Publication Title

Washington University Law Quarterly


The focus of this paper is on two topics. The first is about the use of a privately arranged assignment for the benefit of creditors (“ABC”) as a substitute for bankruptcy. In its most unqualified form, the argument is that California high-tech firms—an important group given the role of California in high-tech industries—systematically use bankruptcy less than firms in other states, and that this practice follows directly from California legal rules that make the process for ABCs more streamlined in California than it is in other states.

The second, with potentially broader significance, is that data gathered from the files of the bankrupt firms in the data set provides a unique glimpse of the capital structure of mid-size business bankruptcies, which shows a startling amount of assets and debt both secured and unsecured. Contrary to the idea that venture-backed firms have simple capital structures with few claimants, and that they have substantially no valuable assets when they fail, the average bankrupt firm in the data set reported tangible assets of more than $20 million, claims of secured creditors of about $14 million, and claims of unsecured creditors of about $34 million. That data, together with the results of my interviews about why those firms seek relief in bankruptcy, supports a much-improved understanding of exactly what benefits the bankruptcy system provides that firms could not obtain by contracts among themselves.

The paper proceeds in three steps: a description of the quantitative data and interviews collected for this paper; statistical analysis of the quantitative data, informed by the results of the interviews; and discussion of the theoretical and policy implications of my findings.