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Full-Text Articles in Law

Bankruptcy For Banks: A Tribute (And Little Plea) To Jay Westbrook, David A. Skeel Jr. Oct 2018

Bankruptcy For Banks: A Tribute (And Little Plea) To Jay Westbrook, David A. Skeel Jr.

Faculty Scholarship at Penn Law

In this brief essay, to be included in a book celebrating the work of Jay Westbrook, I begin by surveying Jay’s wide-ranging contributions to bankruptcy scholarship. Jay’s functional analysis has had a profound effect on scholars’ understanding of key issues in domestic bankruptcy law, and Jay has been the leading scholarly figure on cross-border insolvency. After surveying Jay’s influence, I turn to the topic at hand: a proposed reform that would facilitate the use of bankruptcy to resolve the financial distress of large financial institutions. Jay has been a strong critic of this legislation, arguing that financial ...


Bankruptcy’S Uneasy Shift To A Contract Paradigm, David A. Skeel Jr., George Triantis Jun 2018

Bankruptcy’S Uneasy Shift To A Contract Paradigm, David A. Skeel Jr., George Triantis

Faculty Scholarship at Penn Law

The most dramatic development in twenty-first century bankruptcy practice has been the increasing use of contracts to shape the bankruptcy process. To explain the new contract paradigm—our principal objective in this Article-- we begin by examining the structure of current bankruptcy law. Although the Bankruptcy Code of 1978 has long been viewed as mandatory, its voting and cramdown rules, among others, invite considerable contracting. The emerging paradigm is asymmetric, however. While the Code and bankruptcy practice allow for ex post contracting, ex ante contracts are viewed with suspicion.

We next use contract theory to assess the two modes of ...


The New Bond Workouts, William W. Bratton, Adam J. Levitin Jan 2018

The New Bond Workouts, William W. Bratton, Adam J. Levitin

Faculty Scholarship at Penn Law

Bond workouts are a famously dysfunctional method of debt restructuring, ridden with opportunistic and coercive behavior by bondholders and bond issuers. Yet since 2008 bond workouts have quietly started to work. A cognizable portion of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. The result has been a new, broad reading of the primary law governing workouts, section 316(b) of the Trust Indenture Act of 1939 ...


Valuation Disputes In Corporate Bankruptcy, Kenneth M. Ayotte, Edward R. Morrison Jan 2018

Valuation Disputes In Corporate Bankruptcy, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

Prior scholarship points to disagreements about valuation and judicial valuation error as key drivers of Chapter 11 outcomes. Avoiding valuation disputes and valuation errors is also the underlying driver of most proposed reforms, from Baird’s auctions to Bebchuk’s options. In this paper, we undertake a detailed examination of bankruptcy court opinions involving valuation disputes. Our paper has two goals. The first is to understand how parties and their expert witnesses justify their opposing views to the judge, and how judges decide between them. The second is to provide practical guidance to judges in resolving valuation disputes. We document ...


When Social Enterprises Fail, Jonathan Brown Jan 2017

When Social Enterprises Fail, Jonathan Brown

Pace Law Faculty Publications

This Article identifies the conflicts between social enterprise legislation and bankruptcy law and presents a normative argument for a legal regime that would harmonize the two. Focusing on benefit corporations, the most widely adopted social enterprise form, this Article observes that existing law leaves uncertainty as to the role of directors at a time of financial distress and will produce outcomes that are at odds with the core goals of social enterprise legislation. Then, drawing on academic proposals for contract-based systems of bankruptcy, this Article argues that just as a firm may opt out of a corporate governance norm of ...


Becker V. Becker, 131 Nev. Adv. Op. 85 (Oct. 29, 2015), Paul George Oct 2015

Becker V. Becker, 131 Nev. Adv. Op. 85 (Oct. 29, 2015), Paul George

Nevada Supreme Court Summaries

In response to a certified question by the United States Bankruptcy Court for the District of Nevada, the Court concluded that under NRS 21.090(1)(bb) a debtor can exempt his stock in the corporations described in NRS 78.746(2), but his economic interest in that stock is still subject to the charging order remedy in NRS 78.746(1).


Rediscovering Corporate Governance In Bankruptcy, David A. Skeel Jr. Jan 2015

Rediscovering Corporate Governance In Bankruptcy, David A. Skeel Jr.

Faculty Scholarship at Penn Law

In this Essay on Lynn LoPucki and Bill Whitford’s corporate reorganization project, written for a symposium honoring Bill Whitford, I begin by very briefly describing its historical antecedents. The project draws on the insights and perspectives of two closely intertwined traditions: the legal realism of 1930s, whose exemplars included William Douglas and other participants in the SEC study; and the law in action movement at the University of Wisconsin. In Section II, I briefly survey the key contributions of the corporate governance project, which punctured the then-conventional wisdom about the treatment of shareholders in bankruptcy, managers’ principal allegiance, and ...


Introduction To Institutional Investor Activism: Hedge Funds And Private Equity, Economics And Regulation, William W. Bratton, Joseph A. Mccahery Jan 2015

Introduction To Institutional Investor Activism: Hedge Funds And Private Equity, Economics And Regulation, William W. Bratton, Joseph A. Mccahery

Faculty Scholarship at Penn Law

The increase in institutional ownership of recent decades has been accompanied by an enhanced role played by institutions in monitoring companies’ corporate governance behaviour. Activist hedge funds and private equity firms have achieved a degree of success in actively shaping the business plans of target firms. They may be characterized as pursuing a common goal – in the words used in the OECD Steering Group on Corporate Governance, both seek ‘to increase the market value of their pooled capital through active engagement with individual public companies. This engagement may include demands for changes in management, the composition of the board, dividend ...


When Should Bankruptcy Be An Option (For People, Places Or Things)?, David A. Skeel Jr. Jan 2014

When Should Bankruptcy Be An Option (For People, Places Or Things)?, David A. Skeel Jr.

Faculty Scholarship at Penn Law

When many people think about bankruptcy, they have a simple left-to-right spectrum of possibilities in mind. The spectrum starts with personal bankruptcy, moves next to corporations and other businesses, and then to municipalities, states, and finally countries. We assume that bankruptcy makes the most sense for individuals; that it makes a great deal of sense for corporations; that it is plausible but a little more suspect for cities; that it would be quite odd for states; and that bankruptcy is unimaginable for a country.

In this Article, I argue that the left-to-right spectrum is sensible but mistaken. After defining “bankruptcy ...


Bankruptcy Law As A Liquidity Provider, Kenneth M. Ayotte, David A. Skeel Jr. Jan 2013

Bankruptcy Law As A Liquidity Provider, Kenneth M. Ayotte, David A. Skeel Jr.

Faculty Scholarship at Penn Law

Since the outset of the recent financial crisis, liquidity problems have been cited as the cause behind the bankruptcies and near bankruptcies of numerous firms, ranging from Bear Stearns and Lehman Brothers in 2008 to Kodak more recently. This paper expands the prevailing normative theory of corporate bankruptcy — the Creditors’ Bargain theory — to include a role for bankruptcy as a provider of liquidity. The Creditors’ Bargain theory argues that bankruptcy law should be limited to solving problems caused by multiple, uncoordinated creditors, but focuses almost exclusively on the problem of creditor runs. We argue that two well-known problems that cause ...


Collective Bargaining Agreements In Corporate Reorganizations, Andrew B. Dawson Jan 2010

Collective Bargaining Agreements In Corporate Reorganizations, Andrew B. Dawson

Articles

Congress enacted § 1113 to the Bankruptcy Code in 1984 in order to establish a standard for the rejection of Collective Bargaining Agreements. But the statute's ambiguous language has caused a split between the Second and Third Circuits, and has precipitated a lengthy academic debate largely centered on the interpretation of one word: "necessary." This debate has focused on proper statutory interpretation as well as deeper concerns regarding the policy goals behind the Bankruptcy Code. The present study reports data that indicate that the different interpretations are irrelevant in practice. No matter how "necessary" is defined, the result is always ...


Creditor Control And Conflict In Chapter 11, Kenneth M. Ayotte, Edward R. Morrison Jan 2009

Creditor Control And Conflict In Chapter 11, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

We analyze a sample of large privately and publicly held businesses that filed Chapter 11 bankruptcy petitions during 2001. We find pervasive creditor control. In contrast to traditional views of Chapter 11, equity holders and managers exercise little or no leverage during the reorganization process. 70 percent of CEOs are replaced in the two years before a bankruptcy filing, and few reorganization plans (at most 12 percent) deviate from the absolute priority rule to distribute value to equity holders. Senior lenders exercise significant control through stringent covenants, such as line-item budgets, in loans extended to firms in bankruptcy. Unsecured creditors ...


The Economics Of Bankruptcy: An Introduction To The Literature, Edward R. Morrison Jan 2009

The Economics Of Bankruptcy: An Introduction To The Literature, Edward R. Morrison

Faculty Scholarship

This essay surveys important contributions to the economics of bankruptcy. It is an introductory chapter for a forthcoming volume (from Edward Elgar Press) that compiles the work of legal scholars as well as economists working in the field of corporate finance. The essay begins with the foundational theories of Baird, Jackson, and Rea and then collects scholarly work extending, testing, or revising those theories. At various points I identify questions that merit further study, particularly empirical testing.


Chrysler, Gm And The Future Of Chapter 11, Edward R. Morrison Jan 2009

Chrysler, Gm And The Future Of Chapter 11, Edward R. Morrison

Faculty Scholarship

Although they caused great controversy, the Chrysler and GM bankruptcies broke no new ground. They invoked procedures that are commonly observed in modern Chapter 11 reorganization cases. Government involvement did not distort the bankruptcy process; it instead exposed the reality that Chapter 11 offers secured creditors – especially those that supply financing during the bankruptcy case – control over the fate of distressed firms. Because the federal government supplied financing in the Chrysler and GM cases, it possessed the creditor control normally exercised by private lenders. The Treasury Department found itself with virtually the same, unchecked power that the FDIC exercises with ...


Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison Jan 2008

Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison

Faculty Scholarship

Most nations have enacted statutes governing business liquidation and reorganization. These statutes are the primary focus when policymakers and scholars discuss ways to improve laws governing business failure. This focus is misplaced, at least for distressed small businesses in the United States.

Evidence from a major credit bureau shows that over eighty percent of these businesses liquidate or reorganize without invoking the formal Bankruptcy Code.

The businesses instead invoke procedures derived from the laws of contracts, secured lending, and trusts. These procedures can be cheaper and speedier than a formal bankruptcy filing, but they typically require unanimous consent of senior ...


Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison Jan 2008

Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison

Faculty Scholarship

Most nations have enacted statutes governing business liquidation and reorganization. These statutes are the primary focus when policymakers and scholars discuss ways to improve laws governing business failure. This focus is misplaced, at least for distressed small businesses in the United States.

Evidence from a major credit bureau shows that over eighty percent of these businesses liquidate or reorganize without invoking the formal Bankruptcy Code.

The businesses instead invoke procedures derived from the laws of contracts, secured lending, and trusts. These procedures can be cheaper and speedier than a formal bankruptcy filing, but they typically require unanimous consent of senior ...


Creditor Control And Conflict In Chapter 11, Kenneth M. Ayotte, Edward R. Morrison Jan 2008

Creditor Control And Conflict In Chapter 11, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

We analyze a sample of large privately and publicly held businesses that filed Chapter 11 bankruptcy petitions during 2001. We find pervasive creditor control. In contrast to traditional views of Chapter 11, equityholders and managers exercise little or no leverage during the reorganization process: Seventy percent of CEOs are replaced in the two years before a bankruptcy filing; very few reorganization plans (at most eight percent) deviate from the absolute priority rule in order to distribute value to equityholders. Senior lenders exercise significant control through stringent covenants contained in DIP loans, such as line-item budgets. Unsecured creditors gain leverage through ...


Bargaining Around Bankruptcy: Small Business Workouts And State Law, Edward R. Morrison Jan 2008

Bargaining Around Bankruptcy: Small Business Workouts And State Law, Edward R. Morrison

Faculty Scholarship

In the United States, few failing businesses invoke the Bankruptcy Code to reorganize or liquidate. Most use non-bankruptcy procedures to accomplish the same purposes. These procedures include voluntary agreements between the debtor and its creditors (workouts) and formal devices such as friendly foreclosures, bulk sales, and assignments for the benefit of creditors. This paper documents the importance of non-bankruptcy procedures using firm-level data from Cook County, Illinois. I find that these procedures are used by eighty percent of distressed small businesses. The paper also identifies the conditions under which a business chooses federal bankruptcy law over non-bankruptcy procedures. I model ...


Bankruptcy Noir, James J. White Jan 2008

Bankruptcy Noir, James J. White

Articles

In Bankruptcy Fire Sales, Professor LoPucki and Dr. Doherty do two things. First, they present provocative data about the relative payoff to be had in Chapter 11 by a full reorganization compared with the payoff from a section 363 sale without a full reorganization. Second, they give a yet more provocative explanation for their data. Taking a page from Professor LoPucki's recent book, they blame the meager return that they observe on 363 sales on the unprincipled behavior of the lawyers, managers, creditors, investment bankers, and even judges involved in the sales. Messrs. LoPucki and Doherty's data appear ...


Managers’ Fiduciary Duties In Financially Distressed Corporations: Chaos In Delaware (And Elsewhere), Rutheford B. Campbell Jr., Christopher W. Frost Apr 2007

Managers’ Fiduciary Duties In Financially Distressed Corporations: Chaos In Delaware (And Elsewhere), Rutheford B. Campbell Jr., Christopher W. Frost

Law Faculty Scholarly Articles

The inherent conflict between creditors and shareholders has long occupied courts and commentators interested in corporate governance. Creditors holding fixed claims to the corporation's assets generally prefer corporate decision making that minimizes the risk of firm failure. Shareholders, in contrast, have a greater appetite for risk, because, as residual owners, they reap the rewards of firm success while sharing the risk of loss with creditors.

Traditionally, this conflict is mediated by a governance structure that imposes a fiduciary duty on the corporation's managers-its officers and directors-to maximize the value of the shareholders' interests in the firm. In this ...


Bankruptcy Decision Making: An Empirical Study Of Continuation, Edward R. Morrison Jan 2007

Bankruptcy Decision Making: An Empirical Study Of Continuation, Edward R. Morrison

Faculty Scholarship

Many small businesses attempt to reorganize under Chapter 11 of the U.S. Bankruptcy Code, but most are ultimately liquidated instead. Little is known about this shutdown decision. It is widely suspected that the bankruptcy process exhibits a continuation bias, allowing failing businesses to linger under the protection of the court, which resists liquidation even when it is optimal. This paper examines the shutdown decision in a sample of Chapter 11 bankruptcy cases filed in a typical bankruptcy court over the course of a year. The presence of continuation bias is tested along several dimensions – the extent of managerial control ...


Bankruptcy Reform And The "Sweat Box" Of Credit Card Debt, Ronald J. Mann Jan 2006

Bankruptcy Reform And The "Sweat Box" Of Credit Card Debt, Ronald J. Mann

Faculty Scholarship

Those that backed the 2005 bankruptcy reform law argued that it would protect creditors from consumer abuse and lack of financial responsibility. The substantial increase in the number of bankruptcies over the last decade combined with the perception of system-wide abuse apparently convinced legislators from both political parties that the backers had a point. Thus, Congress enacted amendments to the Bankruptcy Code that – if effective – would fundamentally change the core policies underlying the consumer bankruptcy system in this country. The rhetoric surrounding the reform debates pressed the idea that if borrowers had to repay more of their debts, creditors would ...


Bankruptcy Decisionmaking: An Empirical Study Of Continuation Bias In Small-Business Bankruptcies, Edward R. Morrison Jan 2006

Bankruptcy Decisionmaking: An Empirical Study Of Continuation Bias In Small-Business Bankruptcies, Edward R. Morrison

Faculty Scholarship

Over half of all small businesses reorganizing under Chapter 11 of the U.S. Bankruptcy Code are ultimately liquidated. Little is known about this shutdown decision and about the factors that increase or reduce the amount of time a firm spends in bankruptcy. It is widely suspected, however, that the Chapter 11 process exhibits a "continuation bias," allowing non-viable firms to linger under the protection of the court. This paper tests for the presence of continuation bias in the docket of a typical bankruptcy court over the course of a calendar year. A variety of tests are employed, including the ...


Corporate Complicity Claims: Why There Is No Innocent Decison-Maker Exception To Imputing An Officer's Wrongdoing To A Bankrupt Corporation, Jonathan Witmer-Rich Jan 2006

Corporate Complicity Claims: Why There Is No Innocent Decison-Maker Exception To Imputing An Officer's Wrongdoing To A Bankrupt Corporation, Jonathan Witmer-Rich

Law Faculty Articles and Essays

This Article evaluates the innocent decision-maker exception in light of the doctrinal foundations of the in pari delicto defense and the Wagoner rule, general principles of agency law, and the lower court decisions that address these issues. It concludes that the innocent decision-maker exception is a doctrinal error, traceable to the logical misstep of a single lower court whose decision continues to be mistakenly followed. The innocent decision-maker exception is inconsistent with the basic principles of agency law that underlie imputation in the context of in pari delicto and the Wagoner rule. No court of appeals has explicitly addressed the ...


Law And The Rise Of The Firm , Henry Hansmann, Reiner Kraakman, Richard Squire Jan 2005

Law And The Rise Of The Firm , Henry Hansmann, Reiner Kraakman, Richard Squire

Faculty Scholarship

Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call "entity shielding," is both economically and historically more significant than limited liability. While limited liability shields owners' personal assets from a firm's creditors, entity shielding protects firm assets from the owners' personal creditors (and from creditors of other ...


An Empirical Investigation Of Liquidation Choices Of Failed High-Tech Firms, Ronald J. Mann Jan 2005

An Empirical Investigation Of Liquidation Choices Of Failed High-Tech Firms, Ronald J. Mann

Faculty Scholarship

This paper compares a dataset of failed venture-backed firms to information about the firm's liquidation choices. The first finding is that firms in California are much less likely to use the bankruptcy process than firms in other states, largely because of their ability to use a cheaper and less formal assignment for the benefit of creditors procedure. The paper explores a number of reasons why that procedure succeeds in California more than it does elsewhere, including differences in statutory support for the procedure, the sophistication of market participants in California, the close-knit venture communities in California, and unusual rules ...


Editor's Observations: The Sarbanes-Oxley Act And What Came After, Frank O. Bowman Iii Apr 2003

Editor's Observations: The Sarbanes-Oxley Act And What Came After, Frank O. Bowman Iii

Faculty Publications

On December 2, 2001, the Enron Corporation filed the largest bankruptcy petition in U.S. history. Losses to investors, creditors, employees, and pensioners were in the billions. Criminal investigations are ongoing. On May 1, 2003, the U.S. Sentencing Commission passed a set of amendments to the U.S. Sentencing Guidelines that will, among other things, prevent a federal district judge from awarding a sentence of straight probation to a defendant convicted at trial of an $11,000 mail fraud. This Issue of FSR tells the story of how the first of these apparently unrelated events led to the second ...


Multidisciplinary Practice After In Re Enron: Should The Debate On Mdp Change At All?, Nancy B. Rapoport Jan 2002

Multidisciplinary Practice After In Re Enron: Should The Debate On Mdp Change At All?, Nancy B. Rapoport

Scholarly Works

No abstract provided.


Insider Guaranties In Bankruptcy: A Framework For Analysis, Marshall E. Tracht Jan 2000

Insider Guaranties In Bankruptcy: A Framework For Analysis, Marshall E. Tracht

Articles & Chapters

This article presents an economic analysis of insider guaranties in small business finance and bankruptcy, explaining their role in the panoply of legal and contractual devices used to control financial agency costs. It then uses this model to examine two areas of concern in the bankruptcy treatment of insider guaranties (the Deprizio preference problem and the enforceability of springing and exploding guaranties) and to explore some of the wider implications of insider guaranties for small business bankruptcy. Building on the fact that insider guaranties are typically used less to increase the assets available for repayment of the debt than to ...


Bankruptcy Reorganization: Legal Dynamics Associated With Economic Discontinuity, Young Rock Noh Jan 2000

Bankruptcy Reorganization: Legal Dynamics Associated With Economic Discontinuity, Young Rock Noh

LLM Theses and Essays

This thesis attempts to discover the factors leading to such failures and to propose a cure. It argues that the basic structure of Chapter 11 of the Code, the debtor in possession structure, is one of the essential factors causing such a high rate of failure. The thesis further asserts that it is possible to reduce the rate of unsuccessful reorganization if the bankruptcy court exercises its power of case management more actively and expeditiously. For example, the court can screen the debtors' filing for relief before the reorganization case proceeds too far. Chapter II of this thesis examines the ...