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Bargaining Bankrupt: A Relational Theory of Contract in Bankruptcy
Lipson, Jonathan C.
Lipson, Jonathan C.
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Journal article
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2016
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http://dx.doi.org/10.34944/dspace/6771
Abstract
This Article studies the growing use of contract in bankruptcy. Sophisticated “distress” investors (for example, hedge funds and private equity funds) increasingly enter into contracts amongst themselves and corporate debtors during bankruptcy in order to evade “mandatory” rules on the priority of distributions, thus preferring themselves at the expense of other stakeholders (for example, employees of the corporate debtor). Bankruptcy courts that supervise these cases struggle with these priority-shifting contracts. They are asked to approve them, but have little theoretical or doctrinal guidance on how to assess them. This Article develops a “relational” framework to explore this shift toward contract in bankruptcy. Relationalism seeks to understand power dynamics, and preferences for formal and informal promissory mechanisms in private ordering. Distress investors, bankruptcy professionals (lawyers), and judges in large cases form a classic relationalist environment. They are a community of repeat players with their own norms and preferences for formal and informal promissory exchange. Their contracting practices can affect the hundreds (sometimes thousands) of stakeholders in a large corporate debtor. At the same time, there are growing calls to amend the Bankruptcy Code. Congress, however, has botched recent efforts to do so. Contract may be a better vehicle for institutional adjustment than Congress — if it is perceived as legitimate. A relationalist framework would help sort legitimate from illegitimate contracts in bankruptcy, thus improving our understanding of the system and its operation.
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Jonathan C. Lipson, Bargaining Bankrupt: A Relational Theory of Contract in Bankruptcy, 6.2 Harv. Bus. L. J. 239 (2017).
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Harvard Law School
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Harvard Business Law Review, Vol. 6
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