The Expressive Function of Directors’ Duties to Creditors

This Article offers an explanation of the “doctrine” of directors’ duties to creditors. Courts frequently say—but rarely hold—that corporate directors owe duties to or for the benefit of corporate creditors when the corporation is in distress. These cases are puzzling for at least two reasons. First, they link fiduciary duty to priority in right of payment, effectively treating creditors as if they were shareholders, at least for certain purposes. But this ignores the fact that priority is a complex and volatile concept. Moreover, contract and other rights at law usually protect creditors, even (especially) when a firm is distressed. It is thus not surprising that courts do not in fact want to treat directors as fiduciaries for creditors, except in extreme cases. But this leaves us with the second puzzle: If directors are rarely treated as fiduciaries for creditors, why have the Delaware courts bothered to say so much about this, especially in their recent opinions? This Article explores these two puzzles, and argues that these cases are best understood as examples of “expressive” judging, exhortations to good behavior not necessarily tethered to meaningful instrumental consequences. It identifies four expressive themes in these decisions on, among other things, director discretion, the boundaries of acceptable conduct towards creditors, the role of contract, and the educative function of courts. The Article concludes by noting several doctrinal gaps created by some of the recent case law, and suggests ways that the better expressive aspirations of the Delaware opinions can fill these gaps in fair and efficient ways

The Secret Life of Priority: Corporate Reorganization after \u3ci\u3eJevic\u3c/i\u3e

Academics have long debated whether the order of bankruptcy distributions should be “absolute” or “relative.” Should courts have the flexibility to scramble priority to serve some greater good? The Supreme Court’s recent decision in Czyzewski v. Jevic Holding Corp. holds that the answer is “no”: priority is absolute absent the consent of affected creditors. “Consent” is not self-defining, however, and is largely ignored in debates about priority. This is a problem because consent is hard to pinpoint in corporate reorganizations, a type of aggregate proceeding that can involve hundreds or thousands of creditors and shareholders. Although the Jevic majority does not define consent, its reasoning reflects a Court concerned about process values that proxy for it: stakeholder participation, outcome predictability, and procedural integrity. Jevic thus reveals a secret: “priority” is not only about the order in which a corporate debtor pays its creditors, but also about the process by which it does so. I make three main points. First, I explain why “consent” is indeterminate in this context, inviting inspection of process quality. Second, I assess Jevic’s process-value framework. Implementing these values is not costless, so the Court’s commitment to them suggests that efficiency—the mantra of many scholars—is not the only or necessarily the most important value in reorganization. Third, I argue that these values conflict with the power that senior secured creditors have gained in recent years to control corporate reorganizations. Many worry that this power produces needless expropriation and error. I conclude by sketching opportunities that Jevic creates for scholars and practitioners who share these concerns

Fighting Fiction with Fiction—The New Federalism in (a Tobacco Company) Bankruptcy

This Article analyzes the new federalism’s impact on Chapter 11 reorganizations. The thesis of this Article is that the fictive nature of the new federalism and the three countervailing doctrines renders them highly unstable in the reorganization context. This instability will inevitably and needlessly distort the negotiations that shape Chapter 11 reorganizations. This Article focuses primarily, but not exclusively, on the effect that the new federalism would have on a tobacco company bankruptcy, because that example impresses these problems into starkest relief. Other Chapter 11 reorganizations could create similar problems, including cases in which the debtor is a gun or lead-paint manufacturer, or a healthcare or educational services provider. This Article offers a solution to this instability: federal bankruptcy courts should, as a constitutional matter, have the power under the Bankruptcy Clause to subordinate or discharge claims held by states, as provided in the Bankruptcy Code. The Bankruptcy Clause, contained in Article I, Section 8, Clause 4 of the United States Constitution, empowers Congress to make “uniform [l]aws on the subject of [b]ankruptcies throughout the United States.” If states’ claims are immune from subordination or discharge in Chapter 11 reorganizations, they will likely receive better treatment than would other, similarly situated creditors. Uniformity in this constitutional context should require uniformity of result. The new federalism should tolerate the subordination and discharge of state claims because Congress carefully tailored the Bankruptcy Code to reflect the needs of the states by giving priority to, and exempting from discharge, a variety of state tax claims

Where\u27s The Beef: A Few Words about Paying for Performance in Bankruptcy

This brief essay responds to Yair Listokin’s article, “Paying for Performance in Bankruptcy: Why CEOs Should Be Compensated with Debt,” 155 U. PA. L. REV. 777 (2007). Professor Listokin argues that we should give official creditors’ committees the power to pay management of reorganizing debtors with corporate debt. This, he argues, would properly align their incentives with those who are most likely affected, the “residual claimant” unsecured creditors. Although Professor Listokin’s proposal is a welcome addition to our literature on corporate reorganization, this essay points out several basic problems with it: • First, nothing currently prevents parties from doing this through a reorganization plan; it is thus not clear why there is a problem. • Second, the uncertain nature of bankruptcy recoveries would make the proposal implausible in the large and complex cases where it would presumably be needed most. • Third, by giving creditors’ committees the power to issue corporate debt, the proposal would empower them to reduce their constituents’ recoveries, thus creating new agency problems. The essay closes by observing that Professor Listokin’s proposal is nevertheless an important addition to a long line of thoughtful scholarship on corporate reorganization

Where\u27s The Beef: A Few Words about Paying for Performance in Bankruptcy

This brief essay responds to Yair Listokin’s article, “Paying for Performance in Bankruptcy: Why CEOs Should Be Compensated with Debt,” 155 U. PA. L. REV. 777 (2007). Professor Listokin argues that we should give official creditors’ committees the power to pay management of reorganizing debtors with corporate debt. This, he argues, would properly align their incentives with those who are most likely affected, the “residual claimant” unsecured creditors. Although Professor Listokin’s proposal is a welcome addition to our literature on corporate reorganization, this essay points out several basic problems with it: • First, nothing currently prevents parties from doing this through a reorganization plan; it is thus not clear why there is a problem. • Second, the uncertain nature of bankruptcy recoveries would make the proposal implausible in the large and complex cases where it would presumably be needed most. • Third, by giving creditors’ committees the power to issue corporate debt, the proposal would empower them to reduce their constituents’ recoveries, thus creating new agency problems. The essay closes by observing that Professor Listokin’s proposal is nevertheless an important addition to a long line of thoughtful scholarship on corporate reorganization