Volume 74, Number 1

April 1999

A Positive Theory of Chapter 11

Kevin 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 reorganization during a lengthy exclusivity period, creditors are placed in classes which vote separately on the plan, voting is based on a bicameral system with both majority and supermajority requirements, and a plan may be confirmed only if, among other things, every nonconsenting creditor receives at least as much as it would have if the firm were liquidated under Chapter 7. 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 article, 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 11. 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.