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James Fenimore Cooper’s first novels form an overarching narrative that attempts to capture the American experience. In The Last of the Mohicans, modeled on the captivity narrative, the civilized European world, bound by formal legal rules, overtakes a wilderness—but not completely, and not always for the better. In The Spy, the protagonist is both a social outcast and a true hero of the American Revolution. In The Pioneers, the central character cannot reconcile himself with the new society taking shape in the United States. Each novel culminates in a trial that turns on the law of war. The novels use the tension between the law of war and the inner moral compass of the hero to understand the fate of the young republic and whether it, too, is destined to suffer the fate of past civilizations, each of which was born, rose, and then fell.

Edward Bellamy’s utopian novel, Looking Backward, was the second most popular American novel of the nineteenth century after Uncle Tom’s Cabin. Bellamy imagines Boston in the year 2000. Equality prevails, while money and law have disappeared. This essay focuses on Bellamy’s account of how literature thrives in this society and shows that it is fundamentally flawed. First, to explain how literature is produced, Bellamy is forced to introduce a form of money into his society after all. Moreover, he has no way to explain why the logic that leads to the introduction of money in order to make literature possible does not apply to producing everything else a well-lived life requires. Second, the literature that Bellamy envisions suggests that his world is no utopia at all. It is instead a dull dystopian place in which neither literature nor art is likely to flourish.

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.

This important volume presents a rich collection of ideas on and insights into the law and economics of contracts. It includes material relevant to a large number of legal fields. Many of the articles are classics that have, over the years, become focal points for continuing debate; others provide an easily accessible account of particular areas. The editor's comprehensive introduction provides an overview of law and economics scholarship in contracts over the past few decades and a portal into an evolving field. The topics include: the economics of contracting; efficient breach and renegotiation; expectation damages and its alternatives; and, default rules and mass markets.

Article 23 of the Common European Sales Law requires sellers to make plain the basic attributes of what they are selling. The seller of goods has a duty to disclose "any information concerning the main characteristics of the goods . . . which [she] has or can be expected to have and which it would be contrary to good faith and fair dealing not to disclose to the other party." The largest effect of the rule may lie not in the value of the information that is communicated, but rather the legal consequences that attach to the information that is disclosed. Article 23 works in conjunction with Articles 69 and 100. These provisions require any description of the goods to serve as a warranty. Thus, the scope of the description that Article 23 requires is coextensive with the warranty that the seller must give with respect to the goods that she is selling. Because legal consequences attach to the description, sellers have reason to say less than they might otherwise. Ironically, CESL might lead to disclosure of less information and less useful information than a regime of caveat emptor.

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.

In both Chrysler and General Motors, the government was, among other things, a large creditor exercising control over its debtor and pushing for a speedy sale of the assets. Together the two cases capture the issues central to large Chapter 11 cases today. The debate over speedy sales of businesses in Chapter 11 is over. Sales are now the norm in large reorganizations. Instead of asking whether there should be sales in bankruptcy, we need to ask how to police various forms of abuse. Three years after the fact, we can begin to draw some conclusions about the reorganizations of Chrysler and General Motors. The government’s use of the bankruptcy laws to inject tens of billions into two of the country’s largest automobile companies had its intended effect. At the start of 2009, General Motors and Chrysler were bleeding to death. 2 Maintaining either business as a going concern required a massive infusion of capital no one in the private market was willing to provide. As a result of the government’s intervention, the basic structure of the American automobile industry was preserved.

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.

Fraudulent transfer law in the United States provides a safety net for corporate creditors. It prohibits insolvent debtors from making transfers or incurring obligations for less than reasonably equivalent value. Moreover, it reaches any transaction that lacks economic substance and that is designed merely to make it hard for creditors to monitor the debtor. The distinctive shape of fraudulent transfer law in the United States is not replicated in the other common law or in civil law jurisdictions. Nevertheless, the functions it performs are likely to be part of any legal regime that protects the rights of creditors and other investors.

When a firm encounters financial distress, there is a significant possibility that, at some point, the firm itself should be shut down and its assets put to better use. But Chapter 11 and indeed all market-mimicking reorganization regimes other than a speedy auction entrust the shutdown decision to a bankruptcy judge who lacks information and expertise, as well as the ability to control the timing of her decisions. Understanding the costs of entrusting the shutdown decision to a bankruptcy judge is central to assessing any law of corporate reorganizations. This article models the shutdown decision as the exercise of a real option. The model suggests that the shutdown decision may loom so large in the early parts of the bankruptcy case that it erases any significant difference between Chapter 11 and many alternative market-mimicking regimes. All these regimes take more time than mandatory auctions and thus increase the cost of taking the shutdown decision away from a market actor. Moreover, the real option itself gives parties an incentive to withhold information. Only a system of mandatory auctions both limits the amount of time the shutdown option resides with an inexpert decision maker and forces insiders to give that decision maker sufficient information to value the option

Section 1129(b) of the Bankruptcy Code gives each class of unsecured claims the right to insist that a reorganization plan be "fair and equitable" and to prevent those junior to them from receiving "property" on account of their old interests. The Bankruptcy Code is often said to embrace a rule of absolute priority, but if it does so, it is only through these restrictions. Hence, the meaning of the words "fair and equitable" and "property" is the terrain on which priority battles are contested. One must choose among different methods of statutory interpretation. One can derive priority rules by examining the judicial evolution of the words "fair and equitable" before they were incorporated into the 1978 Bankruptcy Reform Act. Alternatively, one can look to the word "property," and derive priority rules by trying to define this word. Opinions in the most recent Supreme Court case on this issue, 203 N. LaSalle, exemplify these competing approaches. Using these opinions as its starting point, this paper explores the way in which priority rules in bankruptcy have evolved over time and shows how the absolute priority rule is harder to derive from the statute and hence more contingent, positively and normatively, than commonly supposed.

Lenders have long included savings clauses in loan documents as a way to minimize exposure to fraudulent conveyance at-tacks. This paper suggests that scope of operation of savings clauses is exceeding small. Those cases in which lenders find themselves exposed to fraudulent conveyance liability are only rarely ones in which a savings clause is of much use. Savings clauses are useful to guard against constructive fraudulent conveyance attacks, but only in environments in which actual intent fraudulent conveyances attacks are also possible and for these savings clauses do little good. Even when in environments in which they might protect a lender, uncertainties in how they operate may restrict their usefulness, especially in the context of guarantees.

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.

Bankruptcy scholarship is largely a debate about the comparative merits of a mandatory regime on one hand and bankruptcy by free design on the other. By the standard account, the current law of corporate reorganization is mandatory. Various rules that cannot be avoided ensure that investors’ actions are limited and they do not exercise their rights against specialized assets in a way that destroys the value of a business as a whole. These rules solve collective action problems and reduce the risk of bargaining failure. But there are costs to a mandatory regime. In particular, investors cannot design their rights to achieve optimal monitoring as they could in a system of bankruptcy by free design. In this paper, we suggest that the academic debate has missed a fundamental feature of the law. Bankruptcy operates on legal entities, not on firms in the economic sense. For this reason, sophisticated investors do not face a mandatory regime at all. The ability of investors to place assets in separate entities gives them the ability to create specific withdrawal rights in the event the firm encounters financial distress. There is nothing mandatory about rules like the automatic stay when assets can be partitioned off into legal entities that are beyond the reach of the bankruptcy judge. Thus, by partitioning assets of one economic enterprise into different legal entities, investors can create a tailored bankruptcy regime. In this way, legal entities serve as building blocks that can be combined to create specific and varied but transparent investor withdrawal rights. This regime of tailored bankruptcy has been unrecognized and underappreciated and may be preferable to both mandatory and free design regimes. By allowing a limited number of investors to opt out of bankruptcy in a particular, discrete, and visible way, investors as a group may be able to both limit the risk of bargaining failure and at the same time enjoy the disciplining effect that a withdrawal right brings with it.

The Dodd-Frank financial reform legislation creates an “Orderly Liquidation Authority” (OLA) that shares many features in common with the Bankruptcy Code. This is easy to overlook because the legislation uses a language and employs a decision-maker (both borrowed from bank regulation) that will seem foreign to bankruptcy lawyers. Our task in this essay is to identify the core congruities between OLA and the Code. In doing so, we highlight important differences and assess both their constitutionality and policy objectives. We conclude with a few thoughts on the likelihood that OLA will contribute to market stability.

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

Bankruptcy law does not exist in a vacuum, yet one cannot spend much time reading in the field without noting that few judges or scholars have taken this observation to heart.' Too many seem to think that a bankruptcy proceeding provides, in the main, an essentially unlimited opportunity to do what appears at the moment to be good, just, or fair without regard to the reasons for having a system of bankruptcy laws in the first place.2 A close study of the present controversy over the adequate protection of secured creditors illustrates the shallowness of much of the recent discussion of bankruptcy law and the consequences of a failure to

The warranty that comes with your laptop computer is one of its many product attributes. Th lap op has a screen of a particular size. Its microcessors work at a particular speed, and the battery lasts given amount of time bet een recharging. The hard drive has a certain capacity and ean time to failur . There is a instruction manual, online technical support (or lack thereof), and software. Then there are the warranties that the seller ma es (o does not make) that ar also part of bundle. Just as I know the size of the screen, but not ing about the speed of the microprocessor, I know about some of the warran y terms that come with the computer and remain wholly ignoran of others. With respect t s me product attributes, the seller will give buyers a choice of op ions. For a higher price, I can buy a computer with a bigger screen. But with respect to others, th re is o choice. A seller may offer laptop comp ers with only ne type of battery. So too with the attribut s that are legal terms. A seller may give me a choice: I can buy a service con r ct that xtends the warranty. Other ti s, there will be no choic , as whe the seller specifies that Delaware law governs any contract dispute between us. Similarly, some product attributes are readily apparent to everyone, such as the size of th screen and the availability of an expensive service contract. Other pr duct att ibutes, like the speed of the microprocessor and the fo um selection clause, are apparen only to thos who s end time and nergy looking for them. T say that a product comes with boilerplate is to say that one of its attributes, long with many others, is pa ti lly hidden and is one over which here i no choice on the part of the buyer. But why should any of this raise sp cial concern? The legisla ure can regulate micropr cessor speeds or not. So too with boilerplate. But why is boil rplate any different? Legal sch lars have long assumed hat standardized con ract terms i fine print e

This paper shows that the dynamics of Chapter 11 turn dramatically on the size of the business. The vast majority of the assets administered in Chapter 11 are concentrated in a handful of large cases, but most of the businesses in Chapter 11 are small, and the smaller the business, the smaller the distribution to general unsecured creditors. For businesses with assets above $5 million, unsecured creditors typically collect half of what they are owed. Where the business's assets are worth less than $200,000, ordinary general creditors usually recover nothing. In the typical small Chapter 11 case, the tax collector is the central figure. In small business bankruptcies, priority tax liabilities are the largest unsecured liabilities of the business. Tax obligations are entitled to priority and are obligations of both the corporation and those who run it. Given the large shadow tax claims cast over small Chapter 11 reorganizations, accounts of small Chapter 11 must focus squarely on them.

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.

In a Chapter 11 reorganization, senior creditors are entitled to insist upon being paid in full before anyone junior to them receives anything. In practice, however, departures from such “absolute priority” are commonplace. Explaining these deviations has been a central preoccupation of reorganization scholars for decades. By the standard law-andeconomics account, deviations from absolute priority arise because well-positioned insiders take advantage of cumbersome procedures and inept judges. In this paper, we suggest that a far simpler and more benign force dominates bargaining in reorganization cases. “Deviations” from absolute priority are inevitable even in a world completely committed to respecting priority as long as asset values are uncertain. Uncertainty accompanies any valuation procedure. Bargaining in corporate reorganizations takes place in the shadow of this uncertainty, and standard models of litigation and settlement show that valuation uncertainty alone can explain many of the departures from absolute priority we see in large corporate reorganizations. Even where rational and well-informed senior investors expect the absolute priority rule to be strictly enforced, they must account for the uncertainty associated with any valuation. The possibility of an unexpectedly high appraisal will cause them to offer apparently out-of-the-money junior investors contingent interests in the reorganized business. The debate over absolute priority, the central principle of modern corporate reorganization law, has been misdirected for decades. It has failed to recognize that a substantive rule of absolute priority does not lead to an absolute priority outcome. A coherent account of absolute priority must incorporate relative priority. It must take account of the option value implicit in the junior investors’ right to insist on an appraisal. This paper offers an explanation for one of the most important and persistent puzzles in corporate reorganizations. In a Chapter 11 reorganization, senior creditors are, in principle, entitled to insist upon “absolute priority.” They have a right to be paid in full before junior investors receive anything. This “fixed principle” has been the foundation of our corporate reorganization laws for decades. In practice, however, departures from ab

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

In The End of Bankruptcy we detailed the forces that have rendered obsolete traditional conceptions of corporate reorganization. In a response to our article, Lynn LoPucki asserts that our paper lacked empirical foundation. In this response, we draw on LoPucki's data set of the reorganization of large, publicly held entities to show the robustness of our claims, both empirical and theoretical. Looking in detail at the firms whose Chapter 11 cases ended in 2002, most of which concluded after we completed our original piece, we find that in over 80% of the cases the assets of the firm were either sold or the bankruptcy proceeding put in place a restructuring plan agreed to before bankruptcy was filed. The remaining firms evince little in the way of going-concern value. Moreover, equityholders are nearly always wiped out, and the board of directors is usually replaced. Today's bankruptcy practice reveals creditors, particularly the senior lenders, in control. They use their powers to remove managers in whom they have lost confidence, replace the board of directors, put the corporation on the auction block and terminate the interest of equityholders. This paper provides further evidence that issues of control rather than priority dominate modern reorganization practice.

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.

The law of corporate reorganizations is conventionally justified as a way to preserve a firm's going-concern value: Specialized assets in a particular firm are worth more together in that firm than anywhere else. This paper shows that this notion is mistaken. Its flaw is that it lacks a well-developed understanding of the nature of a firm. Initially, it is easy to confuse size with specialization and overstate the extent to which assets are dedicated to a particular enterprise. Even when such dedicated assets exist, they often do not need to stay in the same firm. As Coase taught us, as the costs of contracting go down, so too does the value of keeping assets in a particular firm. But even when specialized assets must be kept inside a firm, two other forces limit the need for a traditional law of corporate reorganizations. Capital structures are increasingly designed with financial distress in mind. For these firms, control rights shift from one set of investors to another as the firm encounters difficulty. Such firms either never file for bankruptcy, or, if they do, it is only to vindicate the pre-determined allocation of control rights. Even where control rights are not sensibly allocated, a quick sale of the firm restores order. When firms can be sold as going concerns, the need for the traditional negotiated plan of reorganization disappears. The vast majority of firms in financial distress never enter bankruptcy. Today the Chapter 11 of a large firm is an auction of the assets, followed by litigation over the proceeds. To the extent we understand the law of corporate reorganizations as providing a collective forum in which creditors and their common debtor fashion a future for a firm that would otherwise be torn apart by financial distress, we may safely conclude that its era has come to an end.

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.

Until the firm is sold or a plan of reorganization is confirmed, Chapter 11 entrusts a judge with the decision of whether to keep a firm as a going concern or to shut it down. The judge revisits this liquidation decision multiple times. The key is to make the correct decision at the optimal time. This paper models this decision as the exercise of a real option and shows that it depends critically on particular types of information about the firm and its industry. Liquidations take place too soon if we merely compare the liquidation value of the assets with the expected earnings of the firm. Moreover, existing law undermines effective decisionmaking. Even though the judge makes the liquidation decision, a number of rules prevent the judge from controlling the timing of the decision, and those who do control it lack the incentive to ensure it is made at the optimal time. The paper introduces a framework that can illuminate many areas of law, such as summary judgment motions, parole, and agency rule making.

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

Congress's exercise of the bankruptcy power was far from inevitable. Indeed, for much of the nineteenth century, there was no federal bankruptcy statute at all. That we might live in a world without bankruptcy law or any similar collective procedure is not as far-fetched or as ridiculous as it might seem at first glance to those of us who are immersed in its intricacies every day. This article will take problems that have been the focus of much of the recent debate in bankruptcy law and ask how these issues would be approached if no bankruptcy law existed.

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.