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ABSTRACT
This Article challenges the persistent claim that Chapter 11's increasing utilization of market mechanisms will help facilitate economically efficient resolutions of corporate financial distress. Using two recent case studies, I show that, in fact, these mechanisms are used by stakeholders with existing market power to take control of the restructuring process and extract rents at the expense of other constituents: creditors, equity holders, and-in the case of companies that receive governmental bailouts-taxpayers. These distortionary effects are obscured by a dominant, neoclassical legal paradigm that ignores institutional and political dynamics. I advance a new explanatory model that draws upon modern social science to capture these otherwise-unexplored forces. This new model offers a template for law reform efforts aimed at improving market equality and allocating resources in commercial restructurings more rationally, contributing to an overall increase in social welfare.
I. INTRODUCTION
In the wake of the Great Recession, many U.S. companies defaulted on their loans, necessitating the restructuring of substantial corporate debt via Chapter 11 bankruptcy.1 Frustrated by the outcomes of some recent high-profile cases,2 many observers think that the prevailing legal process for restructuring bankrupt companies is broken and that Chapter 11 ought to be overhauled.3 To this end, the American Bankruptcy Institute recently convened the Commission to Study the Reform of Chapter 11, laying the groundwork for a comprehensive rewriting of Chapter 11.4
Almost all critics of the extant legal construct cite the need for a more efficient and equitable commercial bankruptcy process.5 But they disagree as to how the existing framework ought to be changed. Many industry leaders celebrate Chapter 11's increasing engagement of market mechanisms, and argue that modern reform efforts should focus on further reducing judicial and statutory interference with the market's own verdict.6 To be sure, this is not a novel view as there is a rich academic tradition of recommending market-based reforms to Chapter 11.7 Proposals of this sort are largely in reaction to the drafters' early optimistic view that party consensus-as opposed to judicial edict-would yield efficient restructuring outcomes in Chapter 11 cases.8 Over time, observers leveled the damning critique that, in practice, certain self-interested stakeholders controlled negotiations and crowded out dissent.9 To avoid these problems, critics urged greater integration of market mechanisms-such as the sale of...