Introduction to the Research Handbook on Corporate Bankruptcy Law

Abstract

More than thirty years ago, Thomas Jackson wrote The Logic and Limits of Bankruptcy Law, which describes bankruptcy as the implementation of a hypothetical bargain among creditors. Under the terms of such a bargain, bankruptcy’s automatic stay on each creditor’s individual collection rights prohibits a potentially destructive grab race and allows for a collectivized proceeding that can maintain a debtor’s going-concern value for the benefits of the creditors as a group. Among both academics and practitioners, Jackson’s hypothetical bargain has become the dominant paradigm in assessing bankruptcy, a true feat for a scholarly work. Much has changed since Jackson wrote his classic treatise, particularly in the world of large-firm corporate bankruptcy, which is the primary focus of this handbook. Creditors have taken control of the corporate reorganization process, previously the domain of debtor management (the “debtor in possession” or “DIP”). Creditor control has been solidified over time by an expanded use of secured credit and prebankruptcy contractual arrangements that allow principal creditors to speak with a single voice in the bankruptcy process. To the extent honored by the bankruptcy courts, such coordination among principal creditors largely replaces Jackson’s hypothetical creditors’ bargain with an actual bargain. That actual bargain has important consequences for the bankruptcy process including a financial stranglehold that restricts a bankruptcy court’s ability to have the process fully honor the entitlement of creditors not part of the coalition. Full adherence to entitlement—known in some contexts as “absolute priority”—has, thus, become difficult to achieve for new reasons. Now, it is dominant creditors who may manage bankruptcy for their own advantage while in the past it was the debtor’s shareholders who, despite holding options that were out of the money, had their managers run the bankruptcy process toward achieving some return to equity. Another consequence of principal creditor coordination in bankruptcy is that large-firm debtors are today, more than in the past, sold in bankruptcy. Fewer firms now undergo traditional reorganization, with new claims and interests issued against the debtor’s assets. In principle, this