A Positive Theory of Chapter 11 74 New York University Law Review 1999

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74 N.Y.U. L. Rev. 161 (1999)
A Positive Theory of Chapter 11

handle is hein.journals/nylr74 and id is 175 raw text is: A POSITIVE THEORY OF CHAPTER 11
IEvIN A. KORDANA*
ERIC A. POSNER**
This Article is the first comprehensive analysis of the complicated voting rules of
Chapter 11. Under these rules, only the debtor may propose a plan of reorganiza-
tion during a lengthy exclusivity period, creditors are placed in classes wihich vote
separately on the plan, voting is based on a bicameral system with both majority
and supermajority requirements, and a plan may be confirned only if, among other
things, every nonconsenting creditor receives at least as much as it would have if the
firm were liquidated under Chapter Z Chapter 11's rules are idiosyncratic and
difficult to understand, yet the literature on these rules is sparse. Several scholars
have argued that it should be replaced with a system that avoids voting and relies
on a more market-driven valuation process. To date however, no one has tried to
understand how all of the voting rules fit together. In this aricl e Professors
Kordana and Posner expand on existing bargaining models to consider bargaining
with multiple creditors, paying particular attention to difficulties posed by imperfect
information, and analyze all of the major voting rules in Chapter 1. The authors
utilize a positive analysis to achieve an increased understanding of the existing
bankruptcy system and its costs and benefits, an essential prerequisite to reform of
Chapter 11.
INTRODUCTION
When corporations file for bankruptcy, they choose whether to
enter Chapter 71 or Chapter 11.2 Under Chapter 7, the firm is liqui-
dated: Its assets are sold off, and the proceeds are distributed to cred-
itors roughly in order of priority. Under Chapter 11, the firm is
reorganized, which means that some or all of the existing creditors
and equityholders yield their contractual rights to receive transfers
from the firm and receive new and usually less valuable rights in the
new entity. The two chapters serve the same bankruptcy purpose of
maximizing the payments to interest holders while respecting contrac-
tual entitlements as much as possible. The difference is that Chapter 7
is intended to apply when the firm is worth more in pieces than as a
* Associate Professor of Law, University of Virginia.
** Professor of Law, University of Chicago. Ve thank Avery Katz, Saul Levmore,
Richard Posner, Robert Rasmussen, Steve Schwarcz, Robert Scott, David Skeel, George
Triantis, and Steven Walt, and audiences at the University of Virginia, George Mason Uni-
versity, and the American Law and Economics Association annual meeting, Berkeley, Cal-
ifornia, 1998. Karen Schoen provided valuable research assistance.
1 See 11 U.S.C. 壯 701-766 (1994).
2 See 11 U.S.C. 壯 1101-1174 (1994 & Supp. 111996).
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