учебный год 2023 / (Encyclopedia of Law and Economics 5) Boudewijn Bouckaert-Property Law and Economics -Edward Elgar Publishing (2010)

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Cases

Fountainbleu Hotel Corp. v. Forty-five Twenty-five, Inc., 114 So.2d 357 (Fla.App. 1959). Ormet Corporation v. Ohio Power Co., 98 F.3d 799 (4th Cir. 1996).

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mitigate the operation of this incentive, lenders typically require in their loan contracts that borrowers make a significant equity investment in the project which will be subordinated to the lender’s claim if the project is liquidated, so that by selecting an excessively risky project, the equity investors will be risking a significant sum of their own funds as well.

The presence of debt with priority over equity also creates another perverse incentive, the so-called Myers (1977) debt-overhang, or ‘underinvestment’ risk, as well. As a firm nears insolvency, but encounters opportunities to invest in net positive value projects, the possibility exists that much of the gains from the project will eventually accrue to the higher priority creditors rather than the controlling equity investors who will, accordingly, forego those profitable investment opportunities. This perverse incentive is more difficult to deal with by contract since it will often be impossible for the parties to foresee and describe the relevant future investment opportunities in their loan contracts (Gertner and Scharfstein, 1991).

2.Debt enables the creation of credible commitments

Most debt is contracted for. Such debt obligates the debtor to make a payment to the creditor at a determinable time set forth in the contract. One might imagine circumstances in which the efficient obligation might be made contingent on any number of future eventualities, and that contracts which had such equity-like features would also be common. The typical impulse to create debt contracts, however, probably stems, instead, from information asymmetries between lenders and borrowers. In the commercial context, the borrower seeks capital needed to conduct some project about which the borrower is better informed than the lender. Although the borrower might assure the lender that the project will generate sufficient revenues to retire the debt, those assurances may not always be credible. If the debtor also promises that should the project fail and the project revenues do not retire the debt, the debtor will subordinate its interests in all of its assets to the creditor’s debt, the debtor’s statement of confidence in his or her project becomes more believable and the commitment to subordinate implicit in the debt contract works as a bonding device. Wellinformed borrowers doubtful about the prospects of their future projects would be less inclined to promise to subordinate themselves. Similarly, the future contingencies in consumer debt contracts which might affect the probability of repayment tend to be within the control of the borrowing consumer, thus exposing the prospective lender to significant moral hazard. The consumer trying to assure that lender that the power to affect many of the future contingencies will not be exercised adversely to the creditor’s interests will find his assurances more credible if accompanied

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by an agreement to subordinate should payment not be made as agreed. To the extent that these informational asymmetries give rise to transaction costs resulting from misalignment of the parties’ incentives, then, the debt contract by enabling the making of credible commitments is an efficient way to realign them. Presumably we observe debt in cases where the parties believe gains from correct incentive alignment outweigh the risks from perverse investment incentives that debt creates.

B.Systems of debt enforcement and the four strands of the law and economics research agenda

Debt contracts are enforced using two differing systems of remedies existing concurrently: One, the nonbankruptcy system which, in the United States, is a creature of the law of each of the 50 sovereign states, provides legal proceedings in which individual creditors can pursue their claims against individual debtors. The other is the Federal Bankruptcy system which provides a number of collective proceedings which involve the debtor and all of the creditors together. The mission of Law and Economics scholarship is thus to explain the existence of and justify the architectures of each system. There is also the question of how to coordinate the two systems – the issue of which system should govern and in what circumstances. Existing law and economics analysis has tended to focus on four salient features of the nonbankruptcy system and how its outcomes tend to differ from the bankruptcy outcomes. The four strands of the literature can be described as follows:

1.Individual vs. collective proceedings?

First, the nonbankruptcy system can be fairly characterized as a system of remedies given to individuals. It focuses on a debtor and a creditor and on the procedures which affect only those two parties. Bankruptcy systems, in contrast, are inherently collective, involving all of the debtor’s creditors in the same legal proceedings. Thus it is fundamental to explain how these two diametrically opposed approaches can both be justified and explained: are there identifiable environments in which one of these alternative systems is appropriate and others in which the converse is likely more efficient?

2.Asset or claimant-type based remedies?

Second, the nonbankruptcy creditors’ remedy system focuses on discrete assets in the debtor’s inventory. Creditors seize only specific assets, which are then auctioned off. Likewise, security interests convey fractionalized property rights only in identified assets which are the collateral for the secured loan or credit. The creation of collective remedies, on the other

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hand, opens the possibility that priority ranking could be determined by the characteristics of creditors and could be applied to all of the debtor’s assets as a group analogously, for example, to the interests of common and preferred shareholders in a firm. The issue is then to explain when and how asset-based as against claimant-type based systems are appropriate.

3.Justifying priorities?

Third, the priority system is a mixed one. As among creditors using the ordinary legal process to enforce their debtor’s obligations, the first to complete the process and seize an asset has a priority right to the proceeds of the auction of that asset over the second to seize. Holders of security interests can finish in the race system, on the other hand, not in the order in which they seek to enforce their rights, but rather in order roughly of the times at which they contracted for those rights. In a collective proceeding, on the other hand, it is administratively possible to conceive of other priority systems which, to note the common example, adopt ratable sharing distributions as opposed to lexicographic priorities. Explaining the contrasting systems, accordingly, requires the development of theories of priorities.

4.Reconfiguring contractual priorities ex post

Fourth, Chapter 11 of the US Bankruptcy Code, which is thought to be a model for collective collection law devices applicable to corporate debtors in the developed and developing world, features a system which alters contractually agreed priorities ex post. How can such a system be justified and explained? A complete economic analysis of creditors’ remedies must explain each of these four features of the existing dual creditors’ remedies system. It is fair to introduce the literature addressing these problems by observing that much explaining remains to be done. What we do know, so far, is discussed, issue by issue, in the rest of this chapter.

C.Should debt collection law provide individual remedies or should it provide collective proceedings?

1.The individualistic creation of debt obligations

Debtors usually incur the debt obligation on an individualized basis. They borrow from a single creditor at a single moment, they buy something from a single seller on credit at an identifiable moment in time or they breach some civil duty owed to a fellow citizen in a unique accidental or wrongful event. The circumstances differ for each debt, and efficiency probably requires that the obligations of the debtor or the remedies of the creditor vary with those circumstances. There are no general commercial

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norms which dictate that the terms granted to one creditor must match those granted to any other, and debt contracts, accordingly, tend to be heterogeneous. Indeed the ways in which heterogeneous contractual obligations are incurred strongly suggests that the pattern of debt obligations is driven by the economics of optimal assortive matching. In the case of debt contracts, debtors must select creditors who possess competitive advantages of supplying debt capital in the types of borrowing contexts they can offer, and such creditors must select the types of borrower to deal with for whom they believe they have a competitive advantage. Nevertheless, to date, the literature does not develop hypotheses about the ways debtors match up with creditors, and the kinds of competitive advantages that generate those matches. It is not difficult to infer, however, that lenders do invest in specializing in dealing with certain kinds of borrowers, or in extending credit to borrowers located in specific geographical areas or pledging certain kinds of collateral, for example. Small loan companies and retail credit sellers and credit card companies specialize in making loans to consumers. Commercial lending departments of banks and commercial finance companies specialize in business loans.

Even were we to better understand why borrower A chose to deal with lender B, however, an additional question would remain: Would the remedy the law offers to B in the event of default work at cross purposes with the parties’ incentives to exploit their respective competitive advantages that motivated the loan transaction in the first place? To the extent that parties are enabled to custom design their own remedial schemes, the risk that the remedy might dilute the gains from optimal matching is likely minimal. Creditors’ remedies, then, should probably only be default provisions. There is much in the literature that criticizes the mandatory one-size-fits-all character of bankruptcy legislation (Schwartz, 1994b, 1997b, 1998; Rasmussen, 1992). Since collective remedies, which we style bankruptcy, tend to be mandatory, and cannot easily be contracted away from, the burden on supporters of bankruptcy to show that the collective remedy is likely to be efficient for individually contracted-for debt ought to be substantial.

2.Creation of collective debt

Sometimes, debtors undertake collective obligations, issuing identical debt instruments (bonds) to numerous members of the general public in a public offering, or committing torts which injure a large number of people, as in failing to properly maintain an aircraft which crashes injuring a number of passengers. In these rarer cases, the obligations of the debtor to any creditor match those owed to any other creditor member of the collective. Debt will probably be collectively incurred whenever there are economies