Coase-Sandor Institute for Law & Economics Research Paper Series

Publication Date

2024

Publication Title

Coase-Sandor Working Paper Series in Law and Economics

Abstract

Control rights are rights to control how a debtor uses certain resources, such as rights to foreclose on collateral, terminate a contract, or prevent assignment of contractual rights. Law and economics scholars have mused whether bankruptcy law should supplant control rights, but they’ve assumed that all control rights share the same goal: to protect a party’s investment in a company.

This Article rejects that assumption. It shows that there are two kinds of control rights that bankruptcy law should treat differently. One kind - what this Article dubs “investment-backed control rights” - aims to protect a party’s investment in the debtor. Since the debtor is best positioned to put its assets to their highest and best uses, the debtor should be able to convert investment-backed control rights from property rules to liability rules. The other kind - what the Article calls “spillover control rights” - is designed to protect a counterparty’s enterprise from how a debtor uses a resource. Franchisor-franchisee, sports league-team, and partnership-partner relationships illustrate these dynamics. Since the right holder has the incentives and knowledge to determine how to optimally use that resource, bankruptcy law should respect the property rule remedies used to enforce spillover control rights.

This Article reveals that these different control rights create their own sets of complementarities at different levels of an organization. Traditional law and economics accounts call for courts to maximize the debtor’s, and only the debtor’s, resources. This Article suggests that bankruptcy law should have a broader scope: it should aim to preserve the complementarities that investment-backed and spillover control rights generate.

Number

1009

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