Optimal Deterrence and the Preference Gap

It is generally understood that the way to discourage particular behavior in individuals is to punish that behavior, on the theory that rational individuals seek to avoid punishment. Laws aimed at deterring behavior operate on the assumption that increasing the likelihood of punishment, the severity of punishment, or both, will decrease the behavior. The success of these laws is evaluated by how much the targeted behavior decreases. The law of preferential transfers—which punishes creditors who have been paid prior to a bankruptcy filing at the expense of other, unpaid creditors—has been defended on the grounds that it deters a race to collect from a struggling debtor. However, deterrence theory suggests that the low likelihood of punishment and the cap on punishment associated with preference law make it a very poor deterrence. Further, empirical evidence drawn from interviews with affected creditors, debtors, and attorneys demonstrates that in practice preference law does little or nothing to deter targeted behavior and, in the process, imposes significant costs. The weaknesses of preference law call for its significant revision, to place a greater focus on specific categories of creditors to be punished on account of their pre-bankruptcy activities

Optimal Deterrence and the Preference Gap

This Article is the first of its kind to argue that preference law is ineffective as a deterrent of collection behavior based on empirical evidence, drawn from interviews of actors within the field-debtors, creditors, and the attorneys who represented them in bankruptcy proceedings. This Article reports on interviews of sampled individuals who participated in successful 7 Chapter 11 reorganization cases involving preference actions. The overwhelming and indisputable conclusion from these interviews is that creditors may adjust their behavior in response to preference law, but not in ways that further the purported goal of preference deterrence. Accordingly, if preference law is a law of deterrence, it is wholly ineffectual in its purpose

Relational Preferences in Chapter 11 Proceedings

It is no secret that creditors hate so-called preference actions, which permit a debtor to recover payments made to creditors on the eve of bankruptcy for the benefit of the estate. Nominally, preference actions are intended to equalize the extent to which each unsecured creditor must bear the loss of a bankruptcy discharge, or to discourage creditors from rushing to collect from the debtor in such a way that will push an insolvent debtor into bankruptcy. But empirical evidence strongly suggests that, at least in chapter 11 reorganization proceedings, preference actions do not fulfill either of these stated goals. Interviews with debtors, trade creditors, and attorneys involved in small- and medium-sized chapter 11 bankruptcy cases establish both that creditors are not deterred from collecting by preference actions, and that preference actions are not applied equally in a system where debtors are able to choose which preferential transfers to avoid and how much to accept in settlement of preference actions. Instead, these interviews suggest an alternative justification for preference law in chapter 11, one more consistent with promoting a debtor\u27s ability to exercise strategic leverage over its creditors in an effort to reorganize. In this way, the law of preference avoidance is actually one of preference perpetuation, and is exercised with an eye towards preserving valuable relationships within bankruptcy proceedings

Relational Preferences in Chapter 11 Proceedings

It is no secret that creditors hate so-called preference actions, which permit a debtor to recover payments made to creditors on the eve of bankruptcy for the benefit of the estate. Nominally, preference actions are intended to equalize the extent to which each unsecured creditor must bear the loss of a bankruptcy discharge, or to discourage creditors from rushing to collect from the debtor in such a way that will push an insolvent debtor into bankruptcy. But empirical evidence strongly suggests that, at least in chapter 11 reorganization proceedings, preference actions do not fulfill either of these stated goals. Interviews with debtors, trade creditors, and attorneys involved in small- and medium-sized chapter 11 bankruptcy cases establish both that creditors are not deterred from collecting by preference actions, and that preference actions are not applied equally in a system where debtors are able to choose which preferential transfers to avoid and how much to accept in settlement of preference actions. Instead, these interviews suggest an alternative justification for preference law in chapter 11, one more consistent with promoting a debtor\u27s ability to exercise strategic leverage over its creditors in an effort to reorganize. In this way, the law of preference avoidance is actually one of preference perpetuation, and is exercised with an eye towards preserving valuable relationships within bankruptcy proceedings

Extreme isolation of WN3/O3 stars and implications for their evolutionary origin as the elusive stripped binaries

Recent surveys of the Magellanic Clouds have revealed a subtype of Wolf-Rayet (WR) star with peculiar properties. WN3/O3 spectra exhibit both WR-like emission and O3 V-like absorption - but at lower luminosity than O3 V or WN stars. We examine the projected spatial distribution of WN3/O3 stars in the LMC as compared to O-type stars. Surprisingly, WN3/O3 stars are among the most isolated of all classes of massive stars; they have a distribution similar to red supergiants dominated by initial masses of 10-15 $M_{\odot}$, and are far more dispersed than classical WR stars or luminous blue variables (LBVs). Their lack of association with clusters of O-type stars suggests strongly that WN3/O3 stars are not the descendants of single massive stars (30 $M_{\odot}$ or above). Instead, they are likely products of interacting binaries at lower initial mass (10-18 $M_{\odot}$). Comparison with binary models suggests a probable origin with primaries in this mass range that were stripped of their H envelopes through non-conservative mass transfer by a low-mass secondary. We show that model spectra and positions on the Hertzsprung-Russell diagram for binary stripped stars are consistent with WN3/O3 stars. Monitoring radial velocities with high-resolution spectra can test for low-mass companions or runaway velocities. With lower initial mass and environments that avoid very massive stars, the WN3/O3 stars fit expectations for progenitors of Type Ib and possibly Type Ibn supernovae.Comment: Accepted for publication in MNRA

Restructuring the Bankruptcy System: A Strategic Response to Stern V. Marshall

The Supreme Court\u27s ruling in Stern v. Marshall has signaled a need to alter the bankruptcy courts\u27 jurisdictional structure. In Stern, the Supreme Court ruled that bankruptcy judges, who lack the life tenure and salary protections provided by Article III, cannot issue final rulings in bankruptcy proceedings previously believed to be within their core jurisdiction. In response to the constitutional challenge raised by Stern, and in recognition that bankruptcy court\u27s jurisdictional limits represent a long-standing problem, many argue for a long-term solution: the restructuring of the system to create specialized Article III bankruptcy courts. This article evaluates this proposal in light of classic principles of system restructuring, namely, that any proposed restructure should stem from the underlying goals or strategy for that system. The creation of a specialized Article III bankruptcy court is consistent with the view of bankruptcy as a method of distribution, but not with bankruptcy as a procedural mechanism to deal with collective default. In recognition of this tension, the article promotes an alternative solution to the Stern problem, one that harmonizes other strategic approaches and promotes uniformity in bankruptcy. This solution would replace bankruptcy courts with an administrative agency subject to the review of non-specialized district courts

The Market for Bankruptcy Courts: A Case for Regulation, Not Obliteration

Large corporate debtors typically file for bankruptcy only after conducting a thorough analysis as to the most favorable venue for the case. Recent legislation has proposed to severely limit all corporate debtors’ ability to select bankruptcy venue. The messaging behind calls for venue reform is outwardly altruistic: it is said to be necessary to facilitate access to justice and to prevent abuse of the system. However, the push for venue reform is largely driven by professional envy and a distrust of specific judges based on unpopular high-profile rulings. Placing new constraints on the ability to choose venue will not achieve the reform’s stated goals and may instead harm debtors and their creditors by limiting their ability to have complex bankruptcy issues heard in the venue to which they are best suited. A better approach is to facilitate a market selection process in which both debtors and creditors can participate, simultaneously enacting reforms that will facilitate creditor involvement and encourage uniformity among courts in matters of substantive and procedural law

Preferences Are Public Rights

In the wake of the Supreme Court’s decision in Stern v. Marshall, there is widespread uncertainty as to what other proceedings may constitutionally fall within a bankruptcy court’s core jurisdiction. Supreme Court jurisprudence has been cryptic regarding the constitutional limitations of non-Article III courts, but the Court has identified a public rights exception to the general rule that the judicial power must be exercised only by judges with life tenure and salary protection. This public rights exception has not yet been explicitly extended to a bankruptcy proceeding, but the reasoning of the Court strongly suggests that a trustee’s motion to avoid preferences would fall under the public rights exception, as a proceeding stemming exclusively from bankruptcy law and necessary to resolve claims against the estate. Accordingly, and contrary to what most scholars have suggested, preference proceedings fit comfortably within the jurisdiction of bankruptcy courts, even after the Supreme Court’s ruling in Stern

Conflicting Preferences in Business Bankruptcy: The Need for Different Rules in Different Chapters

The law of preferential transfers permits the trustee of a bankruptcy estate to avoid transfers made by the debtor to a creditor on account of a prior debt in the 90 days leading up to the bankruptcy proceeding. The standard for avoiding these preferential transfers is one of strict liability, on the rationale that preference actions exist to ensure that all general creditors of the bankruptcy estate recover the same proportional amount, regardless of the debtor\u27s intent to favor any one creditor or the creditor\u27s intent to be so favored. But preference law also permits certain exceptions to strict preference liability and gives the estate trustee discretion in pursuing preference actions. This undermines the policy of equal distribution by permitting some creditors to fare better than others in the bankruptcy distribution. However, these practices are arguably necessary to promote the conflicting bankruptcy policies that seek to maximize the estate for the benefit of creditors and also encourage the survival of struggling businesses. As a result, the law of preferences is internally inconsistent and controversial, attempting unsuccessfully to serve multiple policy masters simultaneously. Much of the analysis on preferences up to now has proposed amending preference law generally in an attempt to satisfy these often conflicting demands. This Article recommends a more dramatic approach: returning preference law to a mechanism of equal distribution in liquidation proceedings by eliminating true exceptions to the rule, and doing away with preference law in the context of bankruptcy reorganization

Clues about the scarcity of stripped-envelope stars from the evolutionary state of the sdO+Be binary system phi Persei

Stripped-envelope stars (SESs) form in binary systems after losing mass through Roche-lobe overflow. They bear astrophysical significance as sources of UV and ionizing radiation in older stellar populations and, if sufficiently massive, as stripped supernova progenitors. Binary evolutionary models predict them to be common, but only a handful of subdwarfs (i.e., SESs) with B-type companions are known. This could be the result of observational biases hindering detection, or an incorrect understanding of binary evolution. We reanalyze the well-studied post-interaction binary phi Persei. Recently, new data improved the orbital solution of the system, which contains a ~1.2 Msun SES and a rapidly rotating ~9.6 Msun Be star. We compare with an extensive grid of evolutionary models using a Bayesian approach and find initial masses of the progenitor of 7.2+/-0.4 Msun for the SES and 3.8+/-0.4 Msun for the Be star. The system must have evolved through near-conservative mass transfer. These findings are consistent with earlier studies. The age we obtain, 57+/-9 Myr, is in excellent agreement with the age of the alpha Persei cluster. We note that neither star was initially massive enough to produce a core-collapse supernova, but mass exchange pushed the Be star above the mass threshold. We find that the subdwarf is overluminous for its mass by almost an order of magnitude, compared to the expectations for a helium core burning star. We can only reconcile this if the subdwarf is in a late phase of helium shell burning, which lasts only 2-3% of the total lifetime as a subdwarf. This could imply that up to ~50 less evolved, dimmer subdwarfs exist for each system similar to phi Persei. Our findings can be interpreted as a strong indication that a substantial population of SESs indeed exists, but has so far evaded detection because of observational biases and lack of large-scale systematic searches.Comment: 11 pages, 5 figures, accepted for publication in A&