. Regul. 39:1–60
     [Google Scholar]
  9. Ayotte KM, Morrison ER. 2009. Creditor control and conflict in Chapter 11. J. Legal Anal. 1:511–51
     [Google Scholar]
  10. Ayotte KM, Scully C 2021. J. Crew, Nine West, and the complexities of financial distress. Yale Law J. Forum 131:363–87
     [Google Scholar]
  11. Ayotte KM, Skeel DA Jr. 2004. Why do distressed companies choose Delaware? An empirical analysis of venue choice in bankruptcy. Facult. Schol., Penn Law Philadelphia: https://scholarship.law.upenn.edu/faculty_scholarship/20
  12. Ayotte KM, Skeel DA Jr. 2013. Bankruptcy law as a liquidity provider. Univ. Chicago Law Rev. 80:1557–624
     [Google Scholar]
  13. Baird DG. 2017. Bankruptcy's quiet revolution. Am. Bankruptcy Law J. 91:593–622
     [Google Scholar]
  14. Baird DG, Bernstein DS. 2006. Absolute priority, valuation uncertainty, and the reorganization bargain. Yale Law J. 115:1930–70
     [Google Scholar]
  15. Baird DG, Rasmussen RK. 2002. The end of bankruptcy. Stanford Law Rev. 55:751–89
     [Google Scholar]
  16. Baird DG, Rasmussen RK. 2006. Private debt and the missing lever of corporate governance. Univ. Pa. Law Rev. 154:1209–51
     [Google Scholar]
  17. Baird DG, Rasmussen RK. 2010. Anti-bankruptcy. Yale Law J. 119:648–99
     [Google Scholar]
  18. Bebchuk LA, Fried JM. 1996. The uneasy case for the priority of secured claims in bankruptcy. Yale Law J. 105:857–934
     [Google Scholar]
  19. Becker B, Ivashina V. 2015. Reaching for yield in the bond market. J. Finance 70:1863–902
     [Google Scholar]
  20. Becker B, Ivashina V. 2016. Covenant-light contracts and creditor coordination. Res. Pap. 16–09, Swed. House Finance Stockholm:
  21. Bharath ST, Panchapagesan V, Werner IM. 2007. The changing nature of Chapter 11. Work. Pap. 2008-03-003, Fisher Coll. Bus., Ohio State Univ. Columbus:
  22. Bratton WW, Levitin AJ. 2018. The new bond workouts. Univ. Pa. Law Rev. 166:1597–674
     [Google Scholar]
  23. Buccola VSJ. 2023. Sponsor control: a new paradigm for corporate reorganization. Univ. Chicago Law Rev. 90:1–47
     [Google Scholar]
  24. Buccola VSJ, Nini G 2022. The loan market response to dropdown and uptier transactions Work. Pap., Wharton School, Univ. Pa. Philadelphia: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4143928
  25. Capkun V, Ors E. 2021. Replacing key employee retention plans with incentive plans in bankruptcy. Account. Organ. Soc. 94:101278
     [Google Scholar]
  26. Carapeto M. 1999. Does debtor-in-possession financing add value? Work. Pap. 294–1999, Inst. Financ. Account., London Bus. School
  27. Casey AJ. 2015. The new corporate web: tailored entity partitions and creditors’ selective enforcement. Yale Law J. 124:2680–744
     [Google Scholar]
  28. Casey AJ. 2020. The new bargaining theory of corporate bankruptcy and Chapter 11’s renegotiation framework. Columbia Law Rev. 120:1709–70
     [Google Scholar]
  29. Casey AJ, Macey J. 2020. The Hertz maneuver (and the limits of bankruptcy law). University of Chicago Law Review Online Oct. 7. https://lawreviewblog.uchicago.edu/2020/10/07/casey-macey-hertz/
    [Google Scholar]
  30. Casey AJ, Tung F, Waldock K. 2022. Restructuring support agreements: an empirical analysis. Work. Pap., Univ. Chicago
  31. Chatterjee S, Dhillon US, Ramirez GG. 2004. Debtor-in-possession financing. J. Bank. Finance 28:3097–111
     [Google Scholar]
  32. Coelho L, John K, Kumar A, Taffler R. 2014. Bankruptcy sells stocks…but who's buying (and why)? Work. Pap., Univ. Algarve, Faro, Port. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2427770
  33. Cole GM. 2002. “Delaware is not a state”: Are we witnessing jurisdictional competition in bankruptcy?. Vanderbilt Law Rev. 55:1845–916
     [Google Scholar]
  34. Coordes LN. 2015. The geography of bankruptcy. Vanderbilt Law Rev. 68:381–439
     [Google Scholar]
  35. Daines R. 2001. Does Delaware law improve firm value?. J. Financ. Econ. 62:525–58
     [Google Scholar]
  36. Dick DL. 2014. Grassroots shareholder activism in large commercial bankruptcies. J. Corp. Law 40:1–51
     [Google Scholar]
  37. Dick DL. 2021. Hostile restructurings. Washington Law Rev. 96:1333–88
     [Google Scholar]
  38. Eckbo BE, Li K, Wang W. 2022. Loans to Chapter 11 firms: contract design and pricing. Work. Pap. 794/2021, Eur. Corp. Gov. Inst., Bruss. Belg:.
  39. Ellias JA. 2016. Do activist investors constrain managerial moral hazard in Chapter 11? Evidence from junior activist investing. J. Legal Anal. 8:493–547
     [Google Scholar]
  40. Ellias JA. 2018a. Bankruptcy claims trading. J. Empir. Legal Stud. 15:772–99
     [Google Scholar]
  41. Ellias JA. 2018b. What drives bankruptcy forum shopping? Evidence from market data. J. Legal Stud. 47:119–49
     [Google Scholar]
  42. Ellias JA. 2019a. Regulating bankruptcy bonuses. South. Calif. Law Rev. 92:653–701
     [Google Scholar]
  43. Ellias JA 2019b. Public testimony re Pacific Gas & Electric Company bankruptcy and Chapter 11 process to California State Senate Committee on Energy, Utilities and Communication Work. Pap., Harvard Law School Cambridge, MA: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3346794
  44. Ellias JA 2020. The law and economics of investing in bankruptcy in the United States. Distressed Debt Trading: Brave New EU Legal Rules in Relation to Bold New Strategies L Welling-Steffens, JA Ellias, SW van den Berg, T Florstedt 47–80. Amsterdam: Eleven Int. Publ.
     [Google Scholar]
  45. Ellias JA, Kamar E, Kastiel K. 2023. The rise of bankruptcy directors. South. Calif. Law Rev. 95:51083–136
     [Google Scholar]
  46. Ellias JA, Stark RJ. 2020. Bankruptcy hardball. Calif. Law Rev. 108:745–87
     [Google Scholar]
  47. Ellias JA, Triantis G. 2021. Government bankruptcy activism. Emory Bankruptcy Dev. J. 37:509–50
     [Google Scholar]
  48. Francus MA. 2022. Texas two-stepping out of bankruptcy. Univ. Mich. Law Rev. Online 120:38–50
     [Google Scholar]
  49. Franks JR, Torous WN. 1989. An empirical investigation of U.S. firms in reorganization. J. Finance 44:747–69
     [Google Scholar]
  50. Franks JR, Torous WN. 1994. A comparison of financial recontracting in distressed exchanges and Chapter 11 reorganizations. J. Financ. Econ. 35:349–70
     [Google Scholar]
  51. Gilson SC, Hotchkiss ES, Osborn MG. 2016. Cashing out: the rise of M&A in bankruptcy. Work. Pap., Harvard Bus. School Cambridge, MA: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2547168
  52. Gilson SC, John K, Lang L. 1990. Troubled debt restructurings: an empirical study of private reorganization of firms in default. J. Financ. Econ. 27:315–53
     [Google Scholar]
  53. Goldschmid PM. 2005. More phoenix than vulture: the case for distressed investor presence in the bankruptcy reorganization process. Columbia Bus. Law Rev. 2005:191–274
     [Google Scholar]
  54. Goyal VK, Madsen JM, Wang W. 2020. Knowing is power: the value of judge-lawyer familiarity. Work. Pap. 2020–019, HKUST Bus. School Hong Kong:
  55. Goyal VK, Wang W. 2017. Provision of management incentives in bankrupt firms. J. Law Finance Account. 2:87–123
     [Google Scholar]
  56. Griffin T, Nini G, Smith DC. 2021. Losing control? The 20-year decline in loan covenant violations Work. Pap., Darden School Bus., Univ. Va. Charlottesville: https://finance.darden.virginia.edu/wp-content/uploads/2019/10/Griffin-Smith-Nini-November-2019-SSRN-version.pdf
  57. Harner MM. 2008. Trends in distressed debt investing: an empirical study of investors’ objectives. Am. Bankruptcy Inst. Law Rev. 16:69–110
     [Google Scholar]
  58. Harner MM, Marincic J. 2011. Behind closed doors: the influence of creditors in business reorganizations. Seattle Law Rev. 34:1155–217
     [Google Scholar]
  59. Hotchkiss ES, Smith DC, Strömberg P. 2021. Private equity and the resolution of financial distress. Rev. Corp. Finance 10:694–747
     [Google Scholar]
  60. Hynes R, Walt SD. 2020. Revitalizing involuntary bankruptcy. Iowa Law Rev. 105:1127–85
     [Google Scholar]
  61. Ivashina V, Iverson B, Smith DC. 2016. The ownership and trading of debt claims in Chapter 11 restructurings. J. Financ. Econ. 119:316–35
     [Google Scholar]
  62. Ivashina V, Vallée B. 2020. Weak credit covenants. NBER Work. Pap. 27316
  63. Iverson B. 2018. Get in line: Chapter 11 restructuring in crowded bankruptcy courts. Manag. Sci. 64:5370–94
     [Google Scholar]
  64. Jiang W, Li K, Wang W. 2012. Hedge funds and Chapter 11. J. Finance 67:513–60
     [Google Scholar]
  65. Kraus A, Litzenberger RH. 1973. A state-preference model of optimal financial leverage. J. Finance 28:911–22
     [Google Scholar]
  66. Levitin AJ. 2010. Bankruptcy markets: making sense of claims trading. Brookings J. Corp. Financ. Commer. Law 4:67–112
     [Google Scholar]
  67. Levitin AJ. 2023. Judge shopping in Chapter 11 bankruptcy. Univ. Ill. Law Rev. 2023:351–418
     [Google Scholar]
  68. Lipson JC. 2010. Understanding failure: examiners and the bankruptcy reorganization of large public companies. Am. Bankruptcy Law J. 84:1–78
     [Google Scholar]
  69. LoPucki LM. 2005. Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts Ann Arbor: Univ. Mich. Press
  70. LoPucki LM. 2022. Chapter 11’s descent into lawlessness. Am. Bankruptcy Law J. 96:247–310
     [Google Scholar]
  71. LoPucki LM, Doherty JW. 2004. The determinants of professional fees in large bankruptcy reorganization cases. J. Empir. Legal Stud. 1:111–41
     [Google Scholar]
  72. LoPucki LM, Kalin SD. 2001. The failure of public company bankruptcies in Delaware and New York: empirical evidence of a “race to the bottom. .” Vanderbilt Law Rev. 54:231–82
     [Google Scholar]
  73. LoPucki LM, Whitford WC. 1991. Venue choice and forum shopping in the bankruptcy reorganization of large, publicly held companies.. Wis. Law Rev. 1991:11–63
     [Google Scholar]
  74. Lubben SJ. 2011. Financial institutions in bankruptcy. Seattle Univ. Law Rev. 34:1259–78
     [Google Scholar]
  75. Meier JM, Servaes H. 2019. The bright side of fire sales. Rev. Financ. Stud. 32:4228–70
     [Google Scholar]
  76. Miller HR. 2007. Chapter 11 in transition from boom to bust and into the future. Am. Bankruptcy Law J. 81:375–404
     [Google Scholar]
  77. Murfin J. 2012. The supply side determinants of loan contract strictness. J. Finance 67:1565–601
     [Google Scholar]
  78. Organek W. 2022. “A bitter result”: Purdue Pharma, a Sackler bankruptcy filing, and improving monetary and nonmonetary recoveries in mass tort bankruptcies. Am. Bankruptcy Law J. 96:361–412
     [Google Scholar]
  79. Rauh JD, Sufi A. 2010. Capital structure and debt structure. Rev. Financ. Stud. 23:4242–80
     [Google Scholar]
  80. Roberts MR. 2015. The role of dynamic renegotiation and asymmetric information in financial contracting. J. Financ. Econ. 116:61–81
     [Google Scholar]
  81. Roe MJ. 2017. Three ages of bankruptcy. Harvard Bus. Law Rev. 7:187–219
     [Google Scholar]
  82. Roe MJ, Skeel D. 2010. Assessing the Chrysler bankruptcy. Univ. Mich. Law Rev. 108:727–71
     [Google Scholar]
  83. Roe MJ, Tung F. 2013. Breaking bankruptcy priority: how rent-seeking upends the creditors’ bargain. Va. Law Rev. 99:1235–90
     [Google Scholar]
  84. Scott RE. 1997. The truth about secured financing. Cornell Law Rev. 82:1436–65
     [Google Scholar]
  85. Siegel GE. 2003. Introduction: ABI guide to trading claims in bankruptcy. Part 2: ABI Committee on Public Companies and Trading Claims. Am. Bankruptcy Inst. Law Rev. 11:177–78
     [Google Scholar]
  86. Simon L. 2020. The guardian trustee in bankruptcy courts and beyond. N.C. Law Rev. 98:1297–346
     [Google Scholar]
  87. Simon L. 2022. Bankruptcy grifters. Yale Law J. 131:1154–216
     [Google Scholar]
  88. Skeel DA Jr. 2004. The past, present and future of debtor-in-possession financing. Cardozo Law Rev. 25:1905–34
     [Google Scholar]
  89. Skeel DA Jr. 2020. Distorted choice in corporate bankruptcy. Yale Law J. 130:366–426
     [Google Scholar]
  90. Smith CW Jr., Warner JB. 1979. On financial contracting: an analysis of bond covenants. J. Financ. Econ. 7:117–61
     [Google Scholar]
  91. Triantis G. 1992. Secured debt under conditions of imperfect information. J. Legal Stud. 21:225–58
     [Google Scholar]
  92. Triantis G. 1993. A theory of the regulation of debtor-in-possession financing. Vanderbilt Law Rev. 46:901–35
     [Google Scholar]
  93. Tung F. 2020. Financing failure: bankruptcy lending, credit market conditions, and the financial crisis. Yale J. Regul. 37:651–707
     [Google Scholar]
  94. Warren E, Westbrook JL. 2005. Contracting out of bankruptcy: an empirical intervention. Harvard Law Rev. 118:1197–254
     [Google Scholar]
  95. Westbrook JL. 2004. The control of wealth in bankruptcy. Tex. Law Rev. 82:795–862
     [Google Scholar]
/content/journals/10.1146/annurev-lawsocsci-111522-085910
Loading
Bankruptcy Law's Knowns and Unknowns
Annual Review of Law and Social Science 19, 319 (2023); https://doi.org/10.1146/annurev-lawsocsci-111522-085910
/content/journals/10.1146/annurev-lawsocsci-111522-085910
/content/journals/10.1146/annurev-lawsocsci-111522-085910
Loading

Data & Media loading...

  • Article Type: Review Article

Most Cited Most Cited RSS feed

This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error