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Full-Text Articles in Law

Bankruptcy’S Role In The Covid-19 Crisis, Edward R. Morrison, Andrea C. Saavedra Jan 2020

Bankruptcy’S Role In The Covid-19 Crisis, Edward R. Morrison, Andrea C. Saavedra

Faculty Scholarship

Policymakers have minimized the role of bankruptcy law in mitigating the financial fallout from COVID-19. Scholars too are unsure about the merits of bankruptcy, especially Chapter 11, in resolving business distress. We argue that Chapter 11 complements current stimulus policies for large corporations, such as the airlines, and that Treasury should consider making it a precondition for receiving government-backed financing. Chapter 11 offers a flexible, speedy, and crisis-tested tool for preserving businesses, financing them with government funds (if necessary), and ensuring that the costs of distress are borne primarily by investors, not taxpayers. Chapter 11 saves businesses and employment, not ...


Beyond Options, Edward R. Morrison, Anthony J. Casey Jan 2016

Beyond Options, Edward R. Morrison, Anthony J. Casey

Faculty Scholarship

Scholars and policymakers now debate reforms that would prevent a bankruptcy filing from being a moment that forces valuation of the firm, crystallization of claims against it, and elimination of junior stakeholders’ interest in future appreciation in firm value. These reforms have many names, ranging from Relative Priority to Redemption Option Value. Much of the debate centers on the extent to which reform would protect the non-bankruptcy options of junior stakeholders, or harm the non-bankruptcy options of senior lenders. We argue that this focus on options misplaced. Protecting options is neither necessary nor sufficient for advancing the goal of a ...


Rules Of Thumb For Intercreditor Agreements, Edward R. Morrison Jan 2015

Rules Of Thumb For Intercreditor Agreements, Edward R. Morrison

Faculty Scholarship

Intercreditor agreements frequently restrict the extent to which subordinated creditors can participate in the bankruptcy process by, for example, contesting liens of senior lenders, objecting to a cash collateral motion, or even exercising the right to vote on a plan of reorganization. Because intercreditor agreements can reorder the bargaining environment in bankruptcy, some judges have been unsure about their enforceability. Other judges have not hesitated to enforce the agreements, at least when they do not restrict the voting rights of subordinated creditors. This essay argues that intercreditor agreements are controversial because they pose a trade-off: they reduce bargaining costs (by ...


Is The Bankruptcy Code An Adequate Mechanism For Resolving The Distress Of Systemically Important Institutions, Edward R. Morrison Jan 2009

Is The Bankruptcy Code An Adequate Mechanism For Resolving The Distress Of Systemically Important Institutions, Edward R. Morrison

Faculty Scholarship

Lehman’s bankruptcy has triggered calls for new approaches to rescuing systemically important institutions. This essay assesses and confirms the need for a new approach. It identifies the inadequacies of the Bankruptcy Code and advocates an approach modeled on the current regime governing commercial banks. That regime includes both close monitoring when a bank is healthy and aggressive intervention when it is distressed. The two tasks – monitoring and intervention – are closely tied, ensuring that intervention occurs only when there is a well-established need for it. The same approach should be applied to all systemically important institutions. President Obama and the ...


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 ...


Is The Bankruptcy Code An Adequate Mechanism For Resolving The Distress Of Systemically Important Institutions?, Edward R. Morrison Jan 2009

Is The Bankruptcy Code An Adequate Mechanism For Resolving The Distress Of Systemically Important Institutions?, Edward R. Morrison

Faculty Scholarship

The President and members of Congress are considering proposals that would give the government broad authority to rescue financial institutions whose failure might threaten market stability. These systemically important institutions include bank and insurance holding companies, investment banks, and other "large, highly leveraged, and interconnected" entities that are not currently subject to federal resolution authority. Interest in these proposals stems from the credit crisis, particularly the bankruptcy of Lehman Brothers. That bankruptcy, according to some observers, caused massive destabilization in credit markets for two reasons. First, market participants were surprised that the government would permit a massive market player to ...


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 ...


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 ...


Timbers Of Inwood Forest, The Economics Of Rent, And The Evolving Dynamics Of Chapter 11, Edward R. Morrison Jan 2007

Timbers Of Inwood Forest, The Economics Of Rent, And The Evolving Dynamics Of Chapter 11, Edward R. Morrison

Faculty Scholarship

The Supreme Court's decision in Timbers of Inwood Forest occupies an unhappy position in bankruptcy case law. It is often remembered as a troubled interpretation of the Code, denying undersecured creditors compensation for an important source of depreciation – depreciation in the real value of a creditor's claim during a lengthy reorganization process. But Timbers was not a simple case in which a bank was denied adequate protection for lost investment opportunities. It was instead a case in which the bank tried to opt out of the bankruptcy process itself. The debtor was an apartment complex. After it entered ...


Serial Entrepreneurs And Small Business Bankruptcies, Douglas G. Baird, Edward R. Morrison Jan 2005

Serial Entrepreneurs And Small Business Bankruptcies, Douglas G. Baird, Edward R. Morrison

Faculty Scholarship

Chapter 11 is thought to preserve the going-concern surplus of a financially distressed business – the extra value that its assets possess in their current configuration. Financial distress leads to conflicts among creditors that can lead to inefficient liquidation of a business with going-concern surplus. Chapter 11 avoids this by providing the business with a way of fashioning a new capital structure. This account of Chapter 11 fails to capture what is happening in the typical case. The typical Chapter 11 debtor is a small corporation whose assets are not specialized and rarely worth enough to pay tax claims. There is ...


Serial Entrepreneurs And Small Business Bankruptcies, Douglas G. Baird, Edward R. Morrison Jan 2005

Serial Entrepreneurs And Small Business Bankruptcies, Douglas G. Baird, Edward R. Morrison

Faculty Scholarship

This empirical study suggests that, far from ensuring assets are put to their best use, Chapter 11 encourages small-business entrepreneurs to remain too long with failed businesses before trying to start (or work for) new ones. Small entrepreneurs open and close a number of businesses over the course of their careers as they search for the business (or employer) that offers the best match with their skills. Chapter 11 delays this matching process and, over this dimension, differs little from rent control and other government policies that encourage socially wasteful lock-in of scarce resources. These costs may not be large ...


Serial Entrepreneurs And Small Business Bankruptcies, Douglas G. Baird, Edward R. Morrison Jan 2005

Serial Entrepreneurs And Small Business Bankruptcies, Douglas G. Baird, Edward R. Morrison

Faculty Scholarship

Chapter 11 is thought to preserve the going-concern surplus of a financially distressed business – the extra value that its assets possess in their current configuration. Financial distress leads to conflicts among creditors that can lead to inefficient liquidation of a business with going-concern surplus. Chapter 11 avoids this by providing the business with a way of fashioning a new capital structure. This account of Chapter 11 fails to capture what is happening in the typical case. The typical Chapter 11 debtor is a small corporation whose assets are not specialized and rarely worth enough to pay tax claims. There is ...


Optimal Timing And Legal Decisionmaking: The Case Of The Liquidation Decision In Bankruptcy, Douglas G. Baird, Edward R. Morrison Jan 1999

Optimal Timing And Legal Decisionmaking: The Case Of The Liquidation Decision In Bankruptcy, Douglas G. Baird, Edward R. Morrison

Faculty Scholarship

Until the firm is sold or a plan of reorganization is confirmed, Chapter 11 entrusts a judge with the decision of whether to keep a firm as a going concern or to shut it down. The judge revisits this liquidation decision multiple times. The key is to make the correct decision at the optimal time. This paper models this decision as the exercise of a real option and shows that it depends critically on particular types of information about the firm and its industry. Liquidations take place too soon if we merely compare the liquidation value of the assets with ...