Recent Posted or Updated Bankruptcy Business-Related Articles of Interest Available for Downloading from SSRN

The following bankruptcy business-related scholarly papers, arranged by SSRN abstract ID number, can be downloaded from the Social Science Research Network website:

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Univ. of Chicago Law School's Douglas G. Baird, IMD International's Arturo Bris, and Yale School of Management's Ning Zhu, "The Dynamics of Large and Small Chapter 11 Cases: an Empirical Study" (Abstract ID:  866865)

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Vanderbilt Univ. School of Law's Robert K. Rasmussen, "Empirically Bankrupt" (Abstract ID:  895547)

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Harvard Law School's Elizabeth Warren and UT Austin's Jay Alan Westbrook, "The Dialogue between Theoretical and Empirical Scholarship" (Abstract ID:  945155)

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Univ. of Rochester's Greg McGlaun, "Lender Control in Chapter 11: Empirical Evidence" (Abstract ID:  961365)

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Dartmouth College - Tuck School of Business' B. Espen Eckbo and Karin S. Thorburn, "Automatic Bankruptcy Auctions and Fire-Sales" (Abstract ID:  963184)

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Max Planck Institutes Wolfgang Schoen, "Balance Sheet Tests or Solvency Tests - Or Both?" (Abstract ID:  963333)

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Univ. of Chicago Law School's Douglas G. Baird, "Legal Approaches to Restricting Distributors to Shareholders: the Role of Fraudulent Transfer Law" (Abstract ID:  963335)

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Univ. of Pennsylvania Law School's David A. Skeel Jr. and George Krause-Vilmar, "Recharacterization and the Nonhindrance of Creditors" (Abstract ID:  963338)

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LSE's Paul L. Davies, "Directors' Creditor-Regarding Duties in Respect of Trading Decisions Taken in the Vicinity of Insolvency" (Abstract ID:  963340)

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Jeffrey D. Van Niel and Nancy B. Rapoport, "'Retail Choice is Coming: Have you Hugged Your Utilities Lawyer Today? (Part 1)" (Abstract ID:  963912)

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Jeffrey D. Van Niel and Nancy B. Rapoport: "'Retail Choice is Coming: Have you Hugged Your Utilities Lawyer Today? (Part 1)" (Abstract ID:  963913)

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Seton Hall University School of Law's Stephen Lubben, "Business Liquidation" (Abstract ID:  964214)

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Georgetown University Law Center's J. Gregory Sidak and the Kellogg School of Management's Daniel F. Spulber, "The Tragedy of Telecoms: Government Pricing of Unbundled Network Elements Under the Telecommunications Act of 1996" (Abstract ID:  964703)

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Georgetown University Law Center's J. Gregory Sidak, "Why Did the U.S. Telecommunications Industry Collapse?" (Abstract ID:  964776)

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Sabanci University's Mine H. Akso, "Going Concern Value Versus Abandonment Option Value in Debt Restructuring Firms" (Abstract ID:  965226)

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Univ. of Chicago's Thomas Chaney, INSEE's David Sraer, and HEC's David Thesmar, "The Corporate Wealth Effect: From Real Estate Shocks to Corporate Investment" (Abstract ID:  965762)

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Indiana University School of Law's Kenneth Glenn Dau-Schmidt, "The Changing Face of Collective Representation: The Future of Collective Bargaining" (Abstract ID:  967454)

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Florida State University College of Law's Kelli A. Alces, "Enforcing Corporate Fiduciary Duties in Bankruptcy" (Abstract ID:  968006)

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California State University-Northridge's Rafael Efrat, "Minority Entrepreneurs in Bankruptcy" (Abstract ID:  972656)

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California State University-Northridge's Rafael Efrat, "The Tax Burden and the Propensity of Small Business Entrepreneurs to File for Bankruptcy" (Abstract ID:  976954)

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Univ. of Virginia's David Mordkoff, "From Bonehead to Chaos: The Demise of the Right to Strike in the Airline Industry" (Abstract ID:  977581)

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UT Austin School of Law's Henry T.C. Hu and Jay Lawrence Westbrook, "Abolition of the Corporate Duty to Creditors" (Abstract ID:  977582)

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Texas Tech University's Stuart Gilliand and Baylor University's John D. Martin, "Corporate Governance Post-Enron: Effective Reforms, or Closing the Stable Door?" (Abstract ID:  977585)

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UCLA School of Law's Lynn M. LoPucki and Joseph W. Doherty, "Bankruptcy Fire Sales" (Abstract ID: 980585)

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Vanderbilt University School of Law's Robert K. Rasmussen, "The Story of Case v. Los Angeles Lumber Products: Old Equity Holders and the Reorganized Corporation" (Abstract ID:  980708)

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Abstracts for each of these papers follows:

Douglas G. Baird, Arturo Bris and Ning Zhu, "The Dynamics of Large and Small Chapter 11 Cases: an Empirical Study" (Abstract ID:  866865):

This paper shows that the dynamics of Chapter 11 turn dramatically on the size of the business. The vast majority of the assets administered in Chapter 11 are concentrated in a handful of large cases, but most of the businesses in Chapter 11 are small, and the smaller the business, the smaller the distribution to general unsecured creditors. For businesses with assets above $5 million, unsecured creditors typically collect half of what they are owed. Where the business's assets are worth less than $200,000, ordinary general creditors usually recover nothing. In the typical small Chapter 11 case, the tax collector is the central figure. In small business bankruptcies, priority tax liabilities are the largest unsecured liabilities of the business. Tax obligations are entitled to priority and are obligations of both the corporation and those who run it. Given the large shadow tax claims cast over small Chapter 11 reorganizations, accounts of small Chapter 11 must focus squarely on them.

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Robert K. Rasmussen: "Empirically Bankrupt" (Abstract ID:  895547):

Empirical legal scholarship endeavors to resolve disputes that are indeterminate at the level of theory. The nature of empirical claims, however, requires that consumers of this work bring a healthy dose of skepticism to any of these projects. Three recent works in the area of corporate reorganizations illustrate how a project that appears on its face to settle scholarly debate can rest on choices that the researcher made rather than on the data itself. One of these works seeks to discredit proposals to make bankruptcy law a default rule rather than a mandatory rule, but it draws its data from a sample half of which is made up of individuals, who by definition are outside the reach of the proposed reform. Moreover, the entire sample omits publicly held corporations, the main target of the reform being examined. The second article discredits prior reorganization practice, but only by establishing a standard that no bankruptcy system has ever satisfied. The third piece concludes that competition for large Chapter 11 cases has corrupted our bankruptcy system, but the empirical basis for this conclusion rests on combining fundamentally different types of bankruptcy cases. For empirical work to be credited, at a minimum, it has to look in the right place, ask the right question and draw the right inferences. When empirical work fails to cross this threshold, it conclusions must be rejected.

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Elizabeth Warren and Jay Alan Westbrook: "The Dialogue between Theoretical and Empirical Scholarship" (Abstract ID:  945155):

In this essay we offer brief reflections on the best process for critiquing empirical work in law and sustaining an engagement between theoretical and empirical approaches. We emphasize the importance of theoretical work in helping to shape the scholarly agenda, but we urge that theory should be more closely tied to fact. We illustrate our argument by responding to a recent critique of our own empirical work by Professor Rasmussen. His principal claim is that our work should be discounted because we reported on all business bankruptcies, both those of entrepreneurs and those in corporate form. In response, we reanalyze our data, separating the individuals from the corporations; in every case the re-analyzed data support the conclusions of our original paper to the same extent or more strongly. Similarly, his other claims about our work are shown to be incorrect.

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Greg McGlaun: "Lender Control in Chapter 11: Empirical Evidence" (Abstract ID:  961365):

Financial economists often assume that control or ownership shifts from equityholders to debtholders after default or bankruptcy. The change in control or ownership solves ex ante contracting problems and ex post incentive problems. However, the mandatory bankruptcy scheme in the US inhibits a simple change in control or ownership from equityholders to debtholders. Some bankruptcy law scholars suggest that debtors and creditors use secured debt contracts as the next best solution. I provide the first non-anecdotal empirical evidence on relations between secured credit and lender control in Chapter 11 of the US Bankruptcy Code. I find evidence that debtors commit to lender control in Chapter 11 through secured debt contracts. The secured debt contracts leave the debtor dependent on external financing in the event of Chapter 11. Once in bankruptcy and dependent on external financing, the debtor and a Chapter 11 lender negotiate a Chapter 11 financing agreement that includes control rights for the Chapter 11 lender, who is often the pre-bankruptcy secured lender. I find support for hypotheses of relations between lender control to Chapter 11 outcomes. For example, debtors dispose of assets sooner in Chapter 11 in the presence of a controlling lender.

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Espen Eckbo and Karin S. Thorburn: "Automatic Bankruptcy Auctions and Fire-Sales" (Abstract ID:  963184):

We test for fire-sales in automatic bankruptcy auctions. Fire-sale discounts exist when the auction leads to piecemeal liquidation, but not when the bankrupt firm is acquired as a going concern. Neither industry-wide distress nor the industry affiliation of the buyer affect prices in going-concern sales. Bids are often structured as leveraged buyouts, which relaxes liquidity constraints and reduces bidder underinvestment incentives in the presence of debt overhang. Prices in prepack auctions (pre-filing private workouts) are on average lower than for in-auction going-concern sales, suggesting that prepacks may help preempt excessive liquidation when the auction is expected to be illiquid. Prepack targets have a greater industry-adjusted probability of refiling for bankruptcy, indicating that liquidation preemption is a risky strategy.

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Wolfgang Schoen: "Balance Sheet Tests or Solvency Tests - Or Both?" (Abstract ID:  963333):

One of the standard requirements of company law is the restriction of distributions to shareholders in order to protect the legitimate interests of the company's creditors. As lawful dividends don't have to be paid back when the company runs into losses at a later stage, we need a measuring rod in order to decide on the availability of funds for distribution. The traditional balance sheet test is running into criticism due to the rigidity of the old rules and the conflicts between the philosophy of IAS/IFRS and the concept of creditor protection. Newly offered devices like the solvency test aim at giving a better view of the business prospects of the company but they suffer from a limited time horizon and a wide range of discretion for directors. This makes them particularly problematic when long-term obligations have to be addressed. In the end, a combination of balance sheet test and solvency test seems to be a reasonable solution.

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Douglas G. Baird: "Legal Approaches to Restricting Distributors to Shareholders: the Role of Fraudulent Transfer Law" (Abstract ID:  963335):

Fraudulent transfer law in the United States provides a safety net for corporate creditors. It prohibits insolvent debtors from making transfers or incurring obligations for less than reasonably equivalent value. Moreover, it reaches any transaction that lacks economic substance and that is designed merely to make it hard for creditors to monitor the debtor. The distinctive shape of fraudulent transfer law in the United States is not replicated in the other common law or in civil law jurisdictions. Nevertheless, the functions it performs are likely to be part of any legal regime that protects the rights of creditors and other investors.

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David A. Skeel Jr. and George Krause-Vilmar: "Recharacterization and the Nonhindrance of Creditors" (Abstract ID:  963338):

Using a 1977 article by Robert Clark as the starting point, this article attempts to shed new light on the question of whether and when shareholder loans to her company should be either equitably subordinated or, as courts have done in a few recent cases, recharacterized as equity. In its emphasis on the particular issue of shareholder loans, the article has a narrower compass than Clark's article, which uses a four-part typology to explore the relationship among fraudulent conveyance law, equitable subordination, veil piercing and dividend restrictions. But the article also expands Clark's analysis in several respects. The most important adjustment involves the general Nonhindrance ideal, which we use to identify a crucially important form of interference with the rights of creditors that Clark does not himself consider directly.

Part 1 of the article very briefly describes the 1939 Supreme Court case that served as a well-spring for equitable subordination doctrine in general, and for subordination of shareholder loans in particular. Part 2 then focuses on a series of recent decisions that have wrestled with the question whether shareholder loans should be recharacterized as equity contributions. Recharacterization doctrine is closely related to equitable subordination, but most courts view it as a separate development. Part 2 suggests that much of the confusion in the cases could be eliminated by disentangling two issues, whether the status of a loan is ambiguous (which raises issues of Truth, in terms of Clark's typology) and whether it was likely to destroy value that would otherwise go to creditors (the Nonhindrance concern); and by distinguishing bankruptcy recharacterization from the tax characterization cases that seem to have spawned the new doctrine. Part 3 then concludes by briefly considering the German and Austrian approaches to these same issues, which focus on capitalization and creditworthiness.

The most important, and initially counterintuitive, implication comes in Part 2: whereas US courts have treated security interests as a badge of legitimacy in assessing shareholder loans, secured loans are actually the most worrisome form of shareholder investment. These security interests, we argue, should be disallowed.

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Paul L. Davies: "Directors' Creditor-Regarding Duties in Respect of Trading Decisions Taken in the Vicinity of Insolvency" (Abstract ID:  963340):

This paper is concerned with the risks to creditors from strategic business decisions taken by directors. It seeks to explain both why the law should impose creditor-regarding duties when the shareholders no longer have any substantial equity in the company and why such duties should not be imposed when the shareholders still have a substantial economic interest in the company. It goes on to argue that duties on directors to put the company into a formal insolvency procedure once the company has reached a state of insolvency do not adequately meet the interventionist criterion. The incidence of such duties depends in part on whether a balance sheet or a cash flow test is used for insolvency, but in any event duties to open formal insolvency procedures are too rigid unless they operate only when all hope of rescue has disappeared. However, the paper also argues that the need to promote a 'rescue culture' for companies in financial distress may lead the legislature to limit the creditor-regarding duty arising before, but in the vicinity of, insolvency to cases of liquidation and not to extend it to companies being handled through procedures whose main aim is to save the company or (parts of) its business as a going concern.

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Jeffrey D. Van Niel and Nancy B. Rapoport, "'Retail Choice is Coming: Have you Hugged Your Utilities Lawyer Today? (Part 1)" (Abstract ID:  963912):

This part of the article provides a primer on the history of utilities regulation. (Part II provides a discussion on the intersection of utilities law and bankruptcy law, pre-BAPCPA.)

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Jeffrey D. Van Niel and Nancy B. Rapoport: "'Retail Choice is Coming: Have you Hugged Your Utilities Lawyer Today? (Part 1)" (Abstract ID:  963913):

This part of the article provides a discussion on the intersection of utilities law and bankruptcy law, pre-BAPCPA. (Part I provides a primer on the history of utilities regulation.)

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Stephen Lubben: "Business Liquidation" (Abstract ID:  964214):

In this paper I revisit the data used in The Other Liquidation Decision to further examine the important question of liquidation of American businesses under chapters 7 and 11 of the Bankruptcy Code. In particular, I utilize a propensity score matching technique to address the differences between the chapter 7 and 11 cases in the sample. I also examine the use of weighted data to address the original study's selection protocols.

Some results are predictable: for example, unsecured creditors sometimes fare much better in chapter 11 liquidations. But other results are likely to surprise academics and chapter 11 practitioners alike. For example, even under a chapter 11 liquidation plan the median recovery to unsecured creditors is zero. At least half of the unsecured creditors will suffer a complete loss, regardless of the procedure the debtor uses to liquidate. And very few creditors ultimately receive the benefits of a chapter 11 liquidation - most chapter 11 cases convert to chapter 7 and very few liquidating plans are ultimately confirmed. Only 81 of 202 chapter 11 debtors in the sample filed plans, and only 43 of those plans were actually confirmed. Chapter 7 is thus the prevailing method of business liquidation, although a sizable number of firms first attempt either a reorganization or liquidation under chapter 11.

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J. Gregory Sidak and Daniel F. Spulber, "The Tragedy of Telecoms: Government Pricing of Unbundled Network Elements Under the Telecommunications Act of 1996" (Abstract ID:  964703):

 Until 1996, local telephone markets had been treated as natural monopolies and thus subject to regulation. The Telecommunications Act of 1996 (the “Act”) seeks to introduce competition into these markets. One method the Act adopts to stimulate such competition is to mandate that incumbent local exchange carriers (LECs) provide access to their unbundled network, such as loops and switches. In August of 1996, the Federal Communications Commission (FCC) issued its First Report and Order, which established a pricing rule for UNEs. The FCC's pricing rule sets the price for a UNE at its total element long-run incremental cost (TELRIC) plus a reasonable share of the incumbent LEC's forward-looking common costs. We propose a pricing methodology to implement that rule based on a combination of what we call the market-determined efficient component-pricing rule (M-ECPR) and competitively neutral end-user charges. We assert that using the M-ECPR to price UNE access is more faithful to the language and intent of the Act than is the approach adopted by the FCC. We also maintain that the FCC misunderstood the efficient component-pricing rule when the agency rejected it as a basis of pricing UNEs.

After outlining our proposal for pricing UNEs, we argue that the FCC's pricing rule is problematic because it prevents the incumbent LEC from recovering its total costs by denying any recovery of the LEC's historical costs and ensuring that it will not fully recover its forward-looking costs. We then respond to criticisms of the M-ECPR by various economists and refute the assertions that the principal authors of the original efficient component-pricing rule rejected the M-ECPR in favor of TELRIC pricing for UNEs. We conclude by warning that the FCC's pricing rule would discourage investment in local telecommunications networks and may eventually drive LECs into bankruptcy.

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J. Gregory Sidak: "Why Did the U.S. Telecommunications Industry Collapse?" (Abstract ID:  964776):

 The U.S. telecommunications industry has collapsed. As I write this essay, Global Crossing is bankrupt, WorldCom is near bankruptcy, and Qwest may have narrowly avoided it. AOL TimeWarner has lost tens of billions of dollars of shareholder value since its merger, and AT&T continues to divest businesses after having spent more than $100 billion to buy cable television companies that by 2002 it hoped to sell for half their purchase price. Wireless carriers and equipment manufacturers have lost three-quarters of a trillion dollars in market capitalization between January 2001 and June 2002.

By the summer of 2002, some in Washington indelicately asked, “Does the Federal Communications Commission bear some responsibility for this debacle?” Despite the revelation of accounting fraud at WorldCom and investigations being made of other carriers, it is not sufficient to dismiss the collapse as the result of simple corruption, or in the amorphous jargon of business journalists, “speculative excess.” Joseph Schumpeter's famous phrase “creative destruction” is mouthed with greater frequency than insight. Yet, it is incorrect to attribute the collapse to the inevitable workings of the invisible hand of the marketplace. The FCC's hand has been all too visible, explicitly influencing the expectations upon which speculation, and investment, rest.

Two areas of regulatory policy show how the FCC can distort efficient outcomes. One is the FCC's complex and contentious policies for the mandatory unbundling of local exchange networks. The second is the FCC's mishandling of Auction 35, the spectrum auction for wireless telephony frequencies that has become frozen in seemingly endless litigation.

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Mine H. Akso: "Going Concern Value Versus Abandonment Option Value in Debt Restructuring Firms" (Abstract ID:  965226):

This paper investigates whether going-concern value or abandonment option value dominates in troubled debt restructuring (TDR) firms,in an attempt to explain the positive excess returns observed in a few studies on TDR samples. Basing the analysis on the shareholders' call and put options on the assets of the firm, this study first predicts the impact of a TDR on the firm's fundamentals and the shareholders' wealth. Then it investigates the financial profiles and asset structures of TDR firms around their restructuring attempts, uses a new methodology to corroborate the positive market reaction results, compares the results with those of a matched sample, and uses a valuation model to examine the explanatory power of their net income and book values. The findings suggest that the financial profiles of debtor firms improve after the TDR attempt, the exit values of their assets are not any higher than those of a matched sample, and the value relevance of NI improves after the restructuring attempt. The evidence supports the positive wealth effects and the prominence of going-concern value in TDR firms.

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Thomas Chaney, David Sraer, and David Thesmar: "The Corporate Wealth Effect: From Real Estate Shocks to Corporate Investment" (Abstract ID:  965762):

Approximately 50% of US listed firms own some land. When real estate prices go up, these firms make capital gains. This paper presents evidence that such capital gains are used by firms to finance new investment. The land is not sold, but used as collateral to borrow more. Such a collateral windfall alleviates information asymmetries with creditors: new loans have longer maturity and are more syndicated. Debt contracts are less likely to include creditor protecting covenants. Yet, the relaxation of credit constraints is not always good news for investors. It results, for firms with weak shareholders, in lower operating performance.

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Kenneth Glenn Dau-Schmidt: "The Changing Face of Collective Representation: THe Future of Collective Bargaining" (Abstract ID:  67454):

In many ways, these are among the darkest days for the American labor movement. Union membership in the private sector has declined from 36% to 8% from the 1950's to the present. Large organized companies like Ford, GM and their parts suppliers are in bankruptcy, or threatening the same, and drastically cutting their work forces and demanding wage cuts and benefit reductions. The largest private employers in the economy, Manpower Inc. and Walmart, steadfastly resist organization and adopt policies promoting low wages. Real wages in the economy as a whole have remained stagnant for almost three decades now, as more and more manufacturing jobs are sent overseas, or disappear altogether due to technological innovations. Finally, until the most recent election, the Republican party - no friend of labor's - controlled the Presidency, Congress, the Supreme Court, the Board and a majority of governorships and state legislatures. Even with the Democrats' recent electoral gains in Congress and the states, the prospects for labor's legislative agenda seem dim.

Yet this is also a time of great innovation and excitement in the labor movement. The Justice for Janitors movement has organized and negotiated minimum terms for cleaning personnel employed by cleaning contractors to clean and maintain office buildings in Los Angeles, New Jersey and elsewhere in the country. The Coalition of Immokalee Workers, lead a successful four-year boycott against Taco Bell to convince their parent company Yum Foods to pressure growers who supply the chain to raise wages for agricultural workers. New York free lancers in writing, art, financial advice and computers have organized themselves for the purchase of health insurance and other benefits in the organization Working Today. Farm laborers from Mexico and the United States have combined to support the organization of apple-pickers in Washington State, filing complaints under the NAFTA agreement accusing the apple industry of violating labor rights and threatening the health and safety of migrant labor. The AFL-CIO has organized almost a million new affiliate members through community based in its new political affiliate association Working America. Finally, seven powerful unions have organized themselves in the new Change to Win Coalition, promising innovative strategies for organizing and representing the interests of working people.

Why do we see such innovation, even excitement, in the American labor movement, at a time when, by all objective measures, the movement is flat on its back? I will argue that recent changes in the American labor movement represent the beginning of its adaptation to changes in the employment relationship that have occurred as we have moved from production organized according to industrial technology, to production organized under the new information technology in the global economy. A previous change from artisanal to industrial methods of production around the beginning of the twentieth century presaged great change, and growth, in the American labor movement. Similarly, as the American economy transitions from industrial methods of production to adopt new structures utilizing information technology, the American labor movement is being prompted to organize and undertake collective action in new ways, that will hopefully lead to its resurgence. The innovations in the American labor movement to adjust to this change in technology and the employment relationship are what account for the current excitement in the movement.

In this lecture, I will present a brief history of the American economy and trace how changes in the methods of production led to changes in the employment relationship and the collective organization of workers. After a brief discussion of the transition from artisanal to industrial production, I will focus on the more recent changes engendered by the new information technology and the globalization of the economy. My hope is that this discussion will illuminate the significance to recent developments in collective organization and help us divine the future course of the American labor movement.

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Kelli A. Alces: "Enforcing Corporate Fiduciary Duties in Bankruptcy" (Abstract ID:  968006):

Because of a gaping hole in the law of corporate governance, rogue officers and directors can escape liability for severely disloyal, bad faith management by causing the company they operate to enter bankruptcy. The disappearance of the derivative suits that enforce state law fiduciary duties once a corporation files bankruptcy threatens to significantly undermine their deterrent effect outside of bankruptcy. Bankruptcy need not serve as a safe haven for faithless corporate managers. In fact, the Bankruptcy Code provides a solution to this problem, the appointment of a chapter 11 trustee to replace, monitor, or help troubled corporate managers, but bankruptcy courts and debtors' shareholders and creditors have been too intimidated by the traditionally extreme nature of that remedy to use it effectively. As a consequence, parties wishing to hold irresponsible managers accountable for the harm they have caused the now bankrupt corporation continue to try to use state law enforcement mechanisms that are not effective within a bankruptcy case. The common belief that a chapter 11 trustee must completely replace a debtor's management makes that remedy far too expensive to use in all but the most egregious of circumstances. The resulting loophole allows culpable officers and directors to escape the consequences of their malfeasance.

This article argues that bankruptcy courts and litigants should abandon the conventional wisdom regarding the extreme nature of the appointment of a chapter 11 trustee when faced with severe problems with a debtor's management. Instead, bankruptcy courts should embrace the discretion the Bankruptcy Code gives them to define the scope of a trustee's duties in a way that mitigates the harm such managers may inflict upon the debtor without causing the reorganizing company to endure the unnecessary costs or disruptions that would accompany the complete ouster of the debtor's current management. The chapter 11 trustee is, in situations of severe mismanagement of the debtor, a mandatory remedy that has fallen into disuse. Because a trustee is the only means provided by the Bankruptcy Code to address breaches of fiduciary duty by a debtor's managers, bankruptcy courts should require interested parties to use the corporate governance rules and mechanisms enumerated in the Bankruptcy Code before trying to force causes of action against management under state or other nonbankruptcy law to fit into a bankruptcy case. More specifically, courts should require litigants to bring a motion for the appointment of a trustee before requesting leave to pursue derivative suits against the debtor's managers if there is a significant problem with the debtor in possession's operation of the firm.

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Rafael Efrat, "Minority Entrepreneurs in Bankruptcy" (Abstract ID:  972656):

Minorities join the entrepreneurial sector as an avenue of opportunity to address certain disadvantages they face in the labor market. Despite the increasing number of minorities becoming entrepreneurs, minority-owned businesses are under-represented in the entrepreneurial sector in the United States. Furthermore, they also tend to have a higher failure rate relative to non minority owned businesses. Given the higher failure rate among minority business owners compared to non-minority business owners, one may hypothesize that minority-owned businesses would be over-represented in the bankruptcy sample.

Data from this empirical research study, based on bankruptcy petitioners from the United States Bankruptcy Court in the Central District of California, reject this hypothesis finding that minority entrepreneurs are under-represented in the bankruptcy population. The data also suggest that the challenges faced by minority entrepreneurs in the general population are mirrored by the minority entrepreneurs in the bankruptcy sample. Minority entrepreneurs in the bankruptcy sample reported the same inferior human capital they report in the general population. Similar to the circumstances outside of bankruptcy, minority entrepreneurs in the bankruptcy sample were financially more fragile than their non-minority counterparts, with substantially less income and assets. Lastly, just as minority groups outside of bankruptcy have less access to debt, they reported less debt in bankruptcy as well.

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Rafael Efrat: "The Tax Burden and the Propensity of Small Business Entrepreneurs to File for Bankruptcy" (Abstract ID:  976954):

Despite the success of many entrepreneurs, a sizable number of small businesses fail every year. Tax problems have been found to be a small but an important contributor to business closure. The extent of the tax problems experienced by small business owners is alarming but not surprising given the disproportionate tax burden small business owners face in operating their businesses. The research undertaken in this study aims to explore the extent to which individual small business owners, who have filed for bankruptcy, attribute their financial distress to tax problems. Further, this study intends to examine the demographics and financial characteristics of small business owners that have pointed to the tax system as the cause of their financial demise.

This study has found that tax problems constitute an important reason for bankruptcy filings for a sizable number of entrepreneurs. Interestingly, those entrepreneurs that attribute their business collapse to tax problems do not come from disadvantageous background. Instead, the average entrepreneur in the bankruptcy sample that has faulted tax problems for his financial woes was typically older male, White, native born, well educated and an experienced business owner. Nonetheless, the typical entrepreneur with tax problem in the bankruptcy sample was facing enormously higher debt burden with more than five times as much debts as other entrepreneurs in the bankruptcy sample.

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David Mordkoff: "From Bonehead to Chaos: The Demise of the Right to Strike in the Airline Industry" (Abstract ID:  977581):

This paper chronicles the demise of labor's ability to strike in the commercial aviation industry in the United States. The analysis starts with the airmail strikes of the early 20th century and progresses to the present day, where the Northwest Airlines flight attendants' attempt to strike was enjoined by the District Court (a decision that was upheld by the 2nd Circuit). The first part of the paper is historical. The second part focuses on the NWA case, analyzing the District Court's decision (an analysis of the 2nd Circuit decision will be added). The paper concludes with a legislative proposal for amending the Railway Labor Act to make it easier for unions to strike a formerly-bankrupt carrier, once the carrier leaves bankruptcy protection.

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Henry T.C. Hu and Jay Lawrence Westbrook: "Abolition of the Corporate Duty to Creditors" (Abstract ID:  977582):

Broadly speaking, the core objective of a corporation is simple: directors should further the interests of the shareholders, the corporation's owners. But for nearly two centuries, one judicially crafted exception has existed. When the corporation reaches some stage of financial distress, but has not filed for bankruptcy, the directors should shift their focus from shareholders to creditors. This shift, affecting all decisions, has obvious impact in the crucial area of corporate risk-taking. Not surprisingly, these “duty-shifting” doctrines, especially in their social science-laced modern incarnations, have received extensive scholarly and practitioner attention worldwide. This Article is the first to argue for the abolition of these doctrines. This abolition, by itself, would mean that a duty to creditors would arise only in connection with a formal bankruptcy filing.

This Article also differs fundamentally from prior work in that its critiques are structural rather than operational. First, the doctrines (and existing literature) fail to consider the ends and means of two alternative governance systems: the (normal) corporate governance system rooted in state substantive law and the bankruptcy corporate governance system rooted in federal bankruptcy law. The essential end of the corporate governance system is to further the interests of shareholders, interests that we believe modern finance theory shows to be largely unitary in nature. The key mechanisms of this system seek to ensure managerial adherence to the interests of shareholders as a group. In contrast, the creditor group not only has interests different than shareholders, but has interests that are far from unitary. The corporate governance system lacks the tools for resolving these conflicting interests, while bankruptcy law under 11 is designed to protect creditors and does have such tools.

Second, the duty-shifting doctrines misconceive the structure of shareholder ownership rights. From the emergence of the corporate form, share ownership has consisted of both voting rights and economic rights. We suggest that the doctrines completely ignore shareholder voting rights, ironic in an era when such voting rights have become important. And the doctrines misconstrue shareholder economic rights through a “residual claimant” concept naively transplanted from the social sciences

Abolition of the duty-shifting doctrines in all their forms is essential to maintain the structural integrity of the two governance systems and protect the structure of shareholder ownership rights. The real task at hand for corporate and bankruptcy scholars is to determine the optimal transition between two alternative governance systems of corporate law and bankruptcy.

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Stuart Gilliand and John D. Martin: "Corporate Governance Post-Enron: Effective Reforms, or Closing the Stable Door?" (Abstract ID:  977585):

We examine Enron's collapse to provide insights as to the efficacy of recent governance reforms. In doing so, we explore two main issues. First, if recently mandated governance changes had been in place earlier, would they have constrained actions by Enron's management? Second, and more generally, which of the recent governance changes might act to constrain governance failures going forward? Although many aspects of corporate governance failed at Enron, the firm's viability ultimately rested on an inherently risky business strategy, a strategy that the board and others apparently failed to understand. However, it is not apparent that increasing board independence would have changed Enron's strategic direction, or prevented the firm's collapse. From this perspective, many recent reforms, including those mandating specific board structures likely move firms away from their optimal governance structure and are tantamount to closing the stable door after the horse has bolted. We assert that, ceteris paribus, stronger internal controls coupled with reduced potential for conflicts of interest on the part of the external auditor might have constrained management's ability to hide the firm's true financial condition and are likely to constrain aspects of fraudulent behavior going forward.

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Lynn M. LoPucki and Joseph W. Doherty: "Bankruptcy Fire Sales" (Abstract ID:  980585):

For more than two decades, scholars working from an economic perspective have criticized the bankruptcy reorganization process and sought to replace it with market mechanisms. In 2002, Professors Douglas G. Baird and Robert K. Rasmussen asserted in The End of Bankruptcy, an article published in the Stanford Law Review, that improvements in the market for large, public companies had rendered reorganization obsolete. Going concern value could be captured through sale.

This article reports the results of an empirical study comparing the recoveries in bankruptcy sales of large public companies in the period 2000-2004 with the recoveries in bankruptcy reorganizations during the same period. We find that, controlling for company values reported at case commencement, pre-filing operating profits, and post-filing operating profits, the recoveries in reorganization cases are more than double the recoveries from going concern sales. We attribute the low recoveries in sale cases to continuing market illiquidity and the corruption of the bankruptcy process by competition among bankruptcy courts for large, public company cases.

We also find that bankruptcy recoveries are higher in years when merger and acquisition activity is higher for reasons other than high stock prices. Lastly, we find that bankruptcy recoveries are higher when debt capacity in the debtor's industry is lower – the opposite effect predicted by Professors Andrei Shleifer & Robert W. Vishny in their landmark article in 1992.

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Robert K. Rasmussen: "The Story of Case v. Los Angeles Lumber Products: Old Equity Holders and the Reorganized Corporation" (Abstract ID:  980708):

Case v. Los Angeles Lumber occupies a central role in the development of the American law of corporate reorganizations. Justice Douglas's opinion for the Supreme Court adopted the absolute priority rule as the touchstone against which all plans of reorganization would be measured. Even with overwhelming support by the bond holders - the only creditors whose interests were being lessened by the proposed plan in Los Angeles Lumber, the former shareholders could not participate in the reorganized company without making a fresh capital contribution. While the conditions necessary to invoke the absolute priority rule have evolved over time, the rule itself forms the bedrock of modern Chapter 11.

The holding of Los Angeles Lumber thus remains relatively intact. But the subsequent history of the business of Los Angeles Lumber calls into question many of the assumptions on which modern reorganization law rests. Chapter 11 is designed as a forum where the owners of a company can reach an agreement so as to preserve a corporation's going-concern value. Los Angeles Lumber confirmed a plan of reorganization on remand from the Supreme Court. The plan adhered to the newly announced absolute priority rule. The company, however, did not flourish. In the end, it simply lacked going concern value. Despite a boom in the ship building business, Los Angeles Lumber could not operate effectively and was taken over by the federal government. The judicially supervised reorganization in the end brought no benefit to the investors in Los Angeles Lumber.

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© Steve Jakubowski 2007

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