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Columbia Law School

Bankruptcy Law

Bankruptcy

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Restructuring Vs. Bankruptcy, Jason Roderick Donaldson, Edward R. Morrison, Giorgia Piacentino, Xiaobo Yu Jan 2020

Restructuring Vs. Bankruptcy, Jason Roderick Donaldson, Edward R. Morrison, Giorgia Piacentino, Xiaobo Yu

Faculty Scholarship

We develop a model of a firm in financial distress. Distress can be mitigated by filing for bankruptcy, which is costly, or preempted by restructuring, which is impeded by a collective action problem. We find that bankruptcy and restructuring are complements, not substitutes: Reducing bankruptcy costs facilitates restructuring, rather than crowding it out. And so does making bankruptcy more debtor-friendly, under a condition that seems likely to hold now in the United States. The model gives new perspectives on current relief policies (e.g., subsidized loans to firms in bankruptcy) and on long-standing legal debates (e.g., the efficiency of ...


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 ...


Manipulating Random Assignment: Evidence From Consumer Bankruptcies In The Nation's Largest Cities, Edward R. Morrison, Belisa Pang, Jonathon Zytnick Jan 2019

Manipulating Random Assignment: Evidence From Consumer Bankruptcies In The Nation's Largest Cities, Edward R. Morrison, Belisa Pang, Jonathon Zytnick

Faculty Scholarship

Random case assignment is thought to be an important feature of decision-making in federal courts because it helps guard against favoritism (actual or perceived) toward particular parties or types of cases. In bankruptcy courts, cases are randomly assigned to both judges and trustees. In Chapter 7 cases, for example, the trustee is a quasi-judicial actor, typically a private-sector lawyer, who has been selected to audit the debtor's finances, find and liquidate assets, and police compliance with the law. We study three major bankruptcy jurisdictions (covering Chicago, Los Angeles, and parts of New York) and find that the random-assignment process ...


Reforming Institutions: The Judicial Function In Bankruptcy And Public Law Litigation, William H. Simon, Kathleen G. Noonan, Jonathan C. Lipson Jan 2019

Reforming Institutions: The Judicial Function In Bankruptcy And Public Law Litigation, William H. Simon, Kathleen G. Noonan, Jonathan C. Lipson

Faculty Scholarship

Public law litigation (PLL) is among the most important and controversial types of dispute that courts face. These civil class actions seek to reform public agencies such as police departments, prison systems, and child welfare agencies that have failed to meet basic statutory or constitutional obligations. They are controversial because critics assume that judicial intervention is categorically undemocratic or beyond judicial expertise.

This Article reveals flaws in these criticisms by comparing the judicial function in PLL to that in corporate bankruptcy, where the value and legitimacy of judicial intervention are better understood and more accepted. Our comparison shows that judicial ...


Valuation Disputes In Corporate Bankruptcy, Kenneth M. Ayotte, Edward R. Morrison Jan 2018

Valuation Disputes In Corporate Bankruptcy, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

Prior scholarship points to disagreements about valuation and judicial valuation error as key drivers of Chapter 11 outcomes. Avoiding valuation disputes and valuation errors is also the underlying driver of most proposed reforms, from Baird’s auctions to Bebchuk’s options. In this paper, we undertake a detailed examination of bankruptcy court opinions involving valuation disputes. Our paper has two goals. The first is to understand how parties and their expert witnesses justify their opposing views to the judge, and how judges decide between them. The second is to provide practical guidance to judges in resolving valuation disputes. We document ...


Race And Bankruptcy: Explaining Racial Disparities In Consumer Bankruptcy, Edward R. Morrison, Belisa Pang, Antoine Uettwiller Jan 2018

Race And Bankruptcy: Explaining Racial Disparities In Consumer Bankruptcy, Edward R. Morrison, Belisa Pang, Antoine Uettwiller

Faculty Scholarship

Among consumers who file for bankruptcy, African Americans file Chapter 13 petitions at substantially higher rates than other racial groups. Some have hypothesized that the difference is attributable to discrimination by attorneys. We show that the difference may be attributable, in substantial part, to a selection effect: Among distressed consumers, African Americans have longer commutes to work, rely more heavily on cars for the commute, and therefore have greater demand for a bankruptcy process (Chapter 13) that allows them to retain their cars. We begin by showing that African Americans tend to have longer commuting times than other consumers and ...


Extraterritorial Avoidance Actions: Lessons From Madoff, Edward R. Morrison Jan 2015

Extraterritorial Avoidance Actions: Lessons From Madoff, Edward R. Morrison

Faculty Scholarship

The Madoff case provided fertile ground for testing boundaries of the U.S. Bankruptcy Code. This paper looks at one boundary-testing dispute that forced the SDNY District Court to assess the extraterritorial reach of rules governing recovery of fraudulent transfers. The trustee for the Madoff estate sought to recover property that had been transferred from Madoff’s Ponzi scheme to offshore feeder funds, which in turn transferred the property to customers located abroad. The SDNY court stopped the trustee. In its view, the trustee was seeking extraterritorial application of Section 550, that the text of this section does not overcome ...


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 ...


Rolling Back The Repo Safe Harbors, Edward R. Morrison, Mark J. Roe, Christopher S. Sontchi Jan 2014

Rolling Back The Repo Safe Harbors, Edward R. Morrison, Mark J. Roe, Christopher S. Sontchi

Faculty Scholarship

Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that ...


Health And Financial Fragility: Evidence From Car Crashes And Consumer Bankruptcy, Edward R. Morrison, Arpit Gupta, Lenora M. Olson, Lawrence Cook, Heather Keenan Jan 2013

Health And Financial Fragility: Evidence From Car Crashes And Consumer Bankruptcy, Edward R. Morrison, Arpit Gupta, Lenora M. Olson, Lawrence Cook, Heather Keenan

Faculty Scholarship

This paper assesses the importance of adverse health shocks as triggers of bankruptcy filings. We view car crashes as a proxy for health shocks and draw on a large sample of police crash reports linked to hospital admission records and bankruptcy case files. We report two findings: (i) there is a strong positive correlation between an individual's pre-shock financial condition and his or her likelihood of suffering a health shock, an example of behavioral consistency; and (ii) after accounting for this simultaneity, we are unable to identify a causal effect of health shocks on bankruptcy filing rates. These findings ...


Saving Up For Bankruptcy, Ronald J. Mann, Katherine Porter Jan 2010

Saving Up For Bankruptcy, Ronald J. Mann, Katherine Porter

Faculty Scholarship

Bankruptcy is a numbers game. Policymaking, public perception, and the scholarly literature are captivated with the number of annual bankruptcy filings, which hit one million in 2008. The number of annual bankruptcy filings has become a barometer of economic health, reflecting an implicit assumption that bankruptcy is a useful proxy for financial distress.

But at the level of the individual family, the causative relation between financial distress and bankruptcy filings is unclear. On the one hand, only a fraction of those in serious financial distress will ever file for bankruptcy. For example, a study by Michelle White examined a group ...


Saving Up For Bankruptcy, Ronald J. Mann, Katherine M. Porter Jan 2010

Saving Up For Bankruptcy, Ronald J. Mann, Katherine M. Porter

Faculty Scholarship

This paper probes the puzzle of why only a few of those for whom bankruptcy would be economically valuable ever choose to file. We use empirical evidence about the patterns of bankruptcy filings to understand what drives the point in time at which the filings occur, and to generate policy recommendations about how the bankruptcy and debt-collection system sorts those that need relief from those that do not.

The paper combines three kinds of data. First, quantitative data collected from judicial filing records that show the weekly, monthly, and annual patterns of bankruptcy filings. Second, 40 interviews with industry professionals ...


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 ...


Debt, Bankruptcy, And The Life Course, Allison Mann, Ronald J. Mann, Sophie Staples Jan 2009

Debt, Bankruptcy, And The Life Course, Allison Mann, Ronald J. Mann, Sophie Staples

Faculty Scholarship

This Essay considers the significance of credit markets and bankruptcy for life course mobility. Comparing parallel data from the 2007 Survey of Consumer Finances (SCF) and the 2007 Consumer Bankruptcy Project (CBP), it analyzes use of the bankruptcy process as a function of the distribution of unplanned events, the ability of households to use credit markets to limit the adverse effects of such events, and barriers in access to the bankruptcy system. Our findings suggest two things. One, although the financial characteristics of filers vary markedly by age and race, bankrupt households generally come from the bottom quartiles of 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

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 ...


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 ...


The Economics Of Bankruptcy: An Introduction To The Literature, Edward R. Morrison Jan 2009

The Economics Of Bankruptcy: An Introduction To The Literature, Edward R. Morrison

Faculty Scholarship

This essay surveys important contributions to the economics of bankruptcy. It is an introductory chapter for a forthcoming volume (from Edward Elgar Press) that compiles the work of legal scholars as well as economists working in the field of corporate finance. The essay begins with the foundational theories of Baird, Jackson, and Rea and then collects scholarly work extending, testing, or revising those theories. At various points I identify questions that merit further study, particularly empirical testing.


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 ...


Bargaining Around Bankruptcy: Small Business Workouts And State Law, Edward R. Morrison Jan 2008

Bargaining Around Bankruptcy: Small Business Workouts And State Law, Edward R. Morrison

Faculty Scholarship

In the United States, few failing businesses invoke the Bankruptcy Code to reorganize or liquidate. Most use non-bankruptcy procedures to accomplish the same purposes. These procedures include voluntary agreements between the debtor and its creditors (workouts) and formal devices such as friendly foreclosures, bulk sales, and assignments for the benefit of creditors. This paper documents the importance of non-bankruptcy procedures using firm-level data from Cook County, Illinois. I find that these procedures are used by eighty percent of distressed small businesses. The paper also identifies the conditions under which a business chooses federal bankruptcy law over non-bankruptcy procedures. I model ...


Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison Jan 2008

Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison

Faculty Scholarship

Most nations have enacted statutes governing business liquidation and reorganization. These statutes are the primary focus when policymakers and scholars discuss ways to improve laws governing business failure. This focus is misplaced, at least for distressed small businesses in the United States.

Evidence from a major credit bureau shows that over eighty percent of these businesses liquidate or reorganize without invoking the formal Bankruptcy Code.

The businesses instead invoke procedures derived from the laws of contracts, secured lending, and trusts. These procedures can be cheaper and speedier than a formal bankruptcy filing, but they typically require unanimous consent of senior ...


Making Sense Of Nation-Level Bankruptcy Filing Rates, Ronald J. Mann Jan 2008

Making Sense Of Nation-Level Bankruptcy Filing Rates, Ronald J. Mann

Faculty Scholarship

Increased rates of consumer bankruptcy filings are a policy concern around the world. It is not easy, however, to explain the variations in per capita filing rates from country to country. Some of the variation is attributable to different levels of indebtedness. Some is attributable to different cultural attitudes about financial failure. And some is attributable to the accessibility of the legal system as a remedy for irremediable financial distress.

This paper analyzes the differences in nation-level, per capita filing rates. I start with a model that uses economic variables to explain nation-level variations in filing rates. The economic and ...


Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison Jan 2008

Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison

Faculty Scholarship

Most nations have enacted statutes governing business liquidation and reorganization. These statutes are the primary focus when policymakers and scholars discuss ways to improve laws governing business failure. This focus is misplaced, at least for distressed small businesses in the United States.

Evidence from a major credit bureau shows that over eighty percent of these businesses liquidate or reorganize without invoking the formal Bankruptcy Code.

The businesses instead invoke procedures derived from the laws of contracts, secured lending, and trusts. These procedures can be cheaper and speedier than a formal bankruptcy filing, but they typically require unanimous consent of senior ...


Making Sense Of Nation-Level Bankruptcy Filing Rates, Ronald J. Mann Jan 2007

Making Sense Of Nation-Level Bankruptcy Filing Rates, Ronald J. Mann

Faculty Scholarship

Increased rates of consumer bankruptcy filings are a policy concern around the world. It is not easy, however, to explain the variations in per capita filing rates from country to country. Some of the variation is attributable to different levels of indebtedness. Some is attributable to different cultural attitudes about financial failure. And some is attributable to the accessibility of the legal system as a remedy for irremediable financial distress.

This paper analyzes the differences in nation-level, per capita filing rates. I start with a model that uses economic variables to explain nation-level variations in filing rates. The economic and ...


Bankruptcy Decision Making: An Empirical Study Of Continuation, Edward R. Morrison Jan 2007

Bankruptcy Decision Making: An Empirical Study Of Continuation, Edward R. Morrison

Faculty Scholarship

Many small businesses attempt to reorganize under Chapter 11 of the U.S. Bankruptcy Code, but most are ultimately liquidated instead. Little is known about this shutdown decision. It is widely suspected that the bankruptcy process exhibits a continuation bias, allowing failing businesses to linger under the protection of the court, which resists liquidation even when it is optimal. This paper examines the shutdown decision in a sample of Chapter 11 bankruptcy cases filed in a typical bankruptcy court over the course of a year. The presence of continuation bias is tested along several dimensions – the extent of managerial control ...


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 ...


Optimizing Consumer Credit Markets And Bankruptcy Policy, Ronald J. Mann Jan 2006

Optimizing Consumer Credit Markets And Bankruptcy Policy, Ronald J. Mann

Faculty Scholarship

This Article explores the relationship between consumer credit markets and bankruptcy policy. In general, I argue that the causative relationships running between borrowing and bankruptcy compel a new strategy for policing the conduct of lenders and borrowers in modern consumer credit markets. The strategy must be sensitive to the role of the credit card in lending markets and must recognize that both issuers and cardholders are well placed to respond to the increased levels of spending and indebtedness. In the latter parts of the Article, I recommend mandatory minimum payment requirements, a tax on distressed credit card debt, and the ...


Financial Contracts And The New Bankruptcy Code: Insulating Markets From Bankrupt Debtors And Bankruptcy Judges, Edward R. Morrison, Joerg Riegel Jan 2006

Financial Contracts And The New Bankruptcy Code: Insulating Markets From Bankrupt Debtors And Bankruptcy Judges, Edward R. Morrison, Joerg Riegel

Faculty Scholarship

The reforms of 2005 yield important but subtle changes in the Bankruptcy Code's treatment of financial contracts. They might appear only to eliminate longstanding uncertainty surrounding the protections available to financial contract counterparties, especially counterparties to repurchase transactions and other derivative contracts. But the ambit of the reforms is much broader. The expanded definitions – especially the definition of "swap agreement" – are now so broad that nearly every derivative contract is subject to the Code's protection. Instead of protecting particular counterparties to particular transactions, the Code now protects any counterparty to any derivative contract. Entire markets have been insulated ...


The Supreme Court, The Solicitor General, And Bankruptcy: Bfp V. Resolution Trust Corporation, Ronald J. Mann Jan 2006

The Supreme Court, The Solicitor General, And Bankruptcy: Bfp V. Resolution Trust Corporation, Ronald J. Mann

Faculty Scholarship

This chapter tells the story behind BFP v. Resolution Trust Corporation. I see BFP as a case that pitted relatively plain statutory language supporting the debtor-in-possession against policy interests supporting a secured creditor. I argue that an important explanation for the Supreme Court's decision to favor policy over the language of the statute was its perception of a need to protect the availability of non-bankruptcy remedies for secured creditors. Accordingly, I situate my discussion of BFP in the context of the role that the federal government has played in the Supreme Court's cases interpreting the Bankruptcy Code. In ...


Optimizing Consumer Credit Markets And Bankruptcy Policy, Ronald J. Mann Jan 2006

Optimizing Consumer Credit Markets And Bankruptcy Policy, Ronald J. Mann

Faculty Scholarship

This article explores the relationship between consumer credit markets and bankruptcy policy. In general, I argue that the causative relationships running between borrowing and bankruptcy compel a new strategy for policing the conduct of lenders and borrowers in modern consumer credit markets. The strategy must be sensitive to the role of the credit card in lending markets and must recognize that both issuers and cardholders are well placed to respond to the increased levels of spending and indebtedness. In the latter parts of the article, I recommend mandatory minimum payment requirements, a tax on distressed credit card debt, and the ...