Document Type


Publication Date

Summer 1993


Large reorganizations, Chapter 11 cases, Reorganization law, Bankruptcy reform, Classical liquidation model, Empirical legal studies, Equity receiverships, Firm valuation, Absolute priority rule


Bankruptcy Law | Legal History


Dealing with failing businesses is like dealing with failing marriages. It is messy. The bigger the business the messier the process is likely to be. Many big business failures in the United States go through their death throes or cure their ills in reorganizations under Chapter 11 of the Bankruptcy Act. As the vehicle in which big business messes travel, Chapter 11 is viewed as unnecessarily complex, time-consuming, and costly. The justification for Chapter 11's very existence has been challenged.

This article suggests that we are blaming the vehicle for the mess that it carries. Much of what is problematic with divorce law is that divorce must deal with personal misery. Divorces produce unhappy results, we can't do much about the underlying problem, so we reform divorce law. Business failure is also an unfortunate, sometimes tragic, event. Much of what is problematic with Chapter 11 is that it must deal with commercial misery. There are limits on how content we are likely to be with even the most perfect reorganization law.

We erroneously measure Chapter 11's efficiency by focusing on its absolute costs. We also misjudge its distributional results by comparing them with a classical liquidation regime that predates large corporations. To develop these points, section I narrows the focus to large reorganizations. Section II provides historical background that is central to both of my claims. Section III builds on the historical discussion to suggest that much of the cost and delay in Chapter 11 are unavoidable. After analysing a recent empirical attack on Chapter 11, Section IV considers the history's implications for modem reform proposals.

Publication Citation

Published in: University of Toronto Law Journal, vol. 43, no. 3 (Summer 1993).