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Many current bankruptcy debates—from critical vendor orders to the Supreme Court’s decision last year in Czyzewski v. Jevic Holding Corporation—begin with bankruptcy’s distributional rules and questions about how much discretion a judge should have in applying them. It is a mistake, however, to focus on distributional questions without first identifying the bankruptcy partition and ensuring it is properly policed. What appear to be distributional disputes are more often debates about the demarcation of the bankruptcy partition and the best way to police it. Once the dynamics of establishing and policing the bankruptcy partition are taken into account, there is little room for departures from bankruptcy’s distributional rules. There might be a few rare cases in which maximizing the value of the estate requires it, but these inhabit an exceedingly narrow domain so small and so hard to navigate that they are sensibly handled with a per se rule that prohibits them.

In RadLAX Gateway Hotel, LLC v Amalgamated Bank, the Supreme Court’s statutory interpretation focuses on an emerging theme of its bankruptcy jurisprudence: the proper domain of the bankruptcy judge. While one might expect the Court to approach that question of domain as it has for administrative agencies, that is not the approach taken. This article explores the Court’s approach to bankruptcy’s domain. In doing so, we connect three principal strands of the Court’s bankruptcy jurisprudence. The first strand, embodied in Butner v United States, centers on the idea that the bankruptcy forum must vindicate nonbankruptcy rights. The second, most recently addressed in Stern v Marshall, focuses on the limits of bankruptcy judges in deciding and issuing final judgment on the issues before them. Bankruptcy judges must limit themselves to deciding issues central to the administration of the bankruptcy process. RadLAX is the continuation of a third strand that makes it plain that the Court reads ambiguous provisions of the Bankruptcy Code to narrow the range of decisions over which the bankruptcy judge may exercise her discretion — at least when the exercise of that discretion might impact nonbankruptcy rights. The resulting bankruptcy jurisprudence is in stark contrast with the Court’s approach in administrative law. This paper attempts to make sense of this state of affairs and connect it with the realities of bankruptcy practice today.

Over the last few years, reorganization practice has undergone a massive change. A new device — the restructuring support agreement — has transformed Chapter 11 negotiations. This puts reorganization law at a crossroads. Chapter 11’s commitment to a nonmarket restructuring with a rigid priority system requires bankruptcy judges to police bargaining in bankruptcy, but the Bankruptcy Code gives them relatively little explicit guidance about how they should adjust when a new practice alters the bargaining environment. This essay shows that long-established principles of bankruptcy should lead judges to focus not on how these agreements affect what each party receives, but rather on how they can interfere with the flow of information needed to apply Chapter 11’s substantive rules.

A meeting of international finance and insolvency experts was held on November 2, 2013 at the Annenberg House in Santa Monica, California. The meeting was co-hosted by the USC Law School and the Annenberg Retreat at Sunnylands. The goal was to solicit the views of experts on the implications of the IMF’s April 26, 2013 paper captioned “Sovereign Debt Restructuring -- Recent Developments and Implications for the Fund’s Legal and Policy Framework”. The April 26 paper may signal a shift in IMF policies in the area of sovereign debt workouts. Although the Expert Group discussed a number of the ideas contained in the April 26 paper, attention focused on paragraph 32 of that paper. That paragraph states in relevant part: “There may be a case for exploring additional ways to limit the risk that Fund resources will simply be used to bail out private creditors. For example, a presumption could be established that some form of a creditor bail-in measure would be implemented as a condition for Fund lending in cases where, although no clear-cut determination has been made that the debt is unsustainable, the member has lost market access and prospects for regaining market access are uncertain.”This Report summarizes the consensus views of the Expert Group on the practical implications of the suggestions contained in paragraph 32 of the April 26 paper.

WHEN Eastern Airlines filed its bankruptcy petition in March 1989, its future was bleak. For decades, it had systematically invested in the wrong airplanes, beginning with a commitment to propeller aircraft in the late 1950s. Its cost structure was higher than its competitors. It had failed to find a viable market niche in a deregulated environment, an environment in which the hub-and-spoke system brought significant economies of scale. Eastern had already sold its most valuable assets, such as its shuttle between Washington, D.C., and New York, and its entire work force was on strike. Moreover, its service was poorly regarded, and it had little goodwill with the general public. If Chapter 11 mandated that the assets of a publicly traded firm be swiftly sold, however, someone would have bought Eastern's airplanes and landing gates for an amount sufficient to provide a dividend to the preferred stockholders. Instead, the managers of Eastern and later a court-appointed trustee used the umbrella of bankruptcy law to try to keep the airline intact as a going concern. Over the next two years, Eastern lost over a billion dollars. The airline began liquidation only when its assets were insufficient to pay the administrative expenses, such as lawyers' fees, involved in running the bankruptcy case.1 Financial News Network (FNN) entered Chapter 11 in early 1991. Shortly afterward, a joint venture between Dow Jones and Group W offered to pay $90 million for FNN's assets. A unit of NBC countered with a bid of $115 million. The bankruptcy court ordered an auction of the firm's assets. NBC eventually won with a bid of $146 million and

American bankruptcy law provides creditors of a corporate debtor with an alternative way of sorting out their claims to the debtor’s assets. Bankruptcy differs from ordinary avenues of debt collection in that all claims against a common debtor are determined at one time and in one place. Creditors are forced to give up their right to seek repayment on their own. Each creditor must stay its hand while decisions are made about what to do with the firm’s assets and how to recognize the different claims against it. Some creditors who might have been paid in full if bankruptcy had not intervened are worse off. Others, who might have been unaware of the debtor’s financial straits, may be better off. The premise of American bankruptcy law is that sometimes the creditors and others who contributed capital to the firm are better off as a group than they would be if this avenue of debt collection did not exist and creditors had to depend upon their individual remedies under nonbankruptcy law.’ This premise-that the collective interests of the group can be put at risk when individual creditors exercise their rights-brings with it a problem that other legal regimes do not face. Ordinarily, one can depend upon the party that benefits from a particular legal rule to invoke it. Bankruptcy is different. The beneficiaries of bankruptcy law are the creditors as a whole, not individual creditors within the group.? One wants a bankruptcy proceeding to begin when it is in the collective interest of the group, but one must still depend upon someone to initiate it. One must somehow ensure that when a bankruptcy proceeding is in the collective interest of the creditors, it is also in someone’s individual interest as well. Existing bankruptcy law allows creditors to trigger the collective proceeding when three of them with unsecured claims totaling more than $5,000 join in a

WHEN the managers of RJR-Nabisco announced that they wanted to take the company private, the value of its bonds dropped by $500 million in a single day. The manager's plan, as in most buyouts, called for dramatically increasing the debt-equity ratio of the firm. Instead of holding a senior interest in a firm that had assets greatly in excess of its liabilities, the bondholders found that they would be left with an interest in a firm with the same assets but encumbered with much more debt. They would have claims against a firm with a greater risk of becoming insolvent and of being unable to pay its creditors in full. The same promise from a riskier debtor is worth less-in this case, it might seem, $500 million less. Transactions in which a firm is sold and becomes substantially more leveraged were commonplace in the late 1980s. They accounted for over 20 percent of takeover activity in the United States and totaled almost $50 billion a year.' The legal rights of prebuyout creditors will be a focal point of litigation in any of these transactions that unravel in the 1990s, as some already have and more inevitably will. Before they lend, creditors can insist on a variety of event risk covenants such as "poison puts" that allow them to accelerate the firm's obligations to repay in the event that the firm dramatically changes its capital structure. Poison puts and other clauses, however, aid only those who have them. Those parties who do not, like parties to any other agreement, must look to the background legal rules to flesh out their obligations. The rules governing the rights of the bondholders fall within

THE Prisoner's Dilemma casts a shadow over all who want to trade. Two parties may desire that a transaction go forward, but each may fear that the other will not perform. The parties may rationally decide either not to make promises or not to keep them, even though each would be better off if both made promises and kept them. Take the simplest case. I have a book that I want to sell for $10; you would like to buy it for $10.' The trade makes each of us better off, but we have conflicting schedules and can never be in the same place at the same time. I must part with the book before I know that you have parted with the $10. Similarly, you must part with the $10 before you know that I have parted with the book. We may not have an incentive to keep our promises. When I decide whether to send the book, you have already decided whether to send the cash, but I do not know your decision. I look at the two possibilities. First, I examine the course I should take if you have already decided to break your promise. In this event, I should keep the book. I do not want to be left without either the book or the $10. I then determine my best course if you have already decided to sent the $10. Here, too, I should keep the book. I am better off with both the book and the $10 than I am with just the $10. Whether I part with the book has nothing to do with whether you part with the $10. Keeping the book is the optimal strategy

Agency costs dominate academic thinking about corporate governance. The central challenge is to devise legal rules to align the interests of the managers (the agents) with those of the shareholders (the principals). This preoccupation is misplaced. Whether it is finding a baby-sitter or a dean, the challenge of hiring the right person dwarfs the challenge of aligning that person's incentives. The central task for corporate governance - its Prime Directive - is to ensure that the right person is running the business. In this essay, we suggest that the challenge of aligning the managers' incentives has been drastically overstated and the way in which legal rules affect hiring (and firing) decisions has been too often ignored. Putting the emphasis on agency costs may lead to rules that slight what matters most. The current preoccupation with executive compensation runs the risk of inducing the board to worry more about the details of the employment contract rather than selecting the best person in the first instance. More important, the law can play an important role ensuring bad managers are fired. Once hired, all managers need to be mentored, monitored and, when necessary, replaced. There is little to suggest that a single entity is well-situated to perform all three. There is tension between the roles of confidant and policeman. Here, debt contracts play a crucial and largely neglected role. Covenants in debt contracts can insure that underperforming managers are called to task. Private debt holders' role in monitoring a business and ensuring that underperforming managers are replaced may be as important as the market for corporate control.

Chapter 11 is thought to preserve the going-concern surplus of a financially distressed business-the extra value that its assets possess in their current configuration. Financial distress leads to conflicts among creditors that can lead to inefficient liquidation of a business with going-concern surplus. Chapter 11 avoids this by providing the business with a way of fashioning a new capital structure. This account of Chapter 11 fails to capture what is happening in the typical case. The typical Chapter 11 debtor is a small corporation whose assets are not specialized and rarely worth enough to pay tax claims. There is no business worth saving and there are no assets to fight over. The focal point is not the business, but the person who runs it. She is a serial entrepreneur, searching for the business that best matches her skills. For the vast majority of cases, then, Chapter 11 is best seen through the lens of labor economics not corporate finance. Chapter 11 offers the entrepreneur increased liquidity as well as a forum for renegotiating debts (such as unpaid withholding taxes) for which she as well as the corporation are liable. But Chapter 11 offers these benefits only to entrepreneurs who remain with their existing businesses. This lock-in effect is qualitatively no different from the one commonly associated with rent control. These effects, as well as the costs the process imposes on third parties, should be the focus of any assessment of how well Chapter 11 works.

International News Service v. Associated Press held that a wire service had the right to prevent rivals from copying its bulletin. It established the doctrine of misappropriation and justified it on the ground that someone that invests in gathering and disseminating information is entitled to the fruits of its labor. The Supreme Court, however, missed the strong anti-competitive undercurrents in the case. INS and AP were not conventional rivals. The most important AP member (and the person who stood to gain the most from AP's anticompetitive activities) - also owned INS. Far from being about first principles, the case illustrates how common-law reasoning quickly loses its moorings in the absence of a bona fide dispute. The long-recognized failing of the case - that it sets out a principle with no obvious boundaries - was deeply embedded in the facts and illustrates, even in this iconic environment, that the domains of intellectual property and antitrust cannot be easily separated. Portions of this paper are adapted from a chapter to be published in JANE C. GINSBURG AND ROCHELLE C. DREYFUSS, INTELLECTUAL PROPERTY STORIES (forthcoming, Foundation Press, 2005).

This paper revisits two examples of vertical integration in the early automobile industry: GM and Fisher Body on the one hand and Ford Motor and Keim Mills on the other. The paper shows that asset-specific investment and the fear of hold-up played at best a negligible role. What mattered in the case of GM and Fisher Body was close coordination of assembly operations. In the case of Ford Motor and Keim Mills, vertical integration was an important step (but only one of many) that Henry Ford took to ensure that his production team remained intact. In the case of GM and Fisher Body, GM’s decision to coordinate the assembly of Chevrolet components, including car bodies, at multiple locations proved crucial. Shipping complete car bodies and storing them at each Chevrolet assembly plant was expensive and unwieldy. Instead, Fisher Body shipped sheets of stamped metal to assembly plants built at GM’s expense adjacent to each new Chevrolet assembly plant. At these plants, Fisher Body coordinated the welding of the sheets into car bodies with Chevrolet’s production team. The close coordination of these plant level operations made the activities of Fisher and Chevrolet indistinguishable from most activity that takes place inside a conventional firm. These production efficiencies made vertical integration sensible, but the date of formal legal integration came late and was not itself of great moment. The success of the Model T depended crucially on Henry Ford’s ability to keep his production team together. Many team members worked initially for Keim Mills, and Keim became a subsidiary of Ford. But, as in the case of GM and Fisher Body, the formal legal event marking vertical integration of Ford and Keim did not coincide with the important economic events. The members of the Keim Mills team designed the Model T well before vertical integration, and their later contributions came only when they moved from Buffalo to Detroit, something that was independent of and took place after vertical integration. The value of the Model T depended crucially on the members of the team Henry Ford put together, but relatively little on whether, as a legal matter, the Ford Motor Company employed them. Retracing famous journeys is a time-honored and worthy tradition. Great explorers necessarily leave some terrain unsurveyed when they visit new territory for the first time. As we mark the Law School’s centennial, there is one journey especially worthy of our attention. When he was a 20-year-old undergraduate, Ronald Coase spent the better part of a year visiting the great industrial plants in the United States. Out of this research emerged The Nature of the Firm, The Problem of Social Cost, and much of modern law and economics. Coase solved many mysteries that ∗ Harry A. Bigelow Distinguished Service Professor, University of Chicago. I thank Richard Brooks, R.H. Coase, Keith Gill, Mark Haywood, Michael Hilgers, and the staff at the Museum of Science and Industry for their help. The ideas in this paper grow out of my long, fruitful, and continuing collaboration with my colleague Robert Rasmussen, to whom I am, as always, most indebted. For its support of this and many other projects, I am grateful to the John M. Olin Foundation. 1 R. H. Coase, The Nature of the Firm, 4 Economica 386 (1937). 2 R. H. Coase, The Problem of Social Cost, 3 J L & Econ 1 (1960). year, but, happily for the rest of us, not all of them. One of the most intriguing arises out of the relationship between General Motors and Fisher Body, one of its principal suppliers. Coase was primarily interested in what drove managers to produce something inside a firm rather than acquire it in the marketplace. GM’s acquisition of Fisher Body was therefore a subject of particular interest to him. Fisher Body began as an independent firm that supplied GM with all of its closed car bodies. In 1926, GM acquired Fisher and thereafter produced all of its car bodies internally, along with the two other major components of their cars (the chassis and drive train), both of which it made largely in house. Hence, while interviewing GM executives in 1932, Coase naturally asked about the firm’s acquisition of Fisher Body. They told him that the need to build body plants next to GM’s assembly plants drove the decision. The conversation, however, seems to have stopped here. Coase did not learn why they wanted body plants next to assembly plants or why doing this required the vertical integration of the two firms. As it happened, other bits of evidence led him to a new understanding of the nature of the firm, and this line of inquiry

At the time that Enron filed for bankruptcy, it had substantial assets, thousands of creditors, an opaque capital structure, and more than a whiff of fraud. By the traditional account, Enron is a prototypical example of a firm with problems that a law of corporate reorganizations is designed to solve. Like the 19th century receiverships of the great railroads, the reorganization of Enron could have allowed creditors and others to negotiate with each other and find a way to preserve the value of the firm as a going concern at the same time misdeeds are uncovered and losses are allocated among the different players. Negotiations aimed at preserving Enron's value as a going concern never took place, however. As is increasingly the case in large Chapter 11s, Enron's assets were sold quickly, most within a few weeks or months of the filing. The decision as to how to deploy Enron's assets lay not in the court but in the new owners. After selling the assets, the bankruptcy court quickly turned to what courts do best - sorting out complex and perhaps conflicting legal entitlements. This pattern of a prompt sale followed by litigation over the distribution of the proceeds reflects a dramatic change in large firm bankruptcy practice. It suggests that we should no longer think of Chapter 11 as a collective forum in which the interested parties gather to bargain over the fate of the firm.

Perhaps within the next decade, the technology of "reanimation" will allow film producers to cast any actor, living or dead, in any role. In this respect, there will soon be no difference between Humphrey Bogart and Mickey Mouse. Soon a sequel to the Maltese Falcon can star Bogart as he was in 1940. The legal rules that will operate in this environment are still being shaped. The discussion to date has centered on the need to ensure that intellectual property rights are shaped in such a way that preserves a large public domain. Such rights should not limit the ability of new artists and producers to create new work. This paper suggests that the existing debate misses the mark. Legal rules ought to take account of the way in which our cultural icons are both finite and privately owned. They need to be shepherded. Rights of publicity and other intellectual property rights are like any other scarce resource. We count on those who own them to manage them well. As with every property regime, what matters most is for rights to be defined clearly and their transfer easy.

Elizabeth Warren has presented a view of bankruptcy that, while rarely as well articulated, is widely shared. The virtues of Warren's paper, like those of the rest of her work, are easy to identify. Her style is sharp and penetrating. She writes with insight and wit, and she demands that all analysis be held against the light of empirical data-the brighter the better. Warren has put forward a critique of the work I have done with Thomas Jackson that merits a response both because of its own strengths and because it captures misgivings other traditional bankruptcy scholars have shared about our work. There is much in Warren's view of bankruptcy policy that I admire and agree with. Indeed, to understand our disagreement, it is necessary first to recognize the extent of our common ground. Warren and I agree that, in the main, existing bankruptcy law is consistent with sound bankruptcy policy. The trustee should have the powers of a hypothetical lien creditor; the trustee should be able to set aside voidable preferences and reject executory contracts; creditors (including secured creditors) should be stayed from asserting their substantive claims after the filing of a bankruptcy petition. Warren and I also agree that victims of nonmanifested torts should have their rights against the firm recognized in bankruptcy. On what in my view is a different front, Warren and I also think existing laws do not adequately protect many, such as workers, who are affected when a firm fails. Warren and I both have doubts about whether secured credit brings benefits that outweigh its rather obvious costs. I am more inclined than Warren to think that the institution is one worth having, but we agree that the issue is not clear. Warren's attack on the theory of bankruptcy that I have developed with Thomas Jackson goes to methodology. Jackson and I claim that we can isolate bankruptcy issues (such as whether the

Traditional approaches to corporate governance focus exclusively on shareholders and neglect the large and growing role of creditors. Today’s creditors craft elaborate covenants that give them a large role in the affairs of the corporation. While they do not exercise their rights in sunny times when things are going well, these are not the times that matter most. When a business stumbles, creditors typically enjoy powers that public shareholders never have, such as the ability to replace the managers and install those more to their liking. Creditors exercise these powers even when the business is far from being insolvent and continues to pay its debts. Bankruptcy provides no sanctuary, as senior lenders ensure that their powers either go unchecked or are enhanced. The powers that modern lenders wield rival in importance the hostile takeover in disciplining poor or underperforming managers. This Essay explores these powers and begins the task of integrating this lever of corporate governance into the modern account of corporate law.

A BANKRUPTCY proceeding is a day of reckoning for all parties with ownership interests in an insolvent firm. Ownership interests are valued, the assets are sold, and the proceeds are divided among the owners. Bankruptcy proceedings take one of two forms, depending on whether ownership rights to the assets are sold on the open market to one or more third parties or whether ownership rights to the assets are transferred to the old owners in return for the cancellation of their prebankruptcy entitlements. The first kind of bankruptcy proceeding, a liquidation, is governed by Chapter 7 of the Bankruptcy Code; the second kind, a reorganization, is governed by Chapter 11. A bankruptcy proceeding always involves a sale of assets followed by a division of the proceeds among the existing owners. In a Chapter 7 proceeding the sale is real; in a Chapter 11 proceeding the sale is hypothetical.' An analysis of the law of corporate reorganizations should properly begin with a discussion of whether all those with rights to the assets of a firm (be they bondholders, stockholders, or workers) would bargain for one if they had the opportunity to negotiate at the time of their initial investment.2 Properly understood, a bankruptcy proceeding itself can be

IN 1600,' a Hampshire farmer named Pierce conveyed his sheep to his creditor Twyne to satisfy a preexisting debt. Twyne, however, allowed Pierce to remain in possession of the sheep, to shear them, and to mark them as his own. When a sheriff tried to seize the sheep under a writ of execution on behalf of another creditor, Twyne forcibly resisted, maintaining that the sheep were his. Edward Coke, then attorney general, brought a criminal action against Twyne in the Star Chamber. That court held that because the transfer to Twyne was secret it was fraudulent and therefore void.2 Few principles of Anglo-American law have been so long-lived and so widely held, as the one in Twyne's Case.3 The principle that secret inter

defaults, he will require a higher interest rate from the debtor.' In order to reduce this uncertainty, and thereby to facilitate secured credit, the Uniform Commerical Code normally requires a creditor either to take possession of the property or to make a public filing, if he wants a security interest in his debtor's property that is effective against competing property claimants.2 This requirement, coupled with a simple "first-in-time" rule, enables a creditor who wants to lend money on a secured basis to assume that, if the property in question is in the debtor's possession and if no other creditors have filed a financing statement, his claim to that property can have priority over those of other existing and future creditors. The Code assumes that this benefit outweighs the costs imposed upon secured parties by the requirement that they take possession or file.3