The following is an adapted excerpt from “To Protect Their Interests: The Invention and Exploitation of Corporate Bankruptcy” by Stephen J. Lubben, now out at Columbia University Press.
This is a book about corporate bankruptcy. In particular, it is a historical account about how we developed the American corporate bankruptcy system that we have today. In the early days, all bankruptcy was business bankruptcy because bankruptcy was limited to “merchants,” however defined. But corporate bankruptcy (or “restructuring,” or “reorganization”) did not develop until corporations became widespread, outside of specific public projects: certainly no sooner than the 1840s.
The book is motivated by my prior glancing blows with business bankruptcy history. They revealed enough to make it clear that corporate reorganization did not begin with J. P. Morgan—despite the conventional wisdom to the contrary. Moreover, the parts of the story between J. P. Morgan in the 1890s and the enactment of the current Bankruptcy Code in 1978 always seemed to be told at high speed, with only a passing mention of the New Deal. While that approach draws out the connections between the 1890s and today—most evident regarding modern chapter 11—it assumes a strong, linear relationship that may not hold up to more thorough scrutiny. That is, there may not be a direct line between J. P. Morgan and leading modern bankruptcy attorneys like Harvey Miller or Corinne Ball.
This book differs from previous corporate bankruptcy histories in two key respects. First, I place the “founding” of corporate bankruptcy at least a decade earlier than most prior authors. That is, rather than start with the “Morganizations” of the 1890s, I look to the work of Jay Gould in the 1880s. Particularly, as explained in early chapters of this book, I view the Texas and Pacific’s 1885 receivership as a moment when several already-extant techniques came together to be used in the successful reorganization of a large railroad. This is less a genesis moment than simply a clear point of unity, in a context with economic significance. Gould did not invent any new reorganization tools in 1885—he simply used existing tools in a coherent way in the case of a large railroad (the Texas and Pacific) for the first time.
Second, the book spends limited time talking about legislation. Instead, I tell the story of the early development of corporate bankruptcy through the stories of key cases. Even when we get to more modern times, while I certainly note the changeover to statutes, my focus is on what actually happened in reorganization cases. In large part, this reflects my view that participants in the corporate bankruptcy system tend to adapt whatever statute might be available to fit their needs—regardless of what the drafters of that statute might have intended. Thus, I ultimately conclude that modern chapter 11 reflects much more Jay Gould than anything else that the 1978 drafters might have intended.
This is not to say that the controlling actors can do whatever they want when it comes to corporate bankruptcy. Rather, my argument is that “insiders”— those with sway over the corporate bankruptcy process—will flex a statute to meet their ends. When they are unable to do so—chapter X of the Chandler Act, which I discuss in connection with W. T. Grant in chapter 6, might be an example—these same insiders will simply avoid the specific corporate bankruptcy process in favor of something else whenever possible.
My thesis is that big corporate bankruptcy has been, since its inception, a flexible system that is dominated by large players focused on controlling debtor- corporations. Smaller actors, be they shareholders, employees, or creditors, are simply observers. Whether that is good or bad depends on the specific context, and often the specific interest of the outsider that we are considering. For example, in the nineteenth century, small trade creditors or nonemployee tort claimants were often treated pretty well, and indeed frequently were paid in full. Small shareholders, small bondholders, and employees with personal injury claims, on the other hand, frequently went unpaid.
Moreover, I argue that any corporate bankruptcy system involves trade-offs, always creating winners and losers. The current system might be better than any alternative, but it is time to move away from the “everyone wins” stories that have dominated corporate bankruptcy policy discussions since at least the 1980s, if not earlier.
I also use this book to push against another Reagan Age chestnut: the confidence that regulatory systems work better when they solely rely on markets, rather than government, to address concerns. The current Bankruptcy Code, enacted in 1978, is steeped in this mentality. And certainly, the New Deal corporate bankruptcy system that it replaced sometimes did not work very well. But did the Bankruptcy Code, and its chapter 11, go too far in the deregulatory direction? That is, did the rush to trash the New Dealer’s inelegant solutions reopen the door to the real problems that they had identified? I suggest that the answer is “yes.”
This article is excerpted from “To Protect Their Interests: The Invention and Exploitation of Corporate Bankruptcy” by Stephen J. Lubben. Copyright (c) 2026 Columbia University Press. Used by arrangement with the Publisher. All rights reserved.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
Subscribe here for ProMarket‘s weekly newsletter, Special Interest, to stay up to date on ProMarket‘s coverage of the political economy and other content from the Stigler Center.
