Research Interests: reorganization and bankruptcy; leveraged finance; corporate law; theory of the firm
Vince Buccola is an associate professor at the Wharton School, where he studies corporate financial law, especially as it pertains to distress, reorganization, and bankruptcy. Before joining the Wharton faculty, Buccola was a Bigelow Fellow at the University of Chicago Law School. He clerked for Judge Frank H. Easterbrook, of the U.S. Court of Appeals for the Seventh Circuit, and was a trial lawyer at Bartlit Beck. He is a graduate of the University of Chicago Law School (JD) and Wesleyan University (BA).
Vincent Buccola (2023), Sponsor Control: A New Paradigm for Corporate Reorganization, University of Chicago Law Review, 90 (1), pp. 1-47.
Abstract: Bankruptcy scholars have long organized their field around a stylized story, a paradigm, of lender control. When lenders extend credit, the story goes, they insist on the borrower agreeing to strict covenants and granting blanket liens on its assets; then, if the borrower later encounters financial distress, they use their bargained-for rights as prods to steer the company toward a resolution favorable to themselves, whether or not that resolution is value maximizing for the investors as a group. As fruitful as the lender-control heuristic has been, however, it no longer corresponds to reality. This Article introduces a new interpretive paradigm that better accounts for a changed world. Today, more often than not, equity sponsors rather than senior lenders have practical control over the way that distressed companies respond to their financial problems. Lenders no longer hold the big sticks that they once wielded to establish precedence, and the people guiding today’s modal large, distressed business have powerful incentives to preserve the value of sponsor investments. The predictable effect of the new locus of control has been to stand familiar restructuring dynamics on their head. Indeed, a number of seemingly unconnected trends in reorganization practice may best be understood as resulting from sponsors’ first-order incentives to postpone a reckoning that might crystallize losses. Identifying the dynamics of sponsor control thus promises to shed light on a variety of scholarly and policy debates around corporate reorganization.
Vincent Buccola, Efficacious Answers to the Non-Pro Rata Workout.
Abstract: The lack of any comprehensive response to the emergence of non-pro rata refinancing transactions poses a theoretical as well as practical puzzle. Most investors seem to think that equal treatment of creditors in a bond or loan facility ought to orient workout negotiations, at least in most instances. Yet more than two years after a wave of non-pro rata transactions began, and despite evidence that clever lawyers may be able to circumvent structure-specific contractual “fixes,” no effort to rule the transactions out of bounds generally has taken hold. Why not? Some see the episode as reason to doubt the debt markets’ capacity to self-correct. This essay offers a more optimistic account of the status quo. The persistence of non-pro rata deals may be a function of there being, ironically, too many, not too few, efficacious answers. Contract drafters, asset managers, and judges alike have the institutional means to put a stop to wealth-destroying non-pro rata transactions. The problem is that it is hard to know a priori whether the best responses will prove feasible. Because time can tell, the value-maximizing strategy for actors with the bluntest tools is to wait and see. Inaction—for a while—might thus reflect prudent institutional modesty rather than paralysis. A prediction follows: that courts or contract drafters will soon rule out non-pro rata deals generally if asset managers do not figure out how to deal effectively with such transactions on a case-by-case basis.
Abstract: Bankruptcy has a tort problem. Chapter 11 predictably subordinates the claims of tort and other involuntary creditors to those of financial lenders, a fact which encourages firms to rely excessively on secured debt and discount the interests of those they might incidentally harm. For this reason, many scholars have advocated changing repayment priorities to move tort creditors to the front of the line. But despite broad academic support for a new “super priority,” the idea has yet to inspire legislative action. This article proposes an alternative solution rooted in tort claims’ temporal durability rather than their priority. Chapter 11 subordinates tort claims only because of a convention that assets should emerge free-and-clear of prepetition debts if those who control the reorganization so elect. Bankruptcy courts could buck the convention and insist that tort claims follow a debtor’s assets out of Chapter 11 unless a deal otherwise is struck. The theoretical insight motivating our proposal is that durability and priority are close substitutes. In broad strokes, a super-durability norm should produce similar effects to a super-priority rule. In some respects, using durability may in fact be superior. It could avoid the need for costly, inaccurate judicial efforts to estimate the extent of debtors’ tort liability. It could also be implemented by judicial fiat and without new legislation. Whatever one thinks of implementation, taking claim durability seriously as a design variable raises questions—and extends recent debates—about when bankruptcy law needs to crystallize otherwise fluid legal relationships to achieve its ends.
Abstract: Recent high-profile attempts to repudiate municipal bonds break from what had become a stable American norm of honoring public debt. In the nineteenth century, though, hundreds of cities, towns, and counties walked away from their bonds. The Supreme Court’s handling of repudiation in the so-called “municipal bond cases” conjured intense animus. But time and the archaic prose and sheer volume of the opinions have obscured the cases’ significance. This article reconstructs the bond cases with an eye to modern disputes. It reports the results of our reading all 203 cases, decided 1859–1899, in which the Justices opined on bond validity. At a high level, our findings correct a stock narrative in the literature. The standard account paints the Court as a reliable champion of northeastern capitalists in what amounted to regional or class politics more than law. That story does not withstand scrutiny, however. We find, for example, that the Court ruled for the repudiating municipality about a third of the time. The decisions had a readily articulable logic at the heart of which lay the law/fact distinction. Estoppel barred issuers in most instances from denying factual predicates of bond validity, but it did not prevent scrutiny of legal predicates. Where law was at stake, the Justices were willing to hold bonds void on even highly technical grounds. The framework developed by the Justices over this forty-year period, we argue, may be of use to courts facing these issues once again for the first time in a century.
Abstract: Since credit derivatives began to substantially influence financial markets a decade ago, rumors have circulated about so-called “net-short” creditors who seek to damage promising albeit financially distressed companies. A recent episode pitting the hedge fund Aurelius against broadband provider Windstream is widely supposed to be a case in point and has at once fueled calls for law reform and yielded an effigy of ostensible Wall Street predation. This article argues that creditor sabotage is a myth. Net-short strategies work, if at all, by in effect burning money. When therefore an activist creditor shows its cards, as all activists must eventually do, it also reveals an opportunity for other to profit by thwarting the activist’s plans and saving threatened surplus. We discuss three sources of liquidity that targeted firms could tap to block a saboteur—“net-long” derivatives speculators, the targets’ own investors, and bankruptcy. We conclude that it is exceedingly difficult for creditors to make money hobbling debtors and that there is little reason to believe anyone tries. We then examine the Windstream case and find, consistent with our theory, that the strongest reason for thinking Aurelius aimed at sabotage, namely that everyone says so, is weak indeed. Our analysis suggests that calls for law reform are addressed to a non-existent or at worst self-correcting problem. Precisely for this reason, however, the persistent appeal of the sabotage myth is a lesson in political rhetoric. A story needn’t be true for some to find it useful.
Vincent Buccola (Forthcoming), Corporate Expression.
Abstract: The U.S. Supreme Court’s decision in Citizens United v. FEC set off a vigorous and continuing debate about the role of business firms in political life and, more specifically, about their expressive possibilities and limitations. This chapter, to be published in a forthcoming volume of Elgar’s Encyclopedia of Law and Economics, sketches the structure of the American law of corporate expression and surveys the academic literature on political expression in particular. It observes that the evaluative literature reflects two familiar but fundamentally inconsistent approaches to the business firm—one implicitly taking the firm as a black box profit-maximizer and considering the effects of its activity on the broader polity, the other quite explicitly modeling conflict within the firm and considering the effect, especially on shareholders, of managerial discretion. The first approach is naïve; the second, myopic (from a welfarist perspective). This chapter thus argues, albeit gesturally, that the welfare implications of corporate political-expressive capacities remain elusive. One’s best guess is that the effects of robust expressive capacities are directionally mixed with respect to any given firm, heterogeneous across firms, and, because incorporated and unincorporated organizational forms are reasonably close substitutes, small in the aggregate.
Vincent Buccola (2019), Bankruptcy’s Cathedral: Property Rules, Liability Rules, and Distress, Northwestern University Law Review, 114 (3), pp. 705-750.
Abstract: What justifies corporate bankruptcy law in the modern economy? For forty years, economically oriented theorists have rationalized bankruptcy as an antidote to potential coordination failures associated with a company’s financial distress. But the sophistication of financial contracting and the depth of capital markets today threaten the practical plausibility, if not the theoretical soundness, of the conventional model. This Article sets out a framework for assessing bankruptcy law that accounts for changes in the technology of corporate finance. It then applies the framework to three important artifacts of contemporary American bankruptcy practice, pointing toward a radically streamlined vision of the field. Bankruptcy’s virtue, I contend, lies in its capacity to replace “property rules” that may protect investors efficiently when a company is financially healthy with “liability rules” more appropriate for distress. In domains where investors are unable to arrange state-contingent toggling rules, bankruptcy law can do it for them. This agenda plausibly justifies two important uses of Chapter 11—to effect prepackaged plans of reorganization and conclude going-concern sales—but casts doubt on what many suppose to be the sine qua non of bankruptcy, the automatic stay. More broadly, the analysis suggests that an “essential” bankruptcy law would look very different, and do much less, than the law we know.
Abstract: The most significant municipal bankruptcies in history have been filed in the last decade. Chapter 9’s newfound importance has stimulated academic attention, much of it critical, but no general framework has been developed against which scholars and policymakers can evaluate the law’s performance. This article offers a normative, economic account of municipal bankruptcy and uses that account to assess current law and suggest changes. It contends that bankruptcy’s singular aim should be to preserve spatial economies—the advantages to locating within a municipality’s unique geographic boundaries—where large public debts, by discouraging investment, threaten to dissipate them. Judged with this end in view, it is argued, Chapter 9 is a marked failure. The law’s compass is so narrow that intervention comes, if at all, only when spatial economies are likely to have been squandered and economic dysfunction taken hold. Municipal bankruptcy, as it now exists, serves mainly as an ad hoc and ill-conceived subsidy program. This article outlines changes to the law that could hasten debt relief, while acknowledging potential objections.
Abstract: This short response, prepared for the University of Pennsylvania Law Review’s symposium on Bankruptcy’s New Frontiers, takes stock of the contributions of Baird, Casey & Picker, The Bankruptcy Partition, 166 U. Pa. L. Rev. 1675 (2018), and criticizes indeterminacy in the scope of the article’s central construct. Coase’s approach to the theory of the firm would provide a useful supplemental framework, I argue. Questions about the scope of bankruptcy jurisdiction—about the kinds of investor disputes a bankruptcy process should seek to resolve—raise the same tradeoff between opportunism and information costs that Coase and scholars following in his tradition identified long ago. Although optimal scope is unknowable in any given case, the firm investors have created in fact is, I suggest, a useful starting place.
Buccola has taught: