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Modern scholarship on corporate bankruptcy works from the premise that investors are willing to expend resources identifying and saving insolvent firms that can continue efficiently. In this Article, Professor Adler argues that this premise may be faulty, at least for multiple-creditor firms. Viewed properly, from an ex ante perspective, investors may wish to design initial capital structures that will produce few insolvent but viable firms. Consequently, in a world of unimpeded contractual choice investors might forgo any collective insolvency process directed primarily at the preservation of going concerns. Professor Adler argues, accordingly, that corporate bankruptcy law and proposals for its replacement may be ill-advised for largefirms, not because these firms could efficiently continue post insolvency without bankruptcy reorganization or some substitute, but because it may be appropriate that these firms not continue. In the process of making this argument, Professor Adler offers new interpretations of three puzzling phenomena: asset-based finance; the failure of investors to contractually avoid the seemingly expensive American bankruptcy reorganization process; and common equity’s residual interest in a firm that fails to pay dividends on preferred stock.

A party in breach of contract cannot sue the victim of breach to recover what would have been the victim’s loss on the contract. The doctrinal rationale is simple: A violator should not benefit from his violation. This rationale does not, however, provide an economic justification for the rule. Indeed, efficient breach theory is founded on the proposition that a breach of contract need not be met with reproach. Yet the prospect of recovery by the party in breach—that is, the prospect of negative damages—has received scant attention in the contracts literature. Close analysis reveals potential costs to disallowance of negative damages, particularly where a party with private information about the benefits of termination also has an incentive to continue under the contract. These costs can arise both ex post, at the time of a performance-or-termination decision, and ex ante, in anticipation of that decision. Nevertheless, allowance of negative damages could impose its own costs, where background information would create an incentive to repudiate a contract before either party could gather more information, for example. Ex ante contractual provisions, such as liquidated-damages or specific-performance clauses, permit parties some latitude to balance the costs of disallowance and allowance of negative damages, albeit imperfectly. Common law limitations on the mitigation duty may be seen as a mechanism to approach this balance in the absence of an explicit con- tractual solution.