Law Commons^™

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 …

The Doctrine Of Necessity In Bankruptcy Reorganizations, Rahul K. Sharma

Rahul K. Sharma

Necessity is an old concept used in many fields of law. In criminal law and torts, it is a defense. In property law, its reasoning is used to support eminent domain. This paper will analyze the use of the doctrine of necessity in bankruptcy reorganizations. In bankruptcy, necessity has also been used as a justification for paying certain creditors earlier than they would have otherwise been paid. This has become controversial as such payments became routine. A decision by the Seventh Circuit in the 2004 Kmart case strongly criticized such payments and criticized reliance upon the doctrine of necessity. This …

Bankruptcy Vérité, Lynn M. Lopucki, Joseph W. Doherty

Michigan Law Review

In the empirical study we report in Bankruptcy Fire Sales, we compared the recoveries from the going-concern bankruptcy sales of twenty-five large, public companies with the recoveries from the bankruptcy reorganizations of thirty large, public companies. We found that, controlling for the asset size of the company and its presale or pre-reorganization earnings ("EBITDA"), reorganization recoveries were more than double sale recovenes. We are honored that Professor James J. White has chosen to comment on our study. White is an eloquent defender of the status quo, pulls no punches, and always has something interesting to say. Bankruptcy Noir is …

Section 524(G) Without Compromise: Voting Rights And The Asbestos Bankruptcy Paradox, S. Todd Brown

Journal Articles

Section 524(g) of the Bankruptcy Code was adopted to protect unknown future asbestos personal injury victims' rights and prospects for financial recovery. To serve these goals and satisfy the demands of due process, Section 524(g) provides two basic forms of virtual representation for future victims - requiring the appointment of an independent legal representative and aligning the interests of future victims with current claimants (75% of whom must approve any plan that invokes Section 524(g)). In recent years, however, the 75% super-majority vote requirement has been transformed into a veto power wielded by a small group of law firms, who …

Trends In Distressed Debt Investing: An Empirical Study Of Investors' Objectives, Michelle M. Harner

Faculty Scholarship

Increased creditor control in chapter 11 cases has generated considerable debate over the past several years. Proponents of creditor control argue that, among other things, it promotes efficiency in corporate reorganizations. Critics assert that it destroys corporate value and frequently forces otherwise viable entities to liquidate. The increasing involvement of professional distressed debt investors in chapter 11 cases has intensified this debate. In this article, I present and analyze empirical data regarding the investment practices and strategies of distressed debt investors. Based on this data and actual case reports, I reach two primary conclusions. First, although relatively few in number, …

Who Is At The Table? Interpreting Disclosure Requirements For Ad Hoc Groups Of Institutional Investors Under Federal Rule Of Bankruptcy Procedure 2019, James M. Shea, Jr.

Fordham Law Review

This Note explores Federal Rule of Bankruptcy Procedure 2019's disclosure requirements when hedge funds and other institutional investors appear as groups in Chapter 11 cases. In particular, this Note traces the history of Rule 2019 and the various corporate reorganization mechanisms to explain the split between two bankruptcy courts on whether these groups constitute “committees” under Rule 2019. This Note cites the fundamental differences between these groups and protective committees--the committees charged with representing security holders under federal equity receiverships. Hence, ad hoc groups do not have to make detailed disclosures of each individual transaction, disclosure that would be required …

The Corporate Governance And Public Policy Implications Of Activist Distressed Debt Investing, Michelle M. Harner

Faculty Scholarship

Activist institutional investors traditionally have invested in a company's equity to try to influence change at the company. Some of these investors, however, are now purchasing a company's debt for this same purpose. They may seek to change a company's management and board personnel, operational strategies, asset holdings or capital structure. The chapter 11 bankruptcy cases of Allied Holdings, Inc. and its affiliates exemplify the strategies of activist distressed debt investors. In the Allied cases, Yucaipa Companies, a distressed debt investor, purchased approximately 66% of Allied's outstanding general unsecured bond debt. Yucaipa used this debt position to exert significant influence …

Bankruptcy Noir, James J. White

Articles

In Bankruptcy Fire Sales, Professor LoPucki and Dr. Doherty do two things. First, they present provocative data about the relative payoff to be had in Chapter 11 by a full reorganization compared with the payoff from a section 363 sale without a full reorganization. Second, they give a yet more provocative explanation for their data. Taking a page from Professor LoPucki's recent book, they blame the meager return that they observe on 363 sales on the unprincipled behavior of the lawyers, managers, creditors, investment bankers, and even judges involved in the sales. Messrs. LoPucki and Doherty's data appear to …