Business Organizations Law Commons^™

Distorted Choice In Corporate Bankruptcy, David A. Skeel Jr.

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We ordinarily assume that a central objective of every voting process is ensuring an undistorted vote. Recent developments in corporate bankruptcy, which culminates with an elaborate vote, are quite puzzling from this perspective. Two strategies now routinely used in big cases are intended to distort, and clearly do distort, the voting process. Restructuring support agreements (RSAs) and “deathtrap” provisions remove creditors’ ability to vote for or against a proposed reorganization simply on the merits.

This Article offers the first comprehensive analysis of these new distortive techniques. One possible solution is simply to ban distortive techniques, as several scholars advocate with …

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

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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 contracting. …

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

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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 (“TIA”), …

Foreword: Bankruptcy’S New And Old Frontiers, William W. Bratton, David A. Skeel Jr.

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This Symposium marks the fortieth anniversary of the enactment of the 1978 Bankruptcy Code (the “1978 Code” or the “Code”) with an extended look at seismic changes that currently are reshaping Chapter 11 reorganization. Today’s typical Chapter 11 case looks radically different than did the typical case in the Code’s early years. In those days, Chapter 11 afforded debtors a cozy haven. Most everything that mattered occurred within the context of the formal proceeding, where the debtor enjoyed agenda control, a leisurely timetable, and judicial solicitude. The safe haven steadily disappeared over time, displaced by a range of countervailing forces …

Governmental Intervention In An Economic Crisis, Robert K. Rasmussen, David A. Skeel Jr.

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This paper articulates a framework both for assessing the various government bailouts that took place at the onset of Great Recession and for guiding future rescue efforts when they become necessary. The goals for those engineering a bailout should be to be as transparent as possible, to articulate clearly the reason for the intervention, to respect existing priorities among investors, to exercise control only at the top level where such efforts can be seen by the public, and to exit as soon as possible. By these metrics, some of the recent bailouts should be applauded, while others fell short. We …

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

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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 many …

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

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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,” …

Harmonizing Choice-Of-Law Rules For International Insolvency Cases: Virtual Territoriality, Virtual Universalism, And The Problem Of Local Interests, Charles W. Mooney Jr.

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This paper explores the potential content and feasibility of a set of harmonized choice of law rules (HICOL Rules) that would apply in insolvency proceedings. It contemplates a main insolvency proceeding opened in a debtor’s center of main interests (“COMI”) and the existence of (or possibility of opening) one or more non-main (or secondary) proceedings. It also contemplates the possibility that an insolvency representative in a main or non-main proceeding may seek and be granted recognition in another state under the UNCITRAL Model Law on Cross-Border Insolvency (codified as Chapter 15 of the Bankruptcy Code in the U.S.) Under HICOL …

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

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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 …

A Dialogue On The Costs And Benefits Of Automatic Stays For Derivatives And Repurchase Agreements, Darrell Duffie, David A. Skeel Jr.

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For nearly two years, the two of us have had a running discussion of the costs and benefits of automatic stays in bankruptcy for qualified financial contracts (QFCs) such as derivatives and repurchase agreements, particularly those held by systemically important major dealer banks. Under current U.S. bankruptcy law, these contracts are exempted from the automatic stay. The advantages and disadvantages of this treatment have been a matter of significant debate for the past decade, particularly since the 2008 crisis.

After some background on AFCs and automatic stays, we provide our joint analysis of the costs and benefits of stays on …

The New Financial Deal: Understanding The Dodd-Frank Act And Its (Unintended) Consequences, David A. Skeel Jr.

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Contrary to rumors that the Dodd-Frank Act is an incoherent mess, its 2,319 pages have two very clear objectives: limiting the risk of the shadow banking system by more carefully regulating derivatives and large financial institutions; and limiting the damage caused by a financial institution’s failure. The new legislation also has a theme: government partnership with the largest Wall Street banks. The vision emerged almost by accident from the Bear Stearns and AIG bailouts of 2008 and the commandeering of the bankruptcy process to rescue Chrysler and GM in 2009. Its implications for derivatives regulation could prove beneficial: Dodd-Frank will …

Reply: Clawback To The Future, Miriam A. Cherry, Jarrod Wong

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In an earlier article also available on Scholarship Commons, Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes, Minnesota Law Review, Vol. 94, p. 368, 2009, Professors Miriam Cherry and Jarrod Wong set out an initial description and analysis of contractual clawback provisions. In this Reply, Profs. Cherry and Wong address three aspects of Michael Macchiarola's Response: its application of the clawback doctrine to the recoupment of executive compensation; the criticism that the clawbacks doctrine introduces latent subjectivity into contractual analysis; and the apparent operational difficulties in implementing clawbacks.

Bankruptcy Or Bailouts?, Kenneth M. Ayotte, David A. Skeel Jr.

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The usual reaction if one mentions bankruptcy as a mechanism for addressing a financial institution’s default is incredulity. Those who favor the rescue of troubled financial institutions, and even those who prefer that their assets be promptly sold to a healthier institution, treat bankruptcy as anathema. Everyone seems to agree that nothing good can come from bankruptcy. Indeed, the Chapter 11 filing by Lehman Brothers has been singled out by many the primary cause of the severe economic and financial contraction that followed, and proof that bankruptcy is disorderly and ineffective. As a result, ad-hoc rescue lending to avoid bankruptcy …

Clawbacks: Prospective Contract Measures In An Era Of Excessive Executive Compensation And Ponzi Schemes, Miriam A. Cherry, Jarrod Wong

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In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term "clawback" was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term "clawback" reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of …

Bankruptcy Boundary Games, David A. Skeel Jr.

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For the past several decades, Congress has steadily expanded the exclusion of securities market operations from core bankruptcy protections. This Article focuses on three of the most important of these issues: the exclusion of brokerage firms from Chapter 11; the protection of settlement payments from avoidance as preferences or fraudulent conveyances; and the exemption of derivatives from the automatic stay and other basic bankruptcy provisions. In Parts I, II and III of the Article, I consider each of the issues in turn, showing that each has had serious unintended consequences. Both Drexel Burnham and Lehman Brothers evaded the brokerage exclusion, …

Competing Narratives In Corporate Bankruptcy: Debtor In Control Vs. No Time To Spare, David A. Skeel Jr.

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When a company like Chrysler or United Airlines files for bankruptcy, it offers narrative explaining the way out of its predicament. In support of its claim that the business is worth saving, the company may argue that it simply needs time to renegotiate its obligations with its creditors. Alternatively, it may say that asset values are deteriorating rapidly and it is imperative that the bankruptcy court immediately approve a sale of the company, or some other rapid disposition. These two possibilities correspond to the principal resolution narratives in current Chapter 11 bankruptcy practice, which I refer to as Debtor in …

Where's The Beef: A Few Words About Paying For Performance In Bankruptcy, Jonathan C. Lipson

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This brief essay responds to Yair Listokin’s article, “Paying for Performance in Bankruptcy: Why CEOs Should Be Compensated with Debt,” 155 U. PA. L. REV. 777 (2007). Professor Listokin argues that we should give official creditors’ committees the power to pay management of reorganizing debtors with corporate debt. This, he argues, would properly align their incentives with those who are most likely affected, the “residual claimant” unsecured creditors. Although Professor Listokin’s proposal is a welcome addition to our literature on corporate reorganization, this essay points out several basic problems with it: • First, nothing currently prevents parties from doing this …

The Expressive Function Of Directors’ Duties To Creditors, Jonathan C. Lipson

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This Article offers an explanation of the “doctrine” of directors’ duties to creditors. Courts frequently say—but rarely hold—that corporate directors owe duties to or for the benefit of corporate creditors when the corporation is in distress. These cases are puzzling for at least two reasons. First, they link fiduciary duty to priority in right of payment, effectively treating creditors as if they were shareholders, at least for certain purposes. But this ignores the fact that priority is a complex and volatile concept. Moreover, contract and other rights at law usually protect creditors, even (especially) when a firm is distressed. It …

Recharacterization And The Nonhindrance Of Creditors, David A. Skeel Jr., Georg Krause-Vilmar

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Using a 1977 article by Robert Clark as the starting point, this article attempts to shed new light on the question of whether and when shareholder loans to her company should be either equitably subordinated or, as courts have done in a few recent cases, recharacterized as equity. In its emphasis on the particular issue of shareholder loans, the article has a narrower compass than Clark’s article, which uses a four-part typology to explore the relationship among fraudulent conveyance law, equitable subordination, veil piercing and dividend restrictions. But the article also expands Clark’s analysis in several respects. The most important …

An Efficiency-Based Explanation For Current Corporate Reorganization Practice, Kenneth M. Ayotte, David A. Skeel Jr.

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No abstract provided.

European Implications Of Bankruptcy Venue Shopping In The U.S., David A. Skeel Jr.

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No abstract provided.

The Unfortunate Life And Merciful Death Of The Avoidance Powers Under Section 103 Of The Durbin-Delahunt Bill: What Were They Thinking?, (With C. Mooney, Jr.)., Steven L. Harris

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No abstract provided.

The Past, Present And Future Of Debtor-In-Possession Financing, David A. Skeel Jr.

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Chapter 11's distinctive post-petition financing rules trace their ancestry back to the origins of large scale corporate reorganization in America in the nineteenth century. In this sense, post-petition financing has always been with us. But in the past decade, the role of the financers has changed. After a century in the shadows, post-petition lenders have stepped onto center stage. The DIP loan agreement has become the single most important governance lever in many large Chapter 11 cases. Why have these formerly bashful financers suddenly started hogging the spotlight? I argue in this article that the generous terms offered to DIP …

Corporate Anatomy Lessons, David A. Skeel Jr.

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The book that will lay the groundwork for the corporate law debates of the coming decade is The Anatomy of Corporate Law. Written by seven of the world's leading corporate law scholars - Henry Hansmann, Reinier Kraakman and Ed Rock of the U.S.; Paul Davies of England; Gerard Hertig of Switzerland; Klaus Hopt of Germany; and Hideki Kanda of Japan - The Anatomy of Corporate Law attempts to identify the underlying structure of corporate law, and to provide a framework for understanding the wide range of approaches that different countries take to corporate law regulation. It is hard to overstate …

Creditors' Ball: The "New" New Corporate Governance In Chapter 11, David A. Skeel Jr.

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In the 1980s and early 1990s, many observers believed that the American corporate bankruptcy laws were desperately inefficient. The managers of the debtor stayed in control as "debtor in possession" after filing for bankruptcy, and they had the exclusive right to propose a reorganization plan for at least the first four months of the case, and often far longer. The result was lengthy cases, deteriorating value and numerous academic proposals to replace Chapter 11 with an alternative regime. In the early years of the new millennium, bankruptcy could not look more different. Cases proceed much more quickly, and they are …

Avoiding Moral Bankruptcy, David A. Skeel Jr.

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Faced with hundreds of clergy sexual misconduct cases last year, the Archdiocese of Boston hinted that it was considering filing for bankruptcy. Although it is hard to imagine an archdiocese or church filing for bankruptcy, bankruptcy has become an important forum for many social issues that cannot be easily resolved elsewhere. This Article explores the implications of a religious organization bankruptcy filing by focusing on four problems with the bankruptcy alternative: the possibility of dismissal for being filed in bad faith; the question of what church assets are subject to the process; the fact that the church might be subject …

Venture Capital On The Downside: Preferred Stock And Corporate Control, William W. Bratton

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No abstract provided.

Corporate Ownership Structure And The Evolution Of Bankruptcy Law: Lessons From The United Kingdom, John Armour, Brian R. Cheffins, David A. Skeel Jr.

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No abstract provided.

Enron And The Dark Side Of Shareholder Value, William W. Bratton

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No abstract provided.

What's So Bad About Delaware?, David A. Skeel Jr.

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No abstract provided.