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On February 19, 2020, the Small Business Reorganization Act of 2019 went into effect in the United States. This statute was intended to make the rescue regime of Chapter 11 of the United States Bankruptcy Code more effective for smaller businesses that would not otherwise have the financial wherewithal to complete a traditional Chapter 11 reorganization. This article describes the central innovations of the new statute, and considers whether they might be adaptable by other countries. [ABSTRACT FROM AUTHOR]

Law and economics scholars have long argued that efficiency is best served when a firm's capital structure is arranged as a single hierarchical value waterfall. In such a regime, claimants with seniority are made whole before the next-junior stakeholders receive anything. To implement this single waterfall approach, those scholars envision a property-based mechanism: a blanket lien on all of a firm's assets, and therefore all of its value (including as a goingconcern). This view informs a number of academic proposals for contractual bankruptcy and relative priority. Coincident with this scholarship, lawyers, scholars, and judges have largely accepted at face value the proposition that Article 9 of the Uniform Commercial Code implements the single waterfall. In other words, they assume that the law allows a secured lender to write contracts that enable it to capture all of a distressed company's going-concern value. This assumption has placed "senior" secured lenders firmly in the driver's seat when a firm falls into distress. So-called "senior" creditors claim priority in all of the value and control over all of the cash. They often push aggressively for a quick sale of the firm as a going concern, or liquidation of its assets, followed by distribution of all of the sale proceeds to the secured lender. In this Article, we illustrate that neither Article 9 nor the federal Bankruptcy Code, in fact, implements the single waterfall. Instead, both maintain a distinction between claims with priority based on a property interest in the firm's assets and claims to the residual value of the firm. Whenever the firm continues in operation, there will always be two value waterfalls--one tied to assets, and the other not. The second waterfall consists of unencumbered assets, as well as the going-concern and other value of the firm that Chapter 11 preserves. The key legal (and often forgotten) concept that maintains this distinction is "equitable tracing"--required by both Article 9 and Chapter 11. The terms "equitable principles" in Article 9 and "equities of the case" in Chapter 11 refer to equitable tracing principles that, in turn, inform secured creditors' "fair and equitable" baseline entitlement under a Chapter 11 plan. On the petition date, the value of the firm is therefore divided into two categories: value traceable to encumbered assets and other value. This relationship must then be managed over time, as the value of the firm changes. To accomplish this, Chapter 11 treats realization of value as a two-step process that we call "Equitable Realization." Equitable Realization uses tracing principles to allocate a firm's value between asset-based and firm-based claimants and to preserve that allocation over time. First, it fixes the relative positions of secured and unsecured claims when a bankruptcy petition is filed. Second, it delays the fixing of the value of secured claims until collateral is sold or a Chapter 11 plan is confirmed. The value of the secured creditor's collateral may increase, but the secured creditor's entitlement to any bankruptcy-created value extends only to "identifiable proceeds"--value that can be traced to assets encumbered on the petition date. As a result, increases in going-concern value of the company in this period, and other bankruptcy-created value more generally, are not within a lender's collateral package. Any going-concern value created or preserved by Chapter 11 is allocated to the bankruptcy estate for the benefit of all stakeholders--workers, retirees, customers, and more. We then address whether Article 9 and the Bankruptcy Code took the right approach by choosing Equitable Realization over the single waterfall. Many scholars, all the way back to Grant Gilmore, have questioned the wisdom of the single waterfall. Joining and expanding on those scholars' concerns, we explain the benefits of Equitable Realization and how the concept resonates with a large family of corporate and commercial law rules that guard against undercapitalization and judgment proofing. Equitable Realization not only implements the Bankruptcy Code's core goal of equitable treatment of creditors, but, by properly identifying firms' residual claimants, limits a firm's ability to externalize risk and increases the prospect of reorganizing troubled companies. The last task of this Article is to test our insights against the valueallocation proposals in the Final Report of the American Bankruptcy Institute Commission to Study the Reform of Chapter 11, as well as priority-related proposals in academic scholarship. Many of the Commission's proposals are consistent with Equitable Realization. But one proposal in particular, redemption option priority, allocates too much to secured creditors relative to our interpretation of current law. [ABSTRACT FROM AUTHOR]

In Chrysler's Chapter 11 bankruptcy, a finding that the debtor was losing $100 million per day justified the hurry-up sale of the company to Fiat. The assertion that a firm is a melting ice cube is frequently offered, soon after a bankruptcy filing, to justify a quick sale of the firm under § 363(b) of the Bankruptcy Code. This raises a policy question: is this speed and the attendant streamlining of process a bug or feature? Do hurry-up going-concern sales maximize value for the bankruptcy estate, or do they facilitate collusive deals among incumbent managers, senior creditors, and potential purchasers? The answer is a little bit of both. It is crucial to distinguish between sales where the court and parties have good information about the value of the company and the costs of delay, from those in which melting ice cube leverage is used to exploit information asymmetries and to lock in a favored deal. To accomplish this sorting and reduce opportunistic use of transactional leverage, we seek to allocate the increased risks of forgone process to the beneficiaries of the sale rather than to the bankruptcy estate. We propose that a reserve—the Ice Cube Bond—be set aside at the time of sale to preserve any potential disputes about valuation and priority for resolution after the sale has closed. This approach retains expedited § 363 sales as a useful way to quiet title in complex assets and maximize value, while preserving the opportunities for negotiation and adjudication contemplated by the Bankruptcy Code. [ABSTRACT FROM AUTHOR]