Sophisticated — But Not Perfect — Parties

Kenneth Ayotte

Professor Kenneth Ayotte and Christina Scully ’21 challenge a tenet in law and economics in a recent article published in the Yale Law Journal’s online Forum. Using bankruptcies at J. Crew and Nine West as case studies, they argue the assumption that corporate finance contracts are written optimally, leaving little place for bankruptcy law, is an idealized view. In fact, they write, the companies’ stories show that “contracting parties, no matter how sophisticated, cannot possibly imagine and contract to prevent all possible loopholes that other sophisticated parties might exploit,” and that any theory of debt should recognize this inherent complexity.