Bankruptcy\u27s Endowment Effect

This Article responds to Professor Markell\u27s analysis of the recent controversy over cramdown interest rates in corporate bankruptcies. The Article argues that the controversy stems from courts and scholars assigning undue importance to preserving creditors\u27 nonbankruptcy endowments in a manner that is inconsistent with foundational bankruptcy policy. The Article makes the case that the guiding principle for optimal bankruptcy design should instead be the minimization of opportunistic behavior that reduces the net value of a firm. Applying this principle to the question of the cramdown interest rate, this piece shows that an optimal rule supports a cramdown interest rate based on the prevailing market rates for similar loans. The Article demonstrates that this approach is consistent with the Bankruptcy Code and the theoretical principles (although not the ultimate conclusion) that Professor Markell has advocated