Law Commons^™

The New Small Business Bankruptcy Game: Strategies For Creditors Under The Small Business Reorganization Act, Christopher G. Bradley

Law Faculty Scholarly Articles

Most unsecured creditors have little incentive to act energetically in bankruptcy proceedings. They are unlikely to be paid enough to make it worth the effort. Our bankruptcy law allocates much more power to debtors and to secured claimants. This Article suggests that the Act further erodes the position of most unsecured creditors. Their expected recoveries will remain too low to justify anything other than a relatively passive attitude toward the bankruptcy proceeding, and the Act lowers the protections for passive creditors.

Part I provides an overview of the major features of the Act. It explains how a subchapter V case …

Pragmatism Vs. Principle: Bankruptcy Appeals And Equitable Mootness, Christopher W. Frost

Law Faculty Scholarly Articles

Bankruptcy reorganizations are often thought to present unique problems requiring specialized doctrines. Equitable mootness is one such doctrine. This judge-made prudential limitation on appeal rights permits reviewing courts to dismiss otherwise justiciable appeals of bankruptcy court confirmations of reorganization plans. It applies where granting relief would disrupt the implementation of the plan or would harm reliance interests of parties affected by the plan.

Chapter 11 reorganizations present complex multilateral negotiation problems. The bankruptcy represents a general default, pitting stakeholder against stakeholder in conflicts that require a global settlement. The plan of reorganization provides that global settlement through an interconnected web …

Secured Credit And Effective Entity Priority, Christopher W. Frost

Law Faculty Scholarly Articles

The historical and doctrinal development of secured transactions and bankruptcy law has created a priority system that is asset based. Secured creditor priority is tied to the value of specific assets that constitute the secured creditor’s collateral and not to the value of the debtor itself. And yet, in corporate bankruptcy cases, lenders and their attorneys often assert broad claims to the entire enterprise value of the entity—that is, to the present value of the cash flows that the entity will generate as a going concern. The doctrinal basis for such claims is often unstated, however, and several commentators have …

Art & The “Public Trust” In Municipal Bankruptcy, Brian L. Frye

Law Faculty Scholarly Articles

In 2013, the City of Detroit filed the largest municipal bankruptcy action in United States history, affecting about $20 billion in municipal debt. Unusually, Detroit owned its municipal art museum, the Detroit Institute of Arts (“DIA”) and all of the works of art in the DIA collection, which were potentially worth billions of dollars. Detroit’s creditors wanted Detroit to sell the DIA art in order to satisfy its debts. Key to the confirmation of Detroit’s plan of adjustment was the DIA settlement, under which Detroit agreed to sell the DIA art to the DIA corporation in exchange for $816 million …

Bankruptcy Voting And The Designation Power, Christopher W. Frost

Law Faculty Scholarly Articles

Chapter 11 of the Bankruptcy Code is the only form of bankruptcy that requires winning the consent of the creditor body. Creditors are given the right to vote based on an underlying assumption that they will cast their votes to maximize recovery on their claims. When creditors collectively vote to further these distributional goals, then the estate in turn should realize the maximum value for its assets. "Value maximization" is one of the fundamental goals of chapter 11, and voting in bankruptcy is an important way of achieving that goal.

The problem with these assumptions is that creditors sometimes vote …

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 traditional view, …

The Past And Future Of Kentucky's Fraudulent Transfer And Preference Laws, Douglas C. Michael

Law Faculty Scholarly Articles

An important part of the law of creditors' remedies is the ability of creditors to recover property formerly held by the debtor, but transferred to others under circumstances that are considered to be unfair or inequitable. There are two principal ways a creditor can seek to have a debtor's transfer characterized as unfair in order to recover it. First, a transfer to another creditor or a third party can be fraudulent as to one or all of the remaining creditors, or may be deemed to be fraudulent because of the circumstances surrounding the transfer, such as a transfer made by …

The Theory, Reality, And Pragmatism Of Corporate Governance In Bankruptcy Reorganizations, Christopher W. Frost

Law Faculty Scholarly Articles

Governing a corporation during a Chapter 11 reorganization presents a special case of the age-old problem of the separation of ownership and control. Critics of Chapter 11 have long pointed to the insulation provided by the automatic stay to managers of the business as one of the causes of bankruptcy inefficiency. Protected from the normal contractual and market forces that restrain the behavior of managers of healthy companies, managers of firms in bankruptcy, the harshest critics charge, use delay and other strategies to enrich themselves and the shareholders at the expense of the firm's creditors.

This Article addresses the financial …

Bankruptcy Redistributive Policies And The Limits Of The Judicial Process, Christopher W. Frost

Law Faculty Scholarly Articles

Business failure negatively affects a broad range of interests, yet the bankruptcy process directly protects only a small segment of interest-holders: the creditors. Some commentators argue for expansion of that protection to encompass redistributive norms and provide for the interests of non-investors in the failed business. The Bankruptcy Reform Act of 1994’s establishment of a national commission to study the bankruptcy process and its broader policy implications brings with it the opportunity to consider that redistributive argument and perhaps change the process to include the interests of non-investors under the reorganization umbrella. This Article responds to those who would have …

Organizational Form, Misappropriation Risk, And The Substantive Consolidation Of Corporate Groups, Christopher W. Frost

Law Faculty Scholarly Articles

The financial collapse of a corporation raises significant questions regarding its shareholders and creditors' ex ante allocation of the risk that such a collapse might occur. In bankruptcy, most of these risk allocation issues relate to the priority of particular creditors' claims against the assets of the failed business. But determining priority first requires some reasoned means of identifying the assets against which creditors may assert their claims. In many cases, this question is simply one of locating and distributing assets. However, when bankrupt firms have conducted their operations through a complex web of subsidiary corporations, each holding distinct assets …

Running The Asylum: Governance Problems In Bankruptcy Reorganizations, Christopher W. Frost

Law Faculty Scholarly Articles

Like much of life, the study of bankruptcy is the study of leverage. Chapter 11 of the United States Bankruptcy Code may be appropriately described as providing a framework within which interested parties may negotiate solutions to the problems facing a troubled company. The allocation of leverage to the negotiating parties is critical to the ultimate outcome of the process. In any negotiation setting control over the bargaining process is a key item of leverage. This Article proposes a framework for analysis and suggests solutions to the problem of control over corporations during the pendency of a Chapter 11 reorganization …

The Malformed Mouse Meets The Libr: Secured And Restitutionary Claims To Commingled Funds, Harold R. Weinberg

Law Faculty Scholarly Articles

The "malformed mouse" is section 9-306(4)(d) of the Uniform Commercial Code. It provides a formula that determines the extent to which an insolvent debtor's commingled bank account contains funds subject to a security interest. A special entitlement is necessary because it is impossible to physically distinguish this collateral after commingling. The label malformed mouse is appropriate if one agrees with critics who have questioned the mouse's statutory architecture and underlying rationale. The image of an elusive creature is also apt. The mouse continues to elude understanding, although it has been part of the Code for many years and the subject …