Barry E. Adler
Today’s leading experts on the law and economics of corporate bankruptcy address fundamental issues such as the efficiency of bankruptcy, the role of creditors in the bankruptcy process, the allocation of going-concern surplus among claimants, the desirability of liquidation in the absence of such surplus, the role of contract in bankruptcy resolution, the role of derivatives in the bankruptcy process, the costs of the bankruptcy system, and the special case of financial institutions, among other topics. This book’s chapters trace the historical path of both law and policy analysis.
Thomas H. Jackson
Updates the Logic and Limits of Bankruptcy with a review of the hypothetical creditors’ bargain in the context of current bankruptcy scholarship, law, and practice. Areas of focus include the role of dominant creditors in modern practice, the special issues presented by securities and financial instruments, and the novel challenges presented by the insolvency of systemically important financial institutions. The evolving role of markets and the need for statutory reform are also addressed.
Robert K. Rasmussen
Updates the two main aspirations of The End of Bankruptcy. The first aspiration was to articulate the conditions necessary for a Chapter 11 proceeding to serve its traditional goal of protecting a business’s going-concern surplus through a negotiation among its stakeholders. The second was to use this understanding as a basis to take stock of existing bankruptcy practice, especially as it grappled with the financial distress of large enterprises and evolved to market-based resolutions.
Melissa B. Jacoby and Edward J. Janger
Identifies the ways in which the federal bankruptcy process can create value over and above what can be realized through compulsory state processes through either recapitalization or sale of the firm or its assets. Explores procedural and governance-based concerns about value maximization and allocation in all-asset sales and discusses how Ice Cube Bonds would preserve the ability to address these concerns in contexts that include credit bidding and free-and-clear sales.
Compares the resolution of industrial companies under Chapter 11 of the Bankruptcy Code and of financial companies under the Orderly Liquidation Authority of the Dodd-Frank Act. Also, critiques the Single Point of Entry proposal for systemically important financial institutions and concludes that the perceived differences between industrial and financial resolution are overstated. Explains that the bankruptcy process could be adapted to address the differences that exist.
Mark J. Roe
Explains that favorable treatment of derivatives and financial repurchase agreements under bankruptcy law weakens market discipline during ordinary financial times and exacerbates financial failure during an economic downturn or financial crisis. Safe harbors for such instruments facilitate collateral runs and fire sales and encourage short-term financing, which benefit from such privilege. The purpose of the special treatment, containment of contagion, is not accomplished and the resulting risk is to inefficiently burden other creditors including the United States government, which serves as de jure or de facto guarantor of significant financial institutions.
Discusses distress-triggered liabilities: contingent obligations of a corporate debtor that are likely to be triggered by the debtor’s own financial distress. Three common examples of such liabilities are loan default penalties, loan prepayment fees such as make-whole premiums, and intragroup guarantees. Because the risk that a distress-triggered liability will become payable correlates positively with the debtor’s insolvency risk, the incurring of the liability shifts expected losses onto the debtor’s general creditors. The result is an incentive-distorting value transfer from creditors to shareholders that generates the agency costs of debt. Bankruptcy courts could prevent these costs by subordinating distress-triggered claims to general creditor claims. Subordination would preserve the positive economic functions of distress-triggered claims, which in most instances require only that the claims be enforceable to the extent the debtor is solvent. A subordination rule would be consistent with both the purpose and the text of the Bankruptcy Code.
Explores the desirability of subsidiaries as a path around bankruptcy’s automatic stay. Questions the efficacy of the stay itself and formally determines that a stay is desirable when assets are firm specific, when debt contracts are sequential and incomplete, and when bargaining at bankruptcy is imperfect. Under these conditions, a debtor may grant withdrawal rights even when they are less efficient than a stay.
Describes the bankruptcy regulation of the financial and control provisions of new debt incurred by a debtor (DIP financing), as a mechanism for addressing the liquidity problems associated with financial distress. Under this regime, the property- and rule -based scheme governing debt priority outside of bankruptcy is replaced by judicial discretion to authorize the terms of DIP financing on a case-by-case basis. While the bankruptcy statute and policy dictate that a DIP-financing arrangement be authorized only if it creates value by providing liquidity, bankruptcy courts face challenges in executing this objective. In addition, over the past couple of decades, new lenders have used non-financial debt terms to take significant control over the bankruptcy procedure, raising significant governance concerns. The chapter assesses the calls for reform in the judicial oversight of both financial and control provisions, particularly in the recent proposals of the ABI’s Chapter 11 Commission.