Law Commons^™

Should Ad Hoc Committees Have Fiduciary Duties?: Judicial Regulation Of The Bankruptcy Market, David L. Perechocky

David L Perechocky

This article is the first to substantively and directly address the question of whether informal creditor groups in bankruptcy cases could and should have fiduciary duties to other creditors. The rise of activist investors and claims traders in bankruptcy proceedings has significantly changed the bankruptcy process, to much controversy. One particularly contentious topic is the growing presence of informal, or “ad hoc,” creditor groups. Proponents argue that these groups are beneficial by enabling creditors to work together efficiently and effectively, but critics view their actions as disruptive and often unfair to other creditors. A recent decision in the Washington Mutual …

Controlling Creditor Opportunism, Jonathan C. Lipson

Jonathan C. Lipson

This paper addresses problems of creditor opportunism. “Distress investors” such as hedge funds, private equity funds, and investment banks are opportunistic when they use debt to obtain control of a financially troubled firm and extract improper gains at the expense of the firm and its other stakeholders. Examples include the mis-use of private information to short-sell a borrower’s securities and creditor self-dealing.

Creditors can act opportunistically because legal doctrines that historically checked such behavior—e.g., “lender liability”—have not kept pace with fundamental changes in the market for control of distressed firms. The recent Dodd-Frank financial reform is not likely to change …

Where Have All The Lenders Gone?: "Loan To Own Transactions" In The Current Credit Market, Stephanie A. Nadler

Stephanie A Nadler

Credit is not readily available in current markets. While distressed firms are in dire need of capital contributions, traditional lenders are not willing to make risky loans. Distressed firms have turned to hedge funds as lenders for much-needed capital. Thus, hedge funds engage in “loan to own” transactions, a lending technique that has recently drawn much criticism. In a loan to own transaction, the hedge fund makes a loan to a distressed company, while also taking an equity stake in the company. Pursuant to such activity, the hedge fund will generally gain a seat on the board of directors or …

The Tie Between Hedge Funds And Financial Stability: Is The Current Financial Crisis A Call For Regulation?, Domenico Ferrari

Domenico Ferrari

The attitude of regulatory authorities towards hedge funds has been severely affected by the current international financial crisis. The international financial crisis, and the need to develop a brand new regulatory framework to address the current failures, urges a solution for the problem of what degree of regulation should be required for hedge funds. At the same time, the mistake of over-regulation, by using hedge funds as an easy scapegoat for a crisis caused by many different shortcomings and several regulatory loopholes, should be avoided. The examples of the U.S. and Singapore regulatory experience with hedge funds show that the …

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 …

Dr. Jones And The Raiders Of Lost Capital: Hedge Fund Regulation, Part Ii, John W. Verret

John W Verret

Hedge funds can sometimes achieve remarkable returns. The market fees exceed that of other asset classes, leading some fund managers to engage in illicit behavior, including fraud, that violates their duty to their investors and tempts institutional investors to violate their fiduciary duty to their principals. I will examine the hedge fund registration requirement struck down during the summer of 2006, as well as the tools used by other regulators to oversee institutional investors. This study relies on a survey of literature on financial regulation, commentary on the hedge fund registration rule, models of self-regulation, and examples in other areas …