Law Commons^™

The Shadow Bankruptcy System, Jonathan C. Lipson

Jonathan C. Lipson

This article exposes and explores a puzzle at the heart of the current economic crisis: The surprising under-use, and increasing misuse, of Chapter 11 of the United States Bankruptcy Code, the principal legal system for salvaging troubled businesses.

The answer offered here: The rise of the shadow bankruptcy system. “Shadow bankruptcy” describes the severely under-regulated non-bank financial institutions (e.g., hedge funds, private equity funds and investment banks) that increasingly dominate and manipulate Chapter 11 reorganizations.

Like the “shadow banking” system for which it is named, shadow bankruptcy thrives on and promotes opacity and undisclosed, possibly perverse, incentives. Shadow bankruptcy players …

Failure's Futures: Controlling The Market For Information In Corporate Reorganization, Jonathan C. Lipson

Jonathan C. Lipson

This Article identifies and explores an important gap in bankruptcy theory and policy, with significant implications for the coming wave of major business failures: How to manage information about financially distressed businesses?

The paper makes three claims. First, Chapter 11 of the United States Bankruptcy Code plays a unique informational role, as it creates mechanisms to explain a debtor’s failure and to promote reinvestment. Second, the information functions performed by this system face internal and external threats. Internally, bankruptcy reorganization increasingly resembles an unregulated securities market, dominated by sophisticated, wealthy investors whose motives and strategies are often highly opaque. Their …