Episode 227: Douglas Baird
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The Mysterious World of Bankruptcy Law
Bankruptcy law and laws that govern corporate restructures play an important role in our economy. How a business moves forward after declaring bankruptcy is determined by these laws and the judges who uphold them – but how this all works can be somewhat of a mystery to many people.
Doug Baird is the author of the new book ‘The Unwritten Law of Corporate Reorganizations,’ which explains these laws and how they impact our modern economy. Doug and Greg discuss the history of bankruptcy laws (this was an important topic to the Founding Fathers!) and how the first large businesses in the U.S. used them.
Baird is a professor of law at the University of Chicago and focuses a lot of his work on bankruptcy law. He’s written one of the foremost textbooks on the subject, The Elements of Bankruptcy Law, which is one of the most heavily used texts on the subject.
Episode Quotes:
US has always been a debtor nation
18:00: We've always been a debtor nation. And indeed, if you look at debates over the Bill of Rights, I think people who aren't lawyers or aren't familiar with this history would be surprised that a big issue about the Bill of Rights was basically protecting debtors.
One fundamental principle of bankruptcy
07:58: Bankruptcy takes non-bankruptcy rights as it finds them. And it doesn't create new substantive rights. If you're a debtor in bankruptcy, you have to obey the law just like anyone else.
What bankruptcy judges shouldn't do
08:45: Bankruptcy judges shouldn't invent new substantive rights. They shouldn't give you a right; you never had before. But that's different. These substantive rights are different than the rules that govern the bargaining, you know, these meta rules. What are the conditions and the norms of the bargaining environment? And, you know, it's not a question of the deal, but rather who gets a seat at the table and how we figure out the agenda and all these other things.
The relative priority rule
47:41: Relative priority says, "Look, we have a company; we need a new capital structure." But it's not a day of reckoning. It's like an exchange offer. There's no reason to cash out interests, even if they'd be out the money in a day of reckoning because it's not a day of reckoning.
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