Judging Business Judgment: The Federal Common Law of Bankruptcy Transactions in Chapter 11

When a federal judge encounters a statutory gap too wide to fill through ordinary statutory interpretation, should she borrow state law or make her own rule? The Supreme Court instructs judges to err on the former side, weighing the preservation of otherwise-applicable state law against federal needs that might compel a common-law (i.e., judge-made) rule. But in bankruptcy, a field long motivated more by equity than the strict letter of the Bankruptcy Code, judges frequently strive to create the best rule for the case. Products of this common-lawmaking enterprise include standards as weighty as those for transactions under §§ 363-365 of the Code, which allow corporate debtors to breach their contracts or compel counterparties to perform, subordinate their creditors’ priority with new debt and, increasingly, sell themselves entirely.

Lately, however, the Court has taken a path of retrenchment toward this “bankruptcy exceptionalism.” Its latest installment came in the reversal of Purdue, but it stretches back decades. These rebukes cast a shadow over bankruptcy common law. Accordingly, this Article makes a new intervention in debates around common law’s bounds by applying the Court’s precedents to one of bankruptcy’s most vital judge-made rules: the standard for transactions under §§ 363-365. In doing so, it reveals that state—not judge-made—law should govern. The prevailing standard is therefore unsound, with sobering consequences for the many stakeholders that rely on it and, by extension, the countless judge-made rules that the Court’s prior laxity has permitted throughout federal statutory schemes, from tax to securities law.

Determining the right rule for transactions in Chapter 11 impacts every corporate bankruptcy and dictates how billions of dollars are disposed of each year. More than that, it illuminates trans-substantive tensions—between textualism and bankruptcy exceptionalism, federalism and efficiency, and judicial lawmaking and the separation of powers—while informing strategies to reconcile the Court’s common-law antipathy with the need for flexibility in adjudication.