Reorganization Realities, Methodological Realities, and the Paradigm Dominance Game

The comments I present here pertain to two subjects. The first is the Warren and Westbrook attack on arm chair theorists\u27 and the response of the Conferees to this attack. The second is the problem of sample selection and its relationship to regularized data gathering

Virtual Judgment Proofing: A Rejoinder

This is a rejoinder by the author of The Death of Liability, 106 Yale L.J. 1 (1996). The rejoinder is to a reply by Professor James J. White to the original article. Corporate Judgment Proofing: A Response to Lynn LoPucki\u27s The Death of Liability, 107 Yale L.J. 1363 (1998). In response to specific points made by White, LoPucki argues that the judgment proofing of large companies would not be visible in Compustat data because it is not accomplished through secured debt or leasing and because Compustat data is aggregated by corporate group. Contracting parties will permit debtors to judgment proof themselves because by doing so the contracting parties and debtors can externalize liability and split the profits between them. LoPucki also responds to arguments that corporate veil piercing, fraudulent conveyance law, government and consumer reaction, and mandatory insurance will prevent judgment proofing by large companies. The rejoinder concludes that computerization will lead to the proliferation of virtual companies that are born judgment proof

Algorithmic Entities

In a 2014 article, Professor Shawn Bayern demonstrated that anyone can confer legal personhood on an autonomous computer algorithm by putting it in control of a limited liability company. Bayern’s demonstration coincided with the development of “autonomous” online businesses that operate independently of their human owners—accepting payments in online currencies and contracting with human agents to perform the off-line aspects of their businesses. About the same time, leading technologists Elon Musk, Bill Gates, and Stephen Hawking said that they regard human-level artificial intelligence as an existential threat to the human race. This Article argues that algorithmic entities—legal entities that have no human controllers—greatly exacerbate the threat of artificial intelligence. Algorithmic entities are likely to prosper first and most in criminal, terrorist, and other anti-social activities because that is where they have their greatest comparative advantage over human-controlled entities. Control of legal entities will contribute to the threat algorithms pose by providing them with identities. Those identities will enable them to conceal their algorithmic natures while they participate in commerce, accumulate wealth, and carry out anti-social activities. Four aspects of corporate law make the human race vulnerable to the threat of algorithmic entities. First, algorithms can lawfully have exclusive control of not just American LLC’s but also a large majority of the entity forms in most countries. Second, entities can change regulatory regimes quickly and easily through migration. Third, governments— particularly in the United States—lack the ability to determine who controls the entities they charter and so cannot determine which have non-human controllers. Lastly, corporate charter competition, combined with ease of entity migration, makes it virtually impossible for any government to regulate algorithmic control of entities

Court-System Transparency

This article applies systems analysis to two ends. First, it identifies simple changes that would make the court system transparent. Second, it projects transparency\u27s consequences. Transparency means that both the patterns across, and details of, case files are revealed to policymakers, litigants, and the public in easily understood forms. Government must make two changes to achieve court system transparency. The first is to remove the existing restrictions on the electronic release of court documents, including the requirements for registration, separate requests for each document, and monetary payment. The second - already being implemented in the federal courts - is to require the use of data-enabled forms. Once these changes are in place, institutions and private parties will process the available data at the parties\u27 own expense. That processing will generate millions of real-time views of court system operation using automatically-updated regression analyses and both textual and graphical data displays. The effect would be a renaissance. Corruption, incompetence, inefficiency, prejudice and favoritism would be exposed and wither. Litigation would be cheap and easy because parties could see all court files in the system and copy the work of others. Policy makers could see the human consequences of the laws they enact and adjust accordingly. Lawyers could predict the outcomes of their cases, making litigation less necessary. Citizens would for the first time be able to derive and see the real rules by which they are governed. Transparency would have a minimal effect on privacy. The data processed are already public record and adequate privacy protections are already provided through sealing orders and redaction requirements. Transparency would generate pressures on judges and court administrators, but the effects of those pressures would be generally positive. Limitations on the public enforcement of private arbitration awards might be necessary to prevent parties from opting out of the transparent system

The Myth of the Residual Owner: An Empirical Study

Most bankruptcy scholars who have considered the residual owner approach have come away with a healthy skepticism. But despite its theoretical difficulties, the residual owner approach persists. I attribute this persistence to an empirical assumption that usually remains implicit. In spite of the theoretical difficulties in identifying the single residual owners of bankrupt firms, the scholars who employ residual owner approaches believe that in reality, residual owners exist and can be easily identified inmost cases. Parties may bluster about the uncertainty of firm value and other parties may be compelled to compromise with them in order to avoid an expensive, burdensome valuation process. But at bottom, those scholars assume that the parties all know who is in the money, who is out of it, and who—the residual owner—is in between. This Article reports the results of an empirical study designed to test that implicit assumption. The study concludes that no identifiable, single residual owner class exists in most reorganizing large public companies. Even by the end of the case, the parties have not been able to identify such a class. Part I describes the theoretical debate over the existence and utility of single residual owner classes in big bankruptcy cases. Part II presents the empirical study, beginning with a description of the universe of cases studied, the sources of the data, and the limitations of those sources. Subpart A reports and discusses the study’s findings with respect to the numbers of investors having different levels of priority in the reorganizing firm. The typical reorganizing firm has about four investor priority levels that are subordinate to secured and bankruptcy priority creditors. The existence of so many investor priority levels makes it likely that investors at more than one level will share residual owner status. Subpart B reports and discusses the study’s findings with respect to the numbers of residual owners actually identified by the reorganization process. The principal finding is that in 62% of the firms studied, the reorganization plan recognized that investors at more than one priority level shared residual owner status in a manner that left them with a substantial conflict with respect to investment policy. (That figure is a demonstrated minimum level of sharing; the actual level may be much higher.) Part III concludes that theories depending upon the existence of a single residual owner are unworkable. The problem is not merely that single residual owners are difficult to identify. The problem is that they rarely exist

Legal Culture, Legal Strategy, and the Law in Lawyers\u27 Heads

Legal activity invariably takes place within some structure, however lax. No matter how often the impossibility of such structure is announced by academics, murmurs of disbelief are heard in the trenches below. Legal formalism is the effort to make sense of the lawyer\u27s perception of an intelligible order. This is why in the last two centuries formalism has been killed again and again, but has always refused to stay dead. Weinrib claims to find the structure that explains Formalism\u27s refusal to stay dead in natural law. This Article argues for an entirely different explanation. Law exists in the minds of lawyers in a form separate and critically different from its form on the books. The law in lawyers\u27 heads is largely formalistic and the process by which it is applied is largely deductive. The Formalists are correctly reporting on their own experience. The Realists, who consider only the written law, are at least largely correct in their conclusion that it is overwhelmingly indeterminate. The problem is that neither the Formalists nor the Realists have yet recognized the existence and importance of the separate realm of law in lawyers\u27 heads and its power to drive legal outcomes. Part I of this Article begins by presenting evidence of persistent, systematic differences in legal outcomes between communities governed by the same written law. It then explains how mental models shared within legal communities could produce those differences. Part II argues that the determinate nature of shared mental models renders them vulnerable to manipulation through legal strategy. It explores that vulnerability and the models\u27 defenses to it. Part III then presents two partial theories about how law evolves. The first holds that lawyers are socially constrained in the number of challenges they can make to the shared mental model; how they exercise their limited challenges determines the direction of change. The second holds change to emanate from a dialectic in which legal strategy first achieves results thought unattainable. That leads to a new set of expectations and, finally, to the collapse of the old rules into a new set of rules that explain the new expectations directly. Part IV first explores the explanatory implications of the law in lawyers\u27 heads. Law is psychological phenomena; systematic differences in legal outcomes from community to community are not only possible but inevitable; and any attempt to alter the situation will render legal communities less efficient. Part IV then turns to the normative implications. It argues that strategic analysis has important advantages over economic analysis as a means of understanding law; that the legal system should strive for a level of simplicity at which it is understandable by the governed; and that lawyers and judges should attempt to write the unwritten law that governs their various communities. Part V summarizes the argument and conclusions

Bankruptcy Contracting Revised: A Reply to Alan Schwartz\u27s New Model

In Bankruptcy Contracting Reviewed, Alan Schwartz purports to restate and defend the bankruptcy contracting model he presented in A Contract Theory Approach to Business Bankruptcy. What he in fact does is abandon key assumptions of the original model and substitute new ones. The resulting new model is driven by reputational constraints neither present nor possible in the original model. Yet it works no better than the original. The linchpin of Schwartz\u27s response is his insistence that his original model contained an unstated assumption prohibiting debtor firms from lying. In the context of Schwartz\u27s model, the effect of the new assumption is to bar the debtor from strategic behavior at the contracting stage--an implausibility in the context of bankruptcy. To fit this new assumption to his original model, Schwartz had to make new supporting assumptions that he ultimately could not reconcile with the original model. In addition, as Schwartz has filled in more of the details of his model, other problems of inconsistency and incompleteness have come into sharper focus. As will be apparent, Schwartz has not yet demonstrated the feasibility of bankruptcy contracting in the real world or in his revised model

Corporate Charter Competition

The corporate charter competition has dominated the corporate law literature for four decades. This Article draws on the theoretical and empirical insights from that vast literature to present a systems analysis of the competition. The analysis shows the competition to be a system composed of three subsystems, joined by the internal affairs doctrine. The subsystems are those by which (1) corporations choose incorporation states, (2) states decide what packages to offer, and (3) states and stakeholders choose the courts that interpret and enforce corporate law. The analysis suggests that the standard account of charter competition should be revised in five major respects. First, the charter competition is neither dormant nor merely a competition between Delaware and the corporations’ home states. Other states not only compete, but have captured nineteen percent of the public company charter market. Second, charter competition should be modeled not as an attempt to strike the right balance between managers and shareholders, but as a delegation of power to managers who then strike that balance through implicit contracting. That reconceptualization leads to the insight that states do not need corporate law expertise to compete for incorporations. Third, corporate charter competition as a system is neither a race to the top or the bottom. It is capable of generating only one result: deregulation. What remains of corporate law is not regulation, but mere obfuscation. Fourth, Delaware employs a principally judicial strategy in the competition. That strategy, which requires Delaware to attract litigation as well as incorporations, is faltering. The shift to arbitration of shareholder litigation that is already in progress may strip Delaware of its competitive advantage and eliminate its monopoly. Fifth, regardless of what happens to Delaware, for the foreseeable future charter competition will remain a highly stable system that is effectively beyond democratic control

House Swaps: A Strategic Bankruptcy Solution to the Foreclosure Crisis

Since the price peak in 2006, home values have fallen more than 30 percent, leaving millions of Americans with negative equity in their homes. Until the Supreme Court’s 1993 decision in Nobelman v. American Savings Bank, the bankruptcy system would have provided many such homeowners with a remedy. They could have filed bankruptcy, discharged the negative equity, committed to pay the mortgage holders the full values of their homes, and retained those homes. In Nobelman, however, the Court misinterpreted reasonably clear statutory language and invented legislative history to resolve a three-to-one split of circuits in favor of the minority view that debtors could not modify even the unsecured portions of the mortgages on their principal residences. Courts and commentators have since assumed that modifying home mortgages in bankruptcy is impossible. This Article presents a legal strategy for modifying home mortgages despite Nobelman. The strategy requires that debtors move out of their houses, lease the houses for one year, file bankruptcy, and propose mortgage modification plans that pay mortgage holders the full current values of the houses. This Article argues that despite the artificiality of a move-out with the intention to return, bankruptcy judges will approve the modification plans. The judges will do so because existing precedent requires approval and because the modification plans will be in the best interests of not only the debtors but also the mortgage holders and the American economy. The strategy will enable hundreds of thousands of homeowners to retain homes they would otherwise have lost to foreclosure