Law Commons^™

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

All Faculty Scholarship

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”), …

Targeted Subordination Of Official Sector Debt, Lee C. Buchheit, Mitu Gulati

Faculty Scholarship

If Greece’s debt is unsustainable, and most observers (including the IMF) seem to think it is, the country’s only source of funding will continue to be official sector bailout loans. Languishing for a decade or more as a ward of the official sector is undesirable from all perspectives. The Greeks bridle under what they see as foreign imposed austerity; the taxpayers who fund the official sector loans to Greece balk at the prospect of shoveling good money after bad. The question then is how to facilitate Greece’s ability to tap the private capital markets at tolerable interest rates. The IMF’s …

Of Progressive Property And Public Debt, Christopher K. Odinet

Christopher K. Odinet

Is Bankruptcy The Answer For Troubled Cities And States?, David A. Skeel Jr.

All Faculty Scholarship

The financial crisis that has afflicted America’s cities and states for the past decade is far from over. Under existing U.S. law, distressed municipalities can file for bankruptcy if their state permits this, as roughly half do. The states themselves do not have a bankruptcy option, however, no matter how bleak their circumstances may be. There have recently been dramatic developments in the handling of municipal distress. Several cities have filed for bankruptcy under Chapter 9, which, although adequate for sewer and water districts or a very small town, has conventionally been deemed irrelevant for real cities and municipalities. Additionally, …

Mandatory Class Action Lawsuits As A Restructuring Technique, Bryant B. Edwards, Jeffrey A. Herbst, Selina K. Hewitt

Pepperdine Law Review

No abstract provided.

States Of Bankruptcy, David A. Skeel Jr.

All Faculty Scholarship

In the past several years, many states’ financial condition has been so precarious that some observers have predicted that one or more might default. As the crisis persisted, a very unlikely word crept into these conversations: bankruptcy. Should Congress provide a bankruptcy option for states, or would bankruptcy be a mistake? The goal of this Article is to carefully vet this question, using all of the theoretical, empirical and historical tools currently available. The discussion is structured as a “case” for bankruptcy, rather than an “on the one hand, on the other hand” assessment. But it seeks to be scrupulously …

State Bankruptcy From The Ground Up, David A. Skeel Jr.

All Faculty Scholarship

After a brief, high profile debate, proposals to create a new bankruptcy framework for states dropped from sight in Washington in early 2011. With the debate’s initial passions having cooled, at least for a time, we can now consider state bankruptcy, as well as other responses to states’ fiscal crisis, a bit more quietly and carefully. In this Article, I begin by briefly outlining a theoretical and practical case for state bankruptcy. Because I have developed these arguments in much more detail in companion work, I will keep the discussion comparatively brief. My particular concern here is, as the title …

Sovereign Debt Restructuring: Search For An Optimum Voting Threshold, Joy Dey

Joy Dey

Sovereigns have been defaulting on their debts over decades now. A sovereign debt default necessitates a restructuring of the debt instrument in order to reduce the size of the debt or lengthen the maturity period. One of the methods of debt restructuring is an ‘exchange offer’ where the old debt instrument, for example the bond, is exchanged for new debt instruments with altered terms and conditions, particularly the payment terms. Whereas some investors may agree to such restructuring and accept the exchange offer, others might have different aspirations for their investments. A successful sovereign debt restructuring takes place when the …

Sovereign Debt Reform And The Best Interest Of Creditors, William W. Bratton, G. Mitu Gulati

Faculty Scholarship

In April 2002 the International Monetary Fund introduced a sovereign bankruptcy proposal only to be rebuffed by the United States Treasury. Where the IMF wanted a mandatory bankruptcy regime, the Treasury wanted to solve distress problems with contractual devices. Sovereign bondholders and sovereign issuers themselves flatly rejected both proposals, even though they were nominally the beneficiaries of both proponents. This Article addresses and explains this bondholder reaction. In so doing, it takes a highly skeptical view of the IMF's proposal even as it shows that the incentive structure surrounding sovereign lending renders untenable the Treasury's contractarian proposal. The Article's analysis …

Principal And Surety - Right Of Surety To Subrogation To Claim Of Creditor Against Insolvent National Bank, William C. Whitehead

Michigan Law Review

At the closing of defendant bank the commonwealth of Pennsylvania had on deposit $135,000, which was secured by the bond of defendant with plaintiff as surety, and a pledge of bonds of $12,000 par value. The commonwealth received the first dividend, amounting to forty per cent, and plaintiff paid the balance, subtracting $12,441.44 obtained on the intermediate sale of the bonds. Plaintiff contends that it is entitled to subrogation on the basis of the full amount of the original claim of the commonwealth against defendant; and that dividends subsequent to the first should be paid on that claim, although not …

Bankruptcy- Municipal Reorganization - Fairness Of Plan, Kenneth J. Nordstrom

Michigan Law Review

A local government district, finding itself hopelessly in debt, filed a petition for relief under Chapter IX of the Bankruptcy Act as amended. The municipal debt composition plan provided that bondholders would receive eight cents on the dollar. The evidence showed that a considerable quantity of bonds were bought by local landowners at much more than eight cents on the dollar, evidently for the purpose of being used in getting the approval of some such plan as proposed, in the expectation of an increase in value of their lands by improvements to be made by the debtor through a loan …

Some Problems Arising Out Of Deposits To Pay Principal And Interest On Bonds, Paul P. Lipton

Michigan Law Review

Since Lawrence v. Fox contracts students have been puzzled by the numerous and varying relations that may arise when A, the debtor, delivers money to B to pay C, his creditor. Equally puzzling and much more complicated are the rights and relations of the obligor, trustee and bondholders with respect to sums deposited with the trustee to pay principal and interest on bonds.

The insolvency during recent years of many large trust companies that had been named as trustees in indentures securing corporate bonds, having on hand at the time of their failure large sums of money which …

Suretyship-Effect Of Death Of Surety On Rights Of Creditor, Jacob L. Keidan

Michigan Law Review

In a suit on a bond filed in accordance with statutory requirements by a depository designated by a court of bankruptcy, it was pleaded in defense that the surety died before any deposits were received by the designated bank. The circuit court of appeals held for the defendant, ruling that the bond was only a multiple offer and lapsed with the death of the surety. The Supreme Court reversed this decision on the ground that the bond was a single offer, and the designation of the bank as an official depository constituted an acceptance thereof. United States for the use …

Collateral Liabilities Under Section 77b, Homer Kripke

Michigan Law Review

The passage of section 77B of the Bankruptcy Act in 1934 suggested to some lawyers the possibility of using the section as a means of modifying or eliminating the responsibility of persons collaterally liable on obligations for which the corporation to be reorganized or its property was also responsible. The question arose in two common types of situations: (1) guaranties of payment of dividends on capital stock; (2) liability for payment of the bonds or other indebtedness of corporations. In either of these situations, can the liability of persons other than the corporaticm be discharged or modified by reorganization of …

Contracts-Liability Of Purchaser At Forclosure Sale For Obligations Of Forclosed Railroad

Michigan Law Review

The BN Company executed a mortgage on certain railroad properties as security for a bond issue of the Company. Thereafter the Lehigh Company leased the mortgaged property for a term of 999 years. The lease stipulated that "all its covenants are to apply to the parties hereto, and to the several successors and assigns * * * of the parties or their properties." The lessee covenanted therein to indorse a guaranty of payment on the bonds of the BN Company. and did so indorse. Subsequently a mortgage executed by Lehigh prior to the lease with the BN Company, but which …