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Bankruptcy in America, in stark contrast to its status in most other countries, typically signifies not a debtor's last gasp but an opportunity to catch one's breath and recoup. Why has the nation's legal system evolved to allow both corporate and individual debtors greater control over their fate than imaginable elsewhere? Masterfully probing the political dynamics behind this question, David Skeel here provides the first complete account of the remarkable journey American bankruptcy law has taken from its beginnings in 1800, when Congress lifted the country's first bankruptcy code right out of English law, to the present day. Skeel shows that the confluence of three forces that emerged over many years--an organized creditor lobby, pro-debtor ideological currents, and an increasingly powerful bankruptcy bar--explains the distinctive contours of American bankruptcy law. Their interplay, he argues in clear, inviting prose, has seen efforts to legislate bankruptcy become a compelling battle royale between bankers and lawyers--one in which the bankers recently seem to have gained the upper hand. Skeel demonstrates, for example, that a fiercely divided bankruptcy commission and the 1994 Republican takeover of Congress have yielded the recent, ideologically charged battles over consumer bankruptcy. The uniqueness of American bankruptcy has often been noted, but it has never been explained. As different as twenty-first century America is from the horse-and-buggy era origins of our bankruptcy laws, Skeel shows that the same political factors continue to shape our unique response to financial distress.

We ordinarily assume that a central objective of every voting process is ensuring an undistorted vote. Recent developments in corporate bankruptcy, which culminates with an elaborate vote, are quite puzzling from this perspective. Two strategies now routinely used in big cases are intended to distort, and clearly do distort, the voting process. Restructuring support agreements (RSAs) and \"deathtrap\" provisions remove creditors' ability to vote for or against a proposed reorganization simply on the merits. This Article offers the first comprehensive analysis of these new distortive techniques. One possible solution is simply to ban distortive techniques, as several scholars advocate with RSAs that offer joinder bonuses. Although an antidistortion rule would be straightforward to implement, I argue this would be a mistake. The distortive techniques respond to developments that have made reorganization difficult, such as claims trading and a greater need for speed. Further, Chapter 11's baseline was never intended to be neutral: it nudges the parties toward confirming a reorganization plan. There also are independent justifications for some distortive techniques, and the alternative to using them might be even worse – possibly leading to more fire sales of debtors' assets. How can legitimate use of the new distortive techniques be distinguished from more pernicious practices? To answer this question, I outline four rules of thumb to assist the scrutiny. Courts should consider whether holdouts are a serious threat, the magnitude of the coercion, the significance of any independent justifications, and whether the holdout threat is an intentional feature of the parties' contracts. I then apply the rules of thumb to a few prominent recent cases. I conclude by considering two obvious extensions of the analysis, so-called \"gifting\" transactions in Chapter 11 and bond-exchange offers outside of bankruptcy.

The equality of creditors norm is widely viewed as the single most important principle in American bankruptcy law, rivaled only by our commitment to a fresh start for honest but unfortunate debtors. Equality of creditors teaches that similarly situated creditors should be treated similarly. Thus if one general creditor will be paid 25% of what it is owed, others also should receive 25%.

A generation ago, the Creditors' Bargain theory provided the first comprehensive normative theory of bankruptcy. Not least of its innovations was the fact that it put bankruptcy theory on a contractual footing for the first time. Earlier commentators had recognized that bankruptcy law can prevent a \"grab race\" or \"race to the courthouse\" by creditors of a financially troubled debtor as they attempt to collect what they are owed, and that bankruptcy can provide a less chaotic and more even-handed distribution of the debtor's assets than might otherwise be the case. The articles that introduced the Creditors' Bargain were the first to suggest that bankruptcy's solution to these concerns was resolutely contractual in nature.

Since the outset of the recent financial crisis, liquidity problems have been cited as the cause behind the bankruptcies and near bankruptcies of numerous firms, ranging from Bear Stearns and Lehman Brothers in 2008 to Kodak more recently. This Article expands the prevailing normative theory of corporate bankruptcy—the Creditors' Bargain theory—to include a role for bankruptcy as a provider of liquidity. The Creditors' Bargain theory argues that bankruptcy law should be limited to solving problems caused by multiple, uncoordinated creditors, but focuses almost exclusively on the problem of creditor runs. We argue that two well-known problems that cause illiquidity—debt overhang and adverse selection—are also caused by multiple-creditor-coordination problems. As such, bankruptcy law is justified in solving these problems in addition to creditor-run problems. With this insight in hand, we argue that many of bankruptcy's existing rules, including debtor-in-possession financing, sales free and clear of liens, and coerced loans, can be seen as liquidity-providing rules that target either debt-overhang problems, adverse-selection problems, or both. Using bankruptcy to solve liquidity problems can create costs, however, such as the risk of continuation bias. We suggest rules of thumb for judges to use in balancing the benefits and costs of these rules. We also connect our theory to the use of bankruptcy for financial institutions, where liquidity concerns loom large.

Recent proceedings involving large municipalities such as Detroit, Stockton, and Vallejo illustrate both the utility and limitations of using the Bankruptcy Code to adjust municipal debt. In this Article, we contend that, to resolve fully the distress of a substantial city, municipal bankruptcy needs to provide more than simple debt reduction. Debt adjustment alone does nothing to remedy the fragmented decision making and incentives for expanding municipal budgets that are ingrained in municipal governance structures and that often underlie municipal distress. Unless bankruptcy also addresses governance dysfunction, the city faces a return to financial distress. Indeed, this Article demonstrates that governance restructuring has long been an essential element of corporate bankruptcy and that, given the monopoly position of local governments as providers of local public goods, it is even more important in the municipal bankruptcy context. Some might argue that reducing a city's debt is the best that bankruptcy courts can offer, due to concerns that a more comprehensive approach would, among other things, interfere with state sovereignty and exceed the statutory authority that the Bankruptcy Code grants to courts. In our view, these concerns do not withstand scrutiny. Based on a careful analysis of the origins of the current municipal bankruptcy provisions, as well as an assessment of recent Supreme Court jurisprudence, we argue that governance reform is permitted even under existing law, and point out that minor adjustments to municipal bankruptcy law would make this conclusion even clearer. To be sure, the states themselves, rather than a bankruptcy court, ideally should be the ones to effect municipal governance reform.. But political factors and the imperatives of the immediate fiscal crisis make state intervention unlikely, thus underscoring the need for a more comprehensive approach to municipal bankruptcy.

Today's typical Chapter 11 case looks radically different than did the typical case in the 1978 Bankruptcy Code's early years. In those days, Chapter 11 afforded debtors a cozy haven. Most everything that mattered occurred within the context of the formal proceeding, where the debtor enjoyed agenda control, a leisurely timetable, and judicial solicitude. The safe haven steadily disappeared over time, displaced by a range of countervailing forces and a cooperative bankruptcy bench. Lenders, especially debtor-in-possession financers, gradually began to shape the trajectory of many proceedings. They today determine the course of most of the cases. More recently, additional players such as hedge funds and equity funds have also entered the scene, altering the bargaining dynamic. New financial instruments complicate debtors' capital structures and creditor incentives. Even the sites and modes of decisionmaking have shifted, as today's key decisions are negotiated and embedded in contracts concluded even before the debtor files for bankruptcy. The changes, which continue to accumulate, are fundamental. Here, Bratton and Skeel discuss the New Deal redirection and recent evolution of corporate reorganization.

In the past several years, many states' financial condition has been so precarious that some observers have predicted that one or more might default. As the crisis persisted, a very unlikely word crept into these conversations: bankruptcy. Should Congress provide a bankruptcy option for states, or would bankruptcy be a mistake? The goal of this Article is to carefully vet this question, using all of the theoretical, empirical, and historical tools currently available. The discussion is structured as a \"case\" for bankruptcy rather than an \"on the one hand, on the other hand\" assessment. But it seeks to be scrupulously fair and reaches several conclusions that veterans of the public and scholarly debate may find surprising. The Article proceeds as follows. Part I briefly develops the theoretical basis for state bankruptcy. Part II explores each of six key benefits of a state-bankruptcy regime. Part III then turns to six principal objections, considering each in detail. After analyzing the response to New York City's 1975 crisis and a number of states' enactment of municipaloversight boards, Part IV focuses on the possibility of an analogous federal oversight alternative to a more general bankruptcy statute. Although bankruptcy seems superior overall, the oversight strategy would offer some of the same benefits if Congress failed to enact a bankruptcy law before a state crisis materialized.

Creditors have converted two existing contractual tools into important governance levers. The first is debtor-in-possession (DIP) financing. Before they even file for bankruptcy, corporate debtors must arrange an infusion of cash to finance their operations in Chapter 11. To an increasing extent, lenders are using these loan contracts to influence corporate governance in bankruptcy. The fate of an asset or division of the company, even the terms of a transfer of control, has been spelled out as terms in a debtor's DIP financing agreement. The second is that key executives are increasingly given performance-based compensation packages in Chapter 11. The most common strategy is to promise the executives a large bonus if they complete the reorganization quickly; likewise, executives face ever-smaller bonuses if the case takes longer. My aim in this Article is to make sense of these developments, both by putting them into historical context and by identifying the concerns they raise.

When States Go Broke collects insights and analysis from leading academics and practitioners that discuss the ongoing fiscal crisis among the American states. No one disagrees with the idea that the states face enormous political and fiscal challenges. There is, however, little consensus on how to fix the perennial problems associated with these challenges. This volume fills an important gap in the dialogue by offering an academic analysis of the many issues broached by these debates. Leading scholars in bankruptcy, constitutional law, labor law, history, political science and economics have individually contributed their assessments of the origins, context and potential solutions for the states in crisis. It presents readers - academics, policy makers and concerned citizens alike - with the resources to begin and continue that important, solution-oriented conversation.