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Finance theorists have long recognized that bankruptcy is a key component in any general theory of the capital structure of business entities. Legal theorists have been similarly sensitive to the substantial allocational and distributional effects of the bankruptcy law. Nevertheless, until recently, underlying justifications for the bankruptcy process have not been widely studied. Bankruptcy scholars have been content to recite, without critical analysis, the two normative objectives of bankruptcy: rehabilitation of overburdened debtors and equality of treatment for creditors and other claimants. The developing academic interest in legal theory has spurred a corresponding interest in expanding the theoretical foundations of bankruptcy law as well. One of us has developed over the past several years a conceptual paradigm, based on a hypothetical bargain among creditors, as a normative criterion for evaluating the bankruptcy system. The cornerstone of the creditors' bargain is the normative claim that prebankruptcy entitlements should be impaired in bankruptcy only when necessary to maximize net asset distributions to the creditors as a group and never to accomplish purely distributional goals. The strength of the creditors' bargain conceptualization is also its limitation. The hypothetical bargain metaphor focuses on the key bankruptcy objective of maximizing the welfare of the group through collectivization. This single-minded focus on maximizing group welfare helps to identify the underlying patterns in what appear to be unrelated aspects of the bankruptcy process. It also implies that other normative goals should be seen as competing costs of the collectivization process. Yet this claim uncovers a further puzzle. Despite the centrality of the maximization norm, persistent and systematic redistributional impulses are apparent in bankruptcy. Is redistribution in bankruptcy simply attributable to random errors or misperceptions by courts and legislators? Or are other forces present in the bankruptcy process as well? In this Article we undertake to examine the "other forces" that may be at work in bankruptcy. Many bankruptcy rules require sharing of assets with other creditors, shareholders, and third parties. Too often these distributional effects are grouped together under general references to equity, wealth redistribution, or appeals to communitarian values. These labels are unhelpful. They disguise the fact, for instance, that the justification and impact of consensual risk sharing among creditors is entirely different in character from the rationale for using bankruptcy to redistribute wealth to nonconsensual third parties. Understanding these diverse effects requires, therefore, a method of discriminating among the different motivations that impel redistributions in bankruptcy.

In 1571 Parliament passed a statute making illegal and void any transfer made for the purpose of hindering, delaying, or defrauding creditors.' This law, commonly known as the Statute of Elizabeth, was intended to curb what was thought to be a wide-spread abuse. Until the seventeenth century, England had certain sanctuaries into which the King's writ could not enter. A sanctuary was not merely the interior of a church, but certain precincts defined by custom or royal grant. Debtors could take sanctuary in one of these precincts, live in relative comfort, and be immune from execution by their creditors. It was thought that debtors usually removed themselves to one of these precincts only after selling their property to friends and relatives for a nominal sum with the tacit understanding that the debtors would reclaim their property after their creditors gave up or compromised their claims. The Statute of Elizabeth limited this practice. The basic prohibition of this statute, which prevents debtors from making transfers that hinder, delay, or defraud their creditors, has survived for over four centuries. A debtor cannot manipulate his affairs in order to shortchange his creditors and pocket the difference. Those who collude with a debtor in these transactions are not protected either. An individual creditor who discovers his debtor's assets have been fraudulently conveyed can reduce his claim to judgment and have the sheriff levy on the property that is now no longer in the debtor's hands (as long as the property is not in the hands of a bona fide purchaser for value). 'The difficulty that courts and legislatures have faced for hundreds of years has been one of trying to define what kinds of transactions hinder, delay, or defraud creditors. From very early on,common law judges developed per se rules, known as "badges of fraud," that would allow the courts to treat a transaction as a fraudulent conveyance even though no specific evidence suggested that the debtor tried to profit at his creditors' expense. For ...