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120 Colum. L. Rev. 1709 (2020)
Chapter 11's Renegotiation Framework and the Purpose of Corporate Bankruptcy

handle is hein.journals/clr120 and id is 1777 raw text is: COLUMBIA LAW REVIEW VOL. 120 NOVEMBER 2020 NO. 7 ARTICLES CHAPTER il'S RENEGOTIATION FRAMEWORK AND THE PURPOSE OF CORPORATE BANKRUPTCY Anthony J. Casey* A fundamental question for corporate bankruptcy law is why it exists in the first place. Why are there special rules that apply only in financial distress? The conventional law-and-economics answer- known as the Creditors' Bargain Theory-identifies two core purposes of bankruptcy law: recreating a hypothetical ex ante bargain and respecting creditors' nonbankruptcy entitlements. This Article challenges the Creditors' Bargain Theory and presents an alternative: The sole purpose of corporate bankruptcy law is to solve the incomplete contracting problem that accompanies financial distress. Because financial distress is difficult to contract over, relationships involving a distressed firm are governed by incomplete contracts that allow parties to hold each other up. All distressed firms face this same value-destroying hold-up problem, and so pressure arises for a uniform solution. The purpose of corporate bankruptcy law is to provide that solution. In the United States, Chapter 11 of the Bankruptcy Code implements this purpose in the form of a framework for ex post renegotiation of incomplete contracts. This framework imposes judicial oversight and allocates bargaining power to minimize hold up among those with interests in a distressed firm. In a sense, it puts in place * Professor and Faculty Director of the Center of Law and Finance, The University of Chicago Law School. Conversations and collaborations with Ken Ayotte, Douglas Baird, Erin Casey, Rich Levin, and Randy Picker have informed much of this Article. I also thank Adam Badawi, Bobby Bartlett, Margaret Blair, Vince Buccola, Ruoying Chen, Laura Napoli Coordes, Jenny Dai, Jared Ellias, Pamela Foohey, Simin Gao, Hideki Kanda, Joshua Macey, Edward Morrison, Anthony Niblett, Manisha Padi, Zenichi Shishido, Lindsey Simon, Julia Simon-Kerr, Holger Spamann, Katherine Waldock, Defeng Xu, and workshop participants at Berkeley Law School, Harvard Law School, National Taiwan University, the University of Pennsylvania Law School, the University of Tokyo, Tsinghua University, and Vanderbilt Law School for their helpful comments and suggestions. In addition, I thank Julian Gale, Alexis Knutsen, Ben Nickerson, Madeline Prebil, Angela Pyo, and Leonor Suarez for excellent research assistance. The Richard Weil Faculty Research Fund and the Paul H. Leffman Fund provided generous support. 1709

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