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What is Missing in Corporate Bankruptcy Theories? Revisiting the Efficiency Rationale
Published online by Cambridge University Press: 04 July 2014
Abstract
What is corporate bankruptcy law's unique function in the economy? Law and economics scholars reject using it to achieve purely redistributive purposes but this is where their agreement ends. Thus, two questions serve as focal points for debate: First, should the decision on how to redeploy in the economy the assets of the financially distressed firm be mandatory or enabling? Second, which decision-making mechanism should be employed by lawmakers? “First order” theories (arguing for and against a mandatory bankruptcy regime), or “second order” theories (arguing for and against different methods of mandatory decision-making) ensued as a result. Unfortunately, “third order” attempts to supply a convincing answer to the economic question—combining as part of the answer the many redistributive impulses displayed in any corporate bankruptcy setting—were few and scarce. Moreover, scholars have been arguing with each other without fully exhausting the discussion of the gap dividing them. An ex-ante point of view, highlighting the perspective of the debtor-firm's relations with its consensual investors, was offered to lawmakers contemplating social wealth maximization, as a replacement to the conventional ex-post point of view, which emphasizes a more general societal perspective. The distinction between the two paradigms did not go unnoticed by scholars, but unexplainably, it failed to become the center of debate.
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- Copyright © Cambridge University Press and The Faculty of Law, The Hebrew University of Jerusalem 2006
Footnotes
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Research Student, The Hebrew University of Jerusalem. The paper won the first prize at the Judge Julian W. Mack Student Writing Competition for 2004. I would like to thank Zohar Goshen, Barak Medina, and an anonymous reader for their helpful comments.
References
1 Redistribution shall be defined, broadly, as any alteration of pre-bankruptcy entitlements held by agents—i.e., formation of a new bankruptcy entitlement or destruction of a pre-bankruptcy entitlement—that occurs once the firm enters a collective bankruptcy procedure. A provision of bankruptcy law is redistributive to the extent that it creates a bankruptcy entitlement or destroys a pre-bankruptcy entitlement. See Mokal, Rizwaan J., An Agency Cost Analysis of the Wrongful Trading Provisions: Redistribution, Perverse Incentives and the Creditors' Bargain, 59 Cambridge L. J. 335 (2000)CrossRefGoogle Scholar.
2 Redistribution of wealth should be distinguished from redistribution of value. To the extent that claimants of the firm acknowledge, at the time of contracting with the firm, the existence of future redistribute impulses in bankruptcy—resulting redistribution of value in bankruptcy cannot end in a wealth transfer, since claimants destined to be adversely affected will compensate themselves in advance. See Adler, Barry E., Bankruptcy and Risk Allocation, 77 Cornell L. Rev. 439, 464 (1992)Google ScholarPubMed; Nevertheless, even consensual creditorsand not only the firm—would very much like to avoid redistribution when possible in order to increase the demand for loans and maximize profits. See Rasmussen, Robert K., An Essay On Optimal Bankruptcy Rules and Social Justice, 1994 U. Ill. L. Rev. 1, 23 Google Scholar.
3 These scholars argue, that at least one of bankruptcy's main functions is to redistribute wealth between agents affected by the economic disaster induced when firms go bankrupt. Bankruptcy is a loss allocation mechanism, which ought to protect those who cannot adequately protect themselves from a disaster common to all; and bring about creditors to internalize the costs of business failure. See Warren, Elizabeth, Bankruptcy Policy, 54 U. Chi. L. Rev. 775 (1987)CrossRefGoogle Scholar. For a comprehensive listing of relevant literature see Rusch, Linda R., Bankruptcy Reorganization Jurisprudence: Matters of Belief, Faith, and Hope-Stepping Into the Fourth Dimension, 55 Mont. L. Rev. 9 (1994)Google Scholar.
4 Interestingly enough, each of the opposing scholars in this debate has resorted to a particular pattern of imagery in support of his arguments. Opponents of redistribution in bankruptcy have used the example of a bad restaurant in a big city serving fat and greasy food when demand for health food is on the rise, and being kept alive for the sake of their employees; while those advocating redistributive goals have described a small-town factory the shutting down of which would shake the town's entire economy. See Janger, Ted, Crystals and Mud in Bankruptcy Law: Judicial Competence and Statutory Design, 43 Ariz. L. Rev. 559, 567–571 (2001)Google Scholar.
5 A different set of questions does not address the redeployment context (whether to shut down the firm or not) but rather the distribution context. For example should certain claimants be accorded special priority in distribution of the debtor's assets that justifies deviation from the pro-rata distribution rule? See Article 354 of the Companies Ordinance (Consolidated Version), 5743-1983 37 LSI 764 (1983) (Isr.) or Article 507(a) of the Bankruptcy Code, 11 U.S.C. (U.S.) that grant such statutory priority to certain claims.
6 Other goals mentioned: equality and proper compensation for tort victims; the interests of the economy at large, whether local, regional, or national, or of individuals such as suppliers of the firm, for example, or competitors. See, e.g., Frost, Christopher W., Bankruptcy Redistributive Policies and the Limits of the Judicial Process, 74 N.C.L. Rev. 75, 76 (1995)Google Scholar. Even the interests of managers were mentioned. See Finch, Vanessa, Corporate Insolvency Law—Perspectives and Principals 29 (2002)CrossRefGoogle Scholar.
7 Several arguments can be raised to oppose any pure redistributive approach to bankruptcy: First, it is only one of the policies a bankruptcy system should promote, next to an undisputed efficiency goal. See Frost, id. at 90-91. See also Schwartz, Alan, A Contract Theory Approach to Business Bankruptcy, 107 Yale L. J. 1807, 1815 (1998)CrossRefGoogle Scholar; Rasmussen, supra note 2, at 2. Indeed, as long as bankruptcy law affects the ability of firms to borrow money, taking value from lenders and awarding it to non-lenders; or transferring value from secured creditors to what is viewed as less sophisticated unsecured creditors, will discourage lending and entrepreneurial initiative. See Rasmussen, Robert K. & Skeel, David A. Jr., The Economic Analysis of Corporate Bankruptcy Law, 3 Am. Banker. Inst. L. Rev. 85, 87 (1995)Google Scholar; Schwartz, Alan, Contracting For Bankruptcy Systems, in The Fall And Rise Of Freedom Of Contract 433 n. 16 (Buckley, F.H. ed., 1999)Google Scholar; Korobkin, Donald R., Employee Interests in Bankruptcy, 4 Am. Bankr. Inst. L. Rev. 5 (1996)Google Scholar. See also Schwartz, Alan, A Normative Theory of Business Bankruptcy, 91 Va. L. Rev. 1199 (2005)Google Scholar; Mooney, Charles W. Jr., A Normative Theory of Bankruptcy Law: Bankruptcy As (Is) Civil Procedure, 61 Wash. & Lee L. Rev. 931 (2004)Google Scholar. Second, law and economics principles generally emphasize, that any distributional goal can be accomplished via direct government intervention rather than indirectly by forming a complex mechanism such as—in the present case—the bankruptcy system. See Baird, Douglas G., Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. Chi. L. Rev. 815 (1987)CrossRefGoogle Scholar; Kaplow, Louis & Shavell, Steven, Why the Legal System is Less Efficient Than the Income Tax in Redistributing Income, 23 J. Legal Stud. 667 (1994)CrossRefGoogle Scholar; Georgakopoulos, Nicholas L., Solutions to the Intractability of Distributional Concerns, 33 Rutgers L. Rev. 279 (2002)Google Scholar.
8 Israeli law thus seems to demonstrate a clear tendency towards rehabilitation of financially-distressed firms, notwithstanding any redistribution of wealth that occurs. See, e.g., Req.CA 6418/93 Bank Leumi LeIsrael v. Gafni [1995] IsrSC 49(2) 685, 695-696. Courts have implicitly chosen a redistributive approach as they highlighted—in addition, of course, to obvious economic goals—the interests of employees in retaining their place of employment, the interests of the community in general, and the interests of specific groups within the community. See, e.g., DiffCivM (TA)= 13364/02 (bnkrup 1048/02) Midreshet Rupin [September 17, 2002] (unpublished).
9 Maximizing the value of the pool of assets reduces the costs of debt capital (the costs of credit), because creditors recover a higher percentage of their debt; which in turn permits firms, ex-ante, to fund more good projects (with positive NPV). In addition, reducing the costs of debt capital creates better incentives to maximize value. Reducing the costs of debt capital therefore maximizes social wealth. See Schwartz, supra note 7, at 1812-1814. See also Kornhauser, Lewis A., Constrained Optimization—Corporate Law and the Maximization of Social Welfare, in The Jurisprudential Foundations of Corporate and Commercial Law 87, 110–111 (Kraus, Jody S. & Walt, Steven D. ed., 2000)Google Scholar. The same effect could be rephrased: to the extent that a wrong redeployment decision is made, the value of the firm's assets is reduced, which becomes a social cost since society as a whole bears the loss when assets are not put to their highest valued use. See Rasmussen, Robert K., The Ex-Ante Effects of Bankruptcy Reform on Investment Incentives, 72 Wash. U. L. Q. 1159, 1161 (1994)Google Scholar.
10 An economically-distressed firm is characterized as a firm the operating expenses of which exceed its operating revenues, thus inefficiently draining the economy. See White, Michelle J., Corporate Bankruptcy, in 1 The New Palgrave Dictionary of Economics and the Law 483, 486 (Newman, Peter ed., 1998)Google Scholar.
11 A restructuring of the firm's capital means either postponement of debt payments, cancellation of debt, or conversion of debt into equity interests, and any combination of the above.
12 In terms of the errors of the system any bankruptcy system tries to minimize the number of type-I errors, which occur when inefficient firms are saved; and the number of type-II errors, which occur when efficient firms are shut down. See White, Michelle J., Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-Of-Court Debt Restructurings, 10 J. L. Econ. & Org. 268, 269 (1994)Google Scholar; White, Michelle J., Does Chapter 11 Save Economically Inefficient Firms?, 72 Wash. U. L. Q. 1319 (1994)Google Scholar.
13 The other task of the collective procedure—the task of distributing the debtor-firm's assets— receives little academic interest, since there exists little difference, in terms of efficiency, between possible forms of distribution.
14 The idea of fresh start, which is perhaps the basis for the bankruptcy of flesh-and-blood human beings, is irrelevant in corporate bankruptcy, since one can always replace one corporate charter with another. Even the preservation of some unique value embedded in a defined set of assets (“going concern value”) need not be accomplished within a particular company. See Picker, Randal C., Voluntary Petitions and the Creditors' Bargain, 61 U. Cin. L. Rev. 519, 521 (1992)Google Scholar.
15 Cf., Req.CA 8129/02 Argil Transportation Services (1993) Inc. v. The Trustee over Dan Rolider Ltd. [2003] IsrSC 57(5) 481.
16 An important exception is to be found in Sweden, where firms—even with going concerns surplus—are usually auctioned off rather than reorganized. See Per Strömberg, , Conflicts of Interest and Market Iliquidity in Bankruptcy Auctions: Theory and Tests, 55 J. Fin. 2641 (2000)CrossRefGoogle Scholar.
17 See Adler, Barry E., A Theory of Corporate Insolvency, 72 N. Y.U. L. Rev. 343 (1997)Google Scholar (“In essence, there are two approaches to corporate insolvency. A system structured according to the ex-post approach.… A system structured under an alternative, ex ante approach, in contrast, would have.…”)
18 Even attempts to apply the social costs minimization framework more rigorously have been incomplete. See, e.g., infra, text accompanying note 233.
19 See, e.g., recent criticism against those advocating proposals which follow the ex-ante paradigm: “The term ‘proposals’ with respect to contractualist writings is accurate because none of these approaches devotes a great deal of attention to theory as such.” Westbrook, Jay Lawrence, The Control of Wealth in Bankruptcy, 82 Tex. L. Rev. 795, 828 (2004)Google Scholar.
20 Thus, this Article intends to overlook the redistributive debate and intentionally adhere to an approach sometimes referred to in literature as an economic or non-traditionalist one. In other words, and for the following reasons, an efficiency rationale will be the only criterion employed to evaluate legal arrangements.
21 See Fletcher, Ian F., Insolvency in Private International Law—National and International Approaches, 4–5 (1999)Google Scholar.
22 One might depict a continuum of collection alternatives, ranging from sweet-talking the debtor, through formal state-supported procedures, and ending at using violence to force debtors to pay.
23 Cf., the implicit controversy between Justice Theodore Or and Justice Mishael Cheshin concerning the relevance of the bankrupt in issues involving the claimants, in CA 4316/90 Haspaka (in liquidation) v. Agra—Eben Yehuda [1995] IsrSC 49(2) 133, 176.
24 American bankruptcy law is an example. See Epstein, David G., Steve H. Nickles, & James J. White, Bankruptcy 737–745 (1993)Google Scholar.
25 Mokal, Rizwaan J., Priority as Pathology: The Pari Passu Myth, 60 Cambridge L. J. 581, 582–583, 585–587 (2001)CrossRefGoogle Scholar.
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30 See supra note 9.
31 See supra note 12.
32 The sale manifests in an exchange of the claimants' pre-bankruptcy claims against the firm with anything of value, including shares in the reorganized firm or deferred or reduced debt entitlements against the reorganizing firm. For the mechanics of current reorganization typical regime see Roe, Mark J., Corporate Reorganization and Bankrupcy—Legal and Financial Materials (2000)Google Scholar; Baird, Douglas G., Elements of Bankruptcy (3rd ed. 2001)Google Scholar.
33 The classic example for such a bargaining process if of course Chapter 11 of the U.S. Bankruptcy Code of 1978. However, similar bankruptcy procedures exist in the U.K., France, Germany, Japan, and of course in Israel.
34 See Article 350(9) of The Companies Law, 1999 SH 2054 which requires for a reorganization proposal to be confirmed that it first be approved by more than 50% of claimants holding together 75% of the claims against the firm. For an economic description of a typical reorganization traits and considerations of the American Chapter 11 see Gilson, Stuart C., John, Kose, & Lang, Larry H.P., Troubled Debt Restructurings, 27 J. Fin. Econ. 315 (1990)CrossRefGoogle Scholar.
35 Judicial intervention is an important component in the administrative model, and is exercised throughout the process of running the collective procedure. See, e.g., Evans, Jocelyn, The Effect of Discretionary Actions on Small Firm's Ability to Survive Chapter 11 Bankruptcy, 9 J. Corp. Fin. 115 (2003)CrossRefGoogle Scholar.
36 Existing bankruptcy laws in different jurisdictions in fact seem to straightforwardly adopt such a policy of redistribution. See Kaiser, Kevin M. J., European Bankruptcy Laws: Implications for Corporations Facing Financial Distress, 25 Fin. Mgmt 67, 72 (1996)Google Scholar.
37 See, e.g., Article 268 of the Companies Ordinance, supra note 5.
38 See Article 354(4) of the Companies Ordinance, id; Article 364(b) of the Bankruptcy Code, supra note 5.
39 See, e.g., CA 2223/99 Krispi v. H. Electronics (1988) Ltd. [2003] IsrSc 57(6) 116.
40 See the British Section 214 of the Insolvency Act 1986.
41 See Articles 373, 374 of the Companies Ordinance, supra note 5.
42 See, e.g., Senbet, Lemma W. & Seward, James K., Financial Distress, Bankruptcy and Reorganization, in 9 Handbooks in Operations Research and Management Science-Finance 921, 947–948 (Jarrow, Robert, Maksimovic, Vojislav & Ziemba, William T. eds., 1995)Google Scholar.
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45 Bebchuk, Lucian Arye & Fried, Jesse M., The Uneasy Case for the Priority of Secured Claims in Bankruptcy, 105 Yale L. J. 857, 911–913 (1996)CrossRefGoogle Scholar; White, James J., Death and Resurrection of Secured Credit, 12 Am. Banker. Inst. L. Rev. 139, 143 (2004)Google Scholar.
46 In the U.S., the financing of firms in Chapter 11 is called “Debtor-In-Possession Financing.”
47 See, e.g., Article 364(b)-(d) of the Bankruptcy Code, supra note 5. For Israeli law see CA 1728/01 Issaschar Bar Hillel v. Bank Ha'poalim [June 23, 2003] (unpublished).
48 A preliminary question is whether a deep structure of bankruptcy law exists at all. There are those who believe that such structure cannot be found, in light of bankruptcy's legislation, which is “the product of social exigency, moral conflict, and political compromise.” See Korobkin, supra note 7, at 543; Carlson, David G., Philosophy in Bankruptcy, 85 Mich L. Rev. 1341, 1355 (1987)CrossRefGoogle Scholar. For a slightly different view see also Ponoroff, Lawrence & Knippenberg, F. Stephen, The Implied Faith Filing Requirement: Sentinel of an Evolving Bankruptcy Policy, 85 NW. U. L. Rev. 919, 962 (1991)Google Scholar, describing bankruptcy law as adhering to an evolving set of purposes.
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50 See Posner, Richard A., The Ethical and Political Basis of the Efficiency Norm In Common Law Adjudication, 8 Hofstra L. Rev. 487, 492–494 (1980)Google Scholar. Consent is a relatively good proxy for utility in a world in which measuring direct utility of individuals—and therefore employing a Pareto efficiency criterion to evaluate institutions and decide on allocation of resources—in infeasible.
51 For the concept of “risk aversion” see Mas-Collel, Andreu, Whinston, Michael D., & Green, Jerry R., Microeconomic Theory 183 (1995)Google Scholar. Basically, the creditors prefer a lower but more certain return of their debt, to a higher uncertain return. For example, creditors prefer receiving $100 in cash to owning a project that offers 1% chance of receiving $10,000.
52 The pre-bankruptcy-law world characterized by Jackson and Baird is actually a fairly precise description of 19th Century American economy. For an historic perspective see Skeel, David A. Jr., Debt's Dominion: A History of Bankruptcy Law in America (2001)Google Scholar.
53 Where a common pool problem exists, people may overuse the pool, to the detriment of everyone. Each person deciding whether to use the pool could rationally calculate that their own benefits exceed their own costs, because others bear most of the costs.
54 Secured creditors are not part of this problem, because the collateral put forward by the debtor in the security-creating contract between the debtor and the secured creditor guarantees the secured creditor's ability to collect his debt without having to worry about other agents' collection efforts. The security contract will of course be honored in bankruptcy.
55 See Mas-Collel et al., supra note 51, at 236.
56 Notice, that when speaking of the possibility of losing going-concern value, one need not assume anymore that creditors are risk averse. See Rasmussen, Robert K., Bankruptcy and the Administrative State, 42 Hastings L. J. 1567, 1573 n.28 (1991)Google Scholar. Rasmussen thus described Jackson and Baird's theory as assuming risk neutrality.
57 Jackson, supra note 27, at 869-870.
58 Perhaps more trivial is the case of a firm with thousands of creditors, the result of a mass tort committed by that firm. Another demonstration for the high transaction costs environment is the fact that for a specific firm conducting business, its creditors' identity keeps on changing.
59 Comparisons in this context are often made to John Rawls' notion of bargaining in the “original position” behind “a veil of ignorance.” For arguments representing the creditors' bargain as non-rawlsian see Mokal, Riz, Consistency Principle in Corporate Insolvency, 49 (PhD Dissertation, available at http://papers.ssrn.com)Google Scholar (last visited October 10, 2006).
60 On the basis of recognizing the common pool problem, the Creditors' Bargain theory was regarded as advancing a normative distributive proposition: pre-bankruptcy entitlements should be impaired in bankruptcy only when necessary to maximize net asset distributions to the creditors as a group, and never to accomplish purely distributional goals. See Scott, Robert E., Review: Through Bankruptcy with the Creditors' Bargain Heuristic, 53 U. Chi. L. Rev. 690, 692 (1986)CrossRefGoogle Scholar.
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62 See Jackson, supra note 27, at 866-867.
63 Block-Lieb, Susan, The Logic and Limits of Contract Bankruptcy, 2001 U. Ill. L. Rev. 503, 511 (2001)Google Scholar.
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65 Carlson, supra note 48, at 1342-1345.
66 See Finch, supra note 6, at 31.
67 Carlson, supra note 48, at 1355.
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72 Mokal, supra note 59, at 73-77.
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75 Bowers states the figure of 7% - 8%. Studies conducted in other countries support this finding. In Finland, distressed firms before 1993 were usually auctioned, and general creditors were found to receive nothing in 96.8% of the cases. See Ravid, S. Abraham & Sundgren, Stefan, The Comparative Efficiency of Small-Firms Bankruptcies: A Study of the US and Finnish Bankruptcy Codes, 27 Fin. Mgmt. 28, 37 (1998)Google Scholar.
76 Picker, Randal C., Security Interests, Misbehavior, and Common Pools, 59 U. Chi. L. Rev. 645 (1992)CrossRefGoogle Scholar. This is a problem of “creditor misbehavior.”
77 Picker's approach differs from that of James Bowers however, since Bowers assumed no common pool problem exists in the first place, while Picker admitted the problem but have pointed to its solution.
78 Korobkin, Donald R., Rehabilitating Values: A Jurisprudence of Bankruptcy, 91 Colum. L. Rev. 717 (1991)CrossRefGoogle Scholar; Korobkin, supra note 7. For yet another attempt see Mokal, supra note 59, at 93-95.
79 This argument has a deontological aspect as well as economic aspect, and some proponents of the contractual approach are denned as neo-libertarians. See Block-Lieb, supra note 63, at 504-505, 512.
80 The common pool problem prevents, by definition, any such contract.
81 Ex-ante contracting is impossible—according to this view—because “a debtor may have hundreds or even thousands of creditors[and t]he contract by which they select a bankruptcy procedure optimal for the particular firm would have to be a contract among all of them, and it would have to be capable of changing over the years as the firm evolved.” See LoPucki, Lynn M., Contract Bankruptcy: A Reply to Alan Schwartz, 109 Yale L. J. 317 (1999)CrossRefGoogle Scholar. See also Baird, A World Without Bankrupcy, supra note 49, at 135.
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83 For example, a collective procedure might be necessary to decide when to initiate a pre-determined automatic restructuring. For a different view, however, contending that bankruptcy in general, and any form of collectivization in particular, would be unnecessary at least in principle, see Adler, Barry E., A World Without Debt, 72 Wash. U. L. Q. 811, 817–818 (1994)Google Scholar. Nevertheless, not only that Adler recognized that complete abolition of the collective procedure is impossible for a variety of reasons; but, more importantly, even Adler does not argue that one might ignore tort creditors, or subordinate them to a contractual scheme they did not consent to.
84 In this respect, contractarians differ from James Bowers' approach.
85 Including such creditors as victims of sexual harassment, victims of unlawful discrimination, antitrust plaintiffs, Government agencies (taxing authorities, environment protection agency, securities authority), etc.
86 See Rasmussen, supra note 2, at 18-19. All scholars writing in this tradition accept the argument that non-consensual creditors should be subject to the legislator's concern, and that the rights awarded to them cannot be impinged upon by neither the firm nor its consensual creditors.
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88 An ipso-facto clause is intended to terminate or change the terms of a loan contract once bankruptcy —rather than simple non-payment—occurs. Ipso-facto clauses are unenforceable according to American bankruptcy law. See Article 365(e)(1) of the Bankruptcy Code, 11 U.S.C. (1994). See also Schwartz, supra note 7, at 1842-1849.
89 See Schwarcz, supra note 87, at 517 (& n. 4), 524-528. The U.S. Courts' approach to bankruptcy waivers has been ambivalent. While direct waivers were excluded, courts approved of partial waivers or indirect waivers. See Tracht, supra note 87, at 314-315. Israeli courts seem to be more decisive in rejecting attempts to contract around bankruptcy.
90 Baird, Douglas G. & Rasmussen, Robert K., The End of Bankruptcy, 55 Stan. L. Rev. 751 (2002)CrossRefGoogle Scholar
91 Another incentive (perhaps even more compelling) to work an informal reorganization might be created if parties realize that a formal bankruptcy procedure carries with it significant costs. Thus, there is an incentive for the parties to avoid the formal bankruptcy procedure and split the costs saved between them. See Haugen, Robert A. & Senbet, Lemma W., Bankruptcy and Agency Costs: Their Significance to the Theory of Optimal Capital Structure, 23 J. Fin. & Quant. Anal. 27, 28–29 (1988)CrossRefGoogle Scholar.
92 Schwartz, supra note 7, at 1807. However, see contradicting findings: Franks, Julian & Sussman, Oren, Resolving Financial Distress by Way of a Contract: An Empirical Study of Small UK Companies (WP) 4 (2000)Google Scholar.
93 See Schwartz, Alan, Contracting About Bankruptcy, 13 J. L. Econ. & Org. 127 (1997)CrossRefGoogle Scholar; See also Schwartz, supra note 7, at 1819-1820.
94 In a private workout the firm attempts to renegotiate with the creditor the terms of the loan it has defaulted on, hoping to avoid bankruptcy. The creditor might be willing to forgo the default, extend the loan's maturity, or supply further credit to the firm. In exchange, the creditor might demand a security interest in the firm's property, or a waiver by the firm of a future bankruptcy protection such as the stay imposed on that creditor should a formal bankruptcy procedure commence.
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97 See LoPucki, Lynn M., Strange Visions in a Strange World: A Reply to Professors Bradley and Rosenzweig, 91 Mich. L. Rev. 79, 101–102 (1992)CrossRefGoogle Scholar, discussing large, publicly-held companies' similar difficulties in formal reorganizations: “Direct negotiations among so many parties are unthinkable.”
98 Giammarino, Ronald M., The Resolution of Financial Distress, 2 Rev. Fin. Stud. 25, 27 (1989)CrossRefGoogle Scholar; Senbet & Seward, supra note 42, at 936-938. See also John, supra note, at 65. The more intangible the firm's assets are, the harder it is for outsiders to evaluate them, thus decreasing chances of a workout being successful.
99 Haugen & Senbet, supra note 91, at 29.
100 See Roe, Mark J., The Voting Prohibition in Bond Workouts, 97 Yale L. J. 232, 238 (1987)CrossRefGoogle Scholar; Haugen & Senbet, supra note 91, at 29-30; Gertner, Robert & Scharfstein, David, A Theory of Workouts and the Effects of Reorganization Law, 46 J. Fin. 1189, 1191 (1991)Google Scholar. Creditors refusing a workout-offer to exchange debt for equity will benefit at the expense of consenting creditors, because after the workout, debt still enjoys priority over equity. Having more resources to pay creditors because of the workout, the firm will pay a greater share of the creditors' debt, thus leaving less to consenting creditors who exchanged debt for equity. This is called a buoying-up effect. See Roe, id. at 236-237. See also John, Kose, Managing Financial Distress and Valuing Distressed Securities: A Survey and a Research Agenda, 22 Fin. Mgmt. 60, 64–65 (1993)Google Scholar.
101 Roe, id at 237-238. Such impediments can fail even a two party deal. For example, creditors might refuse to make concessions due to skepticism in the firm's—to be sure, in the firm's managers'—either murky forecast of the firm's future or exaggerated valuation of the firm's equity, which is offered in exchange to debt forgiveness. See Gilson, Stuart C., Transactions Costs and Capital Structure Choice: Evidence From Financially Distressed Firms, 52 J. Fin. 161, 171–172 (1997)CrossRefGoogle Scholar.
102 Debtors rather than creditors are to be blamed for failed workouts, as they are often too “greedy” trying to exploit their considerable bargaining power and extract a greater share of the workout rents on account of creditors. This is a “hold-up” problem. See Schwartz, supra note 96, at 629-630. See also Note, , Distress-Contingent Convertible Bonds: A Proposed Solution to the Excess Debt problem, 104 Harv. L. Rev. 1857, 1862–1863 (1991)Google Scholar, exploring different debtor hold-up techniques.
103 Ex-post contracting actually resembles an out of court settlement in civil litigation. However, while 90% of private law suits are settled, because the parties wish to avoid litigation costs, the statistics regarding workouts is significantly lower. See Schwartz, supra note 96, at 595.
104 Haviv-Segal, Irit, Corporate Law in Israel—After The New Corporation Act 226–227 (2004) [in Hebrew]Google Scholar.
105 Haugen & Senbet, supra note 91, at 30.
106 For example, waiving a bankruptcy right such as the stay on the eve of insolvency might send a negative signal suggesting the firm is in distress. See Schwarcz, supra note 87, at 533-534.
107 See Bogart, Daniel B., Games Lawyers Play: Waivers of the Automatic Stay in Bankruptcy and the Single Asset Loan Workout, 43 UCLA L. Rev. 1117 (1996)Google Scholar.
108 See also Coffee, John C. Jr., & Klein, William A., Bondholder Coercion: The Problem of Constrained Choice in Debt Tender Offers and Recapitalizations, 58 U. Chi. L. Rev. 1207, 1243 (1991)CrossRefGoogle Scholar. Support for this last proposition can be found in the existence of a special form of workout called “prepackaged bankruptcy”: the firm solicits in advance creditor approval of a reorganization plan—thus saving on a formal procedure costs—and then enters the collective bankruptcy procedure in order to obtain an all-binding court approval of the plan. However, studies indicate that in practice, successful prepackaged workouts are extremely rare. See, e.g., Gilson et al., supra note 34; Rasmussen, Robert K. & Thomas, Randall S., Timing Matters: Promoting Forum Shopping By Insolvent Corporations, 94 NW. U. L. Rev. 1357, 1388 (2000)Google Scholar. Still, prepacks maybe a superior form of reorganization compared to workouts. See Gilson, supra note 101, at 190, reporting pre-packs to be more flexible in reducing excessive leverage.
109 Rasmussen, Robert K., Debtor's Choice: A Menu Approach to Corporate Bankruptcy, 71 Tex. L. Rev. 51 (1992)Google Scholar.
110 One must remember that not all financially distressed firms file for bankruptcy. For example, Mokal reports that in Britain, twelve times as many businesses close down without entering bankruptcy procedures as those which do enter such procedures. See Mokal, supra note 59, at 85 n.23).
111 See Povel, Paul, Optimal “Soft” or “Tough” Bankruptcy Procedures, 15 J. L. Econ. & Org. 659, 661, 679 (1999)Google Scholar.
112 Rasmussen, supra note 2, at 19. Rasmussen advocated his menu approach when compared also to any reform suggestions made. See Rasmussen, supra note 9. These reforms will be debated in Part III.
113 Rasmussen, supra note 70, at 331-334.
114 Hidden in Rasmussen's suggestion is the assumption that “one size does not fit all,” and that different firms require different decision-making routes, incorporating market mechanisms in varying degrees. See Rasmussen & Skeel, Jr., supra note 7, at 110-111. Rasmussen & Skeel remarked that the divergence between categories of firms—for example, closely-held corporations as opposed to publicly-held—has begun to sink in. American bankruptcy law already incorporates a more lenient procedure for closely-held corporations. See also nn. 130-131 in their article.
115 For example, the firm can include in its charter a waiver of the stay imposed on creditors once a collective procedure commences. See Rasmussen & Skeel, Jr., supra note 7, at 100.
116 For example, even large, publicly-held companies often begin their life as small, closely-held corporations. Rasmussen thus offered solutions. See Rasmussen, supra note 109, at 119; Rasmussen & Skeel Jr., supra note 7, at 114-115.
117 LoPucki, Lynn M., Cooperation in International Bankruptcy: A Post-Universalist Approach, 84 Cornell L. Rev. 696, 738–742 (1999)Google Scholar.
118 Haugen & Senbet, supra note 91, at 30. They rely on earlier research conducted in the context of takeovers and exchange offers. Cf. also Detragiache, Enrica, Adverse Selection and the Costs of Financial Distress, 1 J. Corp. Fin. 347, 349 (1995)CrossRefGoogle Scholar.
119 Jensen, Michael C., Takeovers: Their Causes and Consequences, 2 J. Econ. Persp. 21, 31–32 (1988)Google Scholar. This technique involves issuing securities in indivisible “strips,” that is, security holders must hold the same percent of both debt securities and equity.
120 Merton, Robert C., The Financial System and Economic Performance, 4 J. Fin. Serv. Research 263, 283–285 (1990)CrossRefGoogle Scholar.
121 Bradley, Michael & Rosenzweig, Michael, The Untenable Case For Chapter 11, 101 Yale L. J. 1043 (1992)CrossRefGoogle Scholar.
122 Adler, Barry E., Financial and Political Theories of American Corporate Bankruptcy, 45 Stan. L. Rev. 311, 313–315 (1993)CrossRefGoogle Scholar. According to Adler, a contract between different investors of the firm, including of course creditors, is possible even if all investors are not even within temporal proximity. For example, the management of the firm could act as an agent and confer upon investors an irrevocable agreement to forgo, in due time, individual remedies and agree to a collective procedure. The important point in Adler's argument, however, is that the firm should not be allowed to issue classic debt as we know it, i.e. a fixed obligation coupled with an individual collection remedy; and instead the firm would issue a fixed obligation without the collective-action problem-provoking individual remedy. For example, the firm could issue debt that resembles a preferred stock. Naming his solution “Chameleon Equity,” Adler argued that the creditors should be able to receive, in addition to their fixed right against the firm to be repaid with interest, an additional right which comes into force in case of the firm's default on their debt—the right to wipe out the shareholders and take over equity's rights, i.e. the residual right against the firm and the voting rights. The “Chameleon Equity” can be adopted by the firm at its outset, or when issuing debt. See also Adler, id. at 323-333; Adler, Barry E., The Law of Last Resort, 55 Vand. L. Rev. 1661, 1676–1678 (2002)Google Scholar.
123 Note—Distress Contingent, supra note 102, at 1870. The note offered an automatic conversion of debt to equity in case of financial distress was suggested. According to the recommended scheme, new security called “Distress-Contingent Convertibles” would be issued to creditors, and would transform automatically to equity once the market price of the firm's stocks plummets below a certain threshold. The process of conversion would continue, working its way up the creditors' priority chain, until the firm emerges from financial distress. To the extent markets function well, this suggestion might avoid the costs of financial distress.
124 Schwartz, supra note 7.
125 See LoPucki, supra note 81; Schwartz, supra note 82; LoPucki, Lynn M., Bankruptcy Contracting Revised: A Reply to Alan Schwartz's New Model, 109 Yale L. J. 365 (1999)CrossRefGoogle Scholar.
126 Buckley, supra note 82, at 303-304.
127 Schwarcz, supra note 87, at 534-590.
128 Baird & Rasmussen, supra note 90, at 785.
129 Id. at 778-786.
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131 Westbrook, The Control of Wealth in Bankruptcy, id. at 837-838.
132 Id. at 843-852.
133 Id. at 852-855. Westbrook mainly refers to the abandonment of the Administrative Receivership system. Britain has in fact adopted legal rules that resemble the American Chapter 11.
134 Hart, Oliver, Firms, Contracts, and Financial Structure 158 (1995)CrossRefGoogle Scholar. See also Hart, Oliver, Different Approaches to Bankruptcy (NBER Working Paper) 3 (2000)CrossRefGoogle Scholar; Bufford, Samuel L., What Is Right About Bankruptcy Law and What Is Wrong About Its Critics, 72 Wash. U. L. Q. 829, 841–843 (1994)Google Scholar; Tabb, Charles J., The Future of Chapter 11, 44 S. C. L. Rev. 791, 808 (1993)Google Scholar.
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136 Butler, Richard V. & Gilpatrick, Scott M., A Re-Examination of the Purposes and Goals of Bankruptcy, 2 Am. Banker. Inst. L. Rev. 267, 275–276 (1994)Google Scholar.
137 Skeel, Jr., supra note 135, at 482.
138 Longhofer, Stanley D. & Peters, Stephen R., Protectionfor Whom? Creditor Conflict and Bankruptcy, 6 Am. L. & Econ. Rev. 249, 250–251 (2004)Google Scholar.
139 For a list of relevant nonconsensual creditors see supra note 85.
140 An exception is found in Adler's proposal to prefer non-consensual claimants to all other claimants. See Adler, Financial and Political Theories of American Corporate Bankruptcy, supra note 122, at 339-340.
141 Rasmussen, supra note 9, at 1193.
142 Bufford, supra note 134, at 843-844. See also Dybvig, Philip H., Discussion of Improving Bankruptcy Procedure By Phillipe Aghion, Oliver Hart, and John Moore, 72 Wash. U. L.Q. 873, 877 (1994)Google Scholar.
143 Skeel, Jr., supra note 135, at 490-491.
144 Rasmussen, supra note 9, at 1193-1200.
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146 Voices of pro reorganization scholars are being backed up by empirical evidence contradicting some of the beliefs about the efficiency of the auction method. See Per Strömberg, , Conflicts of Interest and Market Illiquidity in Bankruptcy Auctions: Theory and Tests, 55 J. Fin. 2641 (2000)CrossRefGoogle Scholar.
147 See, e.g., Czarnetzky, John M., Time, Uncertainty, and the Law of Corporate Reorganizations, 67 Fordham L. Rev. 2939, 2943 (1999)Google Scholar.
148 See Adams, Charles W., An Economic Justification for Corporate Reorganizations, 20 Hofstra L. Rev. 117, 128–133 (1991)Google Scholar, describing the reasons that might generate an ongoing concern value.
149 See Bebchuk, Lucian Arye, A New Approach to Corporate Reorganizations, 101 Harv. L. Rev. 775, 776 (1988)CrossRefGoogle Scholar.
150 See Baird, Douglas G., Revisiting Auctions In Chapter 11, 36 J. L. & Econ. 633, 636–637 (1993)CrossRefGoogle Scholar, dividing the companies that occupy the bankruptcy docket in the U.S. to three groups: First, small mom-and-pop business with less than $500,000 worth of assets; Second, closely-held firms of substantial size; and third, large, publicly-held firms. See also Baird, Douglas G. & Picker, Randal C., A Simple Noncooperative Bargaining Model of Corporate Reorganizations, 20 J. Legal Stud. 311 (1991)CrossRefGoogle Scholar.
151 Gilson, supra note 101, at 189-190.
152 Although these conditions do not occur systematically. See Haviv-Segal, Irit, The Rights of Securityholders in Corporate Reorganizations, 16 T. A. L. Rev. 263, 275 (1992) [in Hebrew]Google Scholar.
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156 Although there exists little clear-cut evidence about the efficiency in practice of cash auctions. However, for such evidence see Pulvino, Todd, Do Asset fire-Sales Exist?: An Empirical Investigation of Commercial Aircraft Transactions, 53 J. Fin. 939 (1998)CrossRefGoogle Scholar. In recent years contradicting evidence is also being put forward. See Strömberg, supra note 146.
157 Bebchuk, supra note 149. See also Bebchuk, Lucian Arye, Using Options to Divide Value in Corporate Bankruptcy, 44 Eur. Econ. Rev. 829, 833 (2000)CrossRefGoogle Scholar, rehearsing his proposal. Bebchuk approach relates to the Black-Scholes characterization of any corporate security as an option with respect to the firm's assets.
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159 Note, that sometimes scholars depict their proposal not as mandatory, but they actually refer only to the ability of the parties to embrace a different procedure, rather than to the parties' ability to waive the stay on individual collection efforts. See, e.g., Aghion, Philippe, Hart, Oliver, & Moore, John, Improving Bankruptcy Procedure, 72 Wash. U. L. Q. 849, 851 n.6 (1994)Google Scholar.
160 Triantis, George G., The Interplay Between Liquidation and Reorganization in Bankruptcy: The Role of Screens, Gatekeepers, and Guillotines, 16 Int'l Rev. L. & Econ. 101, 104 (1996)CrossRefGoogle Scholar.
161 Id. at 107-108.
162 Id. at 104.
163 Georgakopoulos, Nicholas, Bankruptcy Law for Productivity, 37 Wake Forest L. Rev. 51 (2002)Google Scholar.
164 See, e.g., Georgakopoulos, id. at 53, 67-83.
165 The Austrian School of economics attempts to understand the way social institutions evolve, highlighting the lack of common will to guide them, but only selfish interests pursued by individuals with subjective perceptions about their uncertain future. See also Vanberg, Viktor J., Austrian School of Economics and the Evolution of Institutions, in 1 The New Palgrave Dictionary of Economics and the Law 134 (Newman, Peter ed., 1998)Google Scholar.
166 Czarnetzky, supra note 147, at 2977-2986.
167 Scott, supra note 60, at 692.
168 Jackson, Thomas & Scott, Robert E., On The Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 Va. L. Rev. 155, 162 (1989)CrossRefGoogle Scholar; Jackson, supra note 27, at 867-870.
169 In fact, there is a third rationale supporting an anti-redistributive policy in bankruptcy. Since insolvency is a foreseeable risk, each claimant makes his decision on whether to take a security interest in the debtor's assets after calculating this risk. Thus, secured creditors have paid the debtor in advance in order to be awarded a priority status in case of insolvency, while unsecured creditors have not paid such a fee. See Jackson & Scott, id. at 160-161. Nevertheless, besides the moral strength of this argument, Jackson and Scott do not present any efficiency implication derived from it.
170 For example, the risk that oil prices would suddenly skyrocket in world markets. Jackson & Scott, id. at 164. Scott has raised this argument even earlier. See Scott, supra note 60, at 699-707; Scott, Robert E., A Relational Theory of Secured Financing, 86 Colum. L. Rev. 901 (1986)CrossRefGoogle Scholar.
171 Jackson & Scott, supra note 168, at 166. Jackson and Scott thus assume risk averse creditors. See Rasmussen, supra note 70, at 328.
172 Jackson & Scott, id. at 168.
173 For example, by awarding monetary payments. But as mentioned by the authors, a problem of false claims might arise. See Scott, Robert E., Sharing the Risks of Bankruptcy: Timbers, Ahlers, and Beyond, 1 Colum. Bus. L. Rev. 183, 190 (1989)Google Scholar.
174 Jackson & Scott, supra note 168, at 168. Jackson and Scott assumed that the parties to the Creditors' Bargain are repeat players.
175 Id. at 197.
176 Rasmussen supra note 70, at 329. Diversified creditors might oppose a risk-sharing bargain if offered to them.
177 Adler, supra note 2, at 441, 456.
178 Id. at 488. For example, a fixed percent of secured creditors' share would be given to junior claimants.
179 Id., at 464-479.
180 For example, when the firm is solvent, the prospect of redistribution towards shareholders in case of bankruptcy exacerbates the problem of excessive risk taking by shareholders, playing with other people's money (the creditors' money).
181 Adler, supra note 2, at 479-489. The classic case is that of a closely-held firm run by a owner-manager, whose entire capital (including human capital) is invested in the firm.
182 Butler & Gilpatrick, supra note 136.
183 Id. at 281.
184 Id. at 281.
185 Id. at 281.
186 Id. at 282. Note, that the authors refer to the present value of the contractual relationship with the firm, and not with the sunk costs invested in them.
187 Id. at 282-283.
188 Id. at 283.
189 Id. at 285-286.
190 Id. at 286-287.
191 LoPucki, Lynn M., A Team Production Theory of Bankruptcy Reorganization, 57 Vand. L. Rev. 741 (2004)Google Scholar.
192 Id. at 765-767.
193 In addition to the theories described above, Paul Lewis has offered an explanation for redistribution in corporate reorganizations, which draws on principles of physics. According to Lewis, business reorganizations could be analyzed with principles of thermodynamics, which is the science of energy, particularly the study of transforming heat into mechanical work, or mechanical work into heat. See Lewis, Paul B., Bankruptcy Thermodynamics, 50 Fla. L. Rev. 329 (1998)Google Scholar.
194 For another example, see Mokal, supra note 1.
195 See Mella-Barral, Pierre, The Dynamics of Default and Debt Reorganization, 12 Rev. Fin. Stud. 535 (1999)CrossRefGoogle Scholar. Some explanations were only positive. For example, it has been argued that the freezeout of unsecured creditors occurs because of excessive bargaining power enjoyed by shareholders in the reorganization setting dictated by the administrative model. See Bebchuk, Lucian Arye & Chang, Howard F., Bargaining and the Division of Value in Corporate Reorganization, 8 J. L. Econ. & Org. 253, 255–256 (1992)Google Scholar.
196 Baird, Douglas G. & Rasmussen, Robert K., Control Rights, Priority Rights, and the Conceptual Foundations of Corporate Reorganizations, 87 Va. L. Rev. 921 (2001)CrossRefGoogle Scholar.
197 See, e.g., Rasmussen, supra note 109.
198 The term “contractual approach to bankruptcy” refers to the ex-ante contracting theories and solutions described in Section III(A)(4).
199 See Aghion et al., supra note 158, at 850-851, for an explanation of the problem.
200 Perhaps another difference between the ex-ante and the ex-post paradigms concerns the issue of eve-of-bankruptcy decisions. Scholars focusing on the viewpoint of the firm, the insiders of which probably know first when financial distress is awaiting, discuss along the lines of the ex-ante paradigm. They speak about the coordination problem created when the firm offers a workout to its creditors. Further research in this direction explores the decision to propose a workout rather than file for a formal bankruptcy, as endogenous and as a strategic choice made by the firm or its management. See, e.g., Berkovitch, Elazar & Israel, Ronen, The Bankruptcy Decision and Debt Contract Negotiations, 2 Eur. Fin. Rev. 1 (1998)CrossRefGoogle Scholar. On the other hand, scholars adhering to the creditors' point of view, focus on the common pool problem created when creditors make a run to the firm's assets.
201 For a general discussion of the need to adopt ex-ante efficiency considerations see Bebchuk, Lucian Arye, The Ex-Ante View of the Cathedral, 100 Mich. L. Rev. 601 (2001)CrossRefGoogle Scholar. According to terminology adopted here, ex-ante efficiency considerations becomes relevant once an ex-post paradigm has been adopted.
202 Of course, certain aspects of bankruptcy can be contractual while others need be mandatory. See, e.g., Schwartz, supra note 7, at 1840-1841.
203 Interestingly enough, the theoretical division between an ex-ante and an ex-post point of view corresponds to another division: between a more “economic” oriented approach to bankruptcy and a more “financial” oriented approach.
204 For recent contributions see Westbrook, Jay Lawrence, Bankruptcy Control of the Recovery Process, 12 Am. Banker. Inst. L. Rev. 245 (2004)Google Scholar; Tabb, Charles J., Of Contractarians and Bankruptcy Reform: A Skeptical View, 12 Am. Banker. Inst. L. Rev. 259, 269–270 (2004)Google Scholar.
205 See Warren, Elizabeth, The Untenable Case for Repeal of Chapter 11, 102 Yale L. J. 437, 472–473 (1992)CrossRefGoogle Scholar. Contractarian ignore nonconsensual claimants sometimes without even explaining why, but often by presenting the following reasoning (usually in an article footnote), which reflects their reply to Warren and others like her:
[Nonconsensual] creditors cannot adjust their relationships with a firm to achieve optimal incentives. But the law can, in principle, award such creditors first priority and thus largely force consensual investors to internalize the costs imposed on those who cannot contract. That the law does not maximize tort-claim recovery is not relevant… the prospect of nonconsensual creditors altogether is inapposite to our discussion of how consensual investors may arrange their priorities. Thus, we do not again refer to nonconsensual creditors.
See Adler & Ayres, supra note 158, at 89
206 Block-Lieb, supra note 63, at 516 & n.49.
207 Bebchuk, Lucian Arye & Fried, Jesse M., The Uneasy Case for the Priority of Secured Claims in Bankruptcy, 105 Yale L. J. 857 (1996)CrossRefGoogle Scholar; Bebchuk, Lucian Arye & Fried, Jesse M., The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and A Reply to Critics, 82 Cornell L. Rev. 1279 (1997)Google Scholar. See contra, Adler, Barry E., Secured Credit Contracts, in 3 The New Palgrave Dictionary of Economics and the Law 405 (Newman, Peter ed., 1998)Google Scholar.
208 Cf. Bebchuk & Fried, supra note 207, at 1299-1300.
209 Id. at 1300.
210 See Rasmussen, supra note 2, at 19.
211 Rasmussen, supra note 109, at 82-83.
212 Thus, it is not only the case of redistribution of wealth from nonconsensual (and non-adjusting) to consensual creditors that should trouble lawmakers.
213 See Adler, supra note 17.
214 See Schwartz, A Contract Theory, supra note 7, at 1814-1819:
[I]n the economic view, the ultimate object of bankruptcy law is to help maximize social wealth. This object implies the instrumental goal of minimizing the cost of debt capital. This instrumental goal, in turn, is facilitated by maximizing the creditors' expected return when the firm is insolvent. Therefore, an efficient bankruptcy system maximizes the value that firms have in, and as a consequence of, the system and minimizes the costs of realizing that value…. Now consider a bankruptcy practice of helping communities by reorganizing some firms whose liquidation values exceed their going-concern values. The efficiency objection to this practice is that the wrong set of firms will survive.
215 See, e.g., Cooter, Robert & Ulen, Thomas, Law and Economics 320–322, 342–344 (4th ed. 2004)Google Scholar.
216 See Mautner, Menachem, “The Eternal Triangles of the Law”: Toward a Theory of Priorities in Conflicts Involving Remote Parties, 90 Mich. L. Rev. 95, 100 (1991)CrossRefGoogle Scholar. See also Dagan, Hanoch, The Craft of Property, 91 Cal. L. Rev. 1517, 1544 (2003)CrossRefGoogle Scholar.
217 Mautner, id. at 100.
218 See, e.g., Dagan, supra note 216, at 1545-1546.
219 See Mautner, supra note 216, at 108-109.
220 See, e.g., Cabrillo, Francisco & Depoorter, Ben W. F., Bankruptcy Proceedings, in 5 Encyclopedia of Law and Economics 261, 261–264 (Bouckaert, Boudewijn & De Geest, Gerrit ed., 2000)Google Scholar arguing, on the one hand, that: “[economists analyze bankruptcy law as the legal instrument to achieve the best possible outcome, which implies a minimization of social costs,” and arguing on the other hand that ‘[the major objective of bankruptcy law is supposed to be the (ex-post) maximization of the proceeds… bankruptcy law should maximize the total value of the firm ex-post.”
221 See, e.g., Block-Lieb, supra note 63 (ignoring the costs of preventing financial distress).
222 This categorization was suggested by Ben Branch, , The Costs of Bankruptcy—A Review, 11 Int'l Rev. Fin. Anal. 39, 40 (2002)Google Scholar.
223 For example, loss of market share. One firm's loss is another firm's gain.
224 Jog, Vijay M., Kotlyar, Igor, & Tate, Donald G., Stakeholder Losses in Corporate Restructuring: Evidence From Four Cases in the North American Steel Industry, 22 Fin. Mgmt 185 (1993)CrossRefGoogle Scholar.
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226 Branch, supra note 158, at 58.
227 Id.
228 Id.
229 Id.
230 Jog et al., supra note 224.
231 The first, second, and third categories of costs are relevant for issues concerning the firm's capital structure.
232 The Creditors' Bargain theory seemed to mind about prevention costs, albeit those costs incurred by unsecured creditors alone. See Jackson, The Logic and Limits of and Limits of Bankruptcy Law, supra note 49, at 15-16 & n. 18.
233 See Block-Lieb, supra note 63, at 519-525 (describing the goals of bankruptcy as loss minimization and administrative costs minimization, and briefly noting that [i]t is neither desirable nor achievable to seek to prevent all financial and economic distress.”)
234 An exception is Rasmussen, supra note 70, at 328-334, and Adler, supra note 2.