The Empty Idea of “Equality of Creditors”

For two hundred years, the equality of creditors norm—the idea that similarly situated creditors should be treated similarly—has been widely viewed as the most important principle in American bankruptcy law, rivaled only by our commitment to a fresh start for honest but unfortunate debtors. I argue in this Article that the accolades are misplaced. Although the equality norm once was a rough proxy for legitimate concerns, such as curbing self-dealing, it no longer plays this role. Nor does it serve any other beneficial purpose. Part I of this Article traces the historical emergence and evolution of the equality norm, first in the federal bankruptcy laws that applied to individuals and small businesses, and then as it diffused (much later) into large scale corporate reorganization practice. Part II describes how easy it has become to circumvent the norm, focusing on five strategies for giving a favored group of creditors a higher payout than other unsecured creditors. Although these evasions could and in some cases should be halted (as shown in Part III), it turns out that equality of creditors is a distraction (Part IV). It contributes nothing to an assessment of the relevant doctrines, and in several contexts seems to have had a pernicious effect. Elsewhere in the law, equality language can provide valuable benefits, such as “telling us that different treatment of people does matter.” Because none of these benefits is present in bankruptcy (Part V), the equality principle should be discarded

The Corporation as Trinity

In “Corporate Capitalism and ‘The City of God,’” Adolf Berle references Augustine’s theological classic The City of God in service of his contention that corporate managers have a social responsibility. In this Article, I turn to another work by Augustine, The Trinity, for insights into another feature the corporation, corporate personhood. The Trinity explicates the Christian belief that God is both three and one. I argue that corporations have analogously Trinitarian qualities. Much as theologically orthodox Christians understand God to be both one and three, I argue that corporations are best seen as both a single entity and through the lens of their individual managers and shareholders. Part I explores the debate over corporate personhood that was prompted by the Citizen United and Hobby Lobby cases. Part II develops the Trinitarian account of the corporation. After outlining the Trinitarian perspective on corporate personhood, Part III explores its implications for a variety of issues, including the personhood of “closely held” corporations, whether noncorporate entities have personhood, and whether a corporation can have a religious identity. The final section returns to Berle to discuss the current debate over corporate political involvement

State Bankruptcy from the Ground Up

After a brief, high profile debate, proposals to create a new bankruptcy framework for states dropped from sight in Washington in early 2011. With the debate’s initial passions having cooled, at least for a time, we can now consider state bankruptcy, as well as other responses to states’ fiscal crisis, a bit more quietly and carefully. In this Article, I begin by briefly outlining a theoretical and practical case for state bankruptcy. Because I have developed these arguments in much more detail in companion work, I will keep the discussion comparatively brief. My particular concern here is, as the title suggests, on developing a bankruptcy framework from the ground up. After briefly discussing what bankruptcy is, and some of the confusion befogging this term, I will argue that state bankruptcy should emphasize five key objectives, an approach I will compare to two possible alternatives. I then will consider six facets of the bankruptcy case: initiation; proposing a reorganization plan; the role of a stay, reachback provisions and confirmation rules; the possibility of “guillotines” or “checks” tailored to the state bankruptcy context; financing; and the structure of the bankruptcy court

Corporate Governance and Social Welfare in the Common Law World

The newest addition to the spate of recent theories of comparative corporate governance is Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power, an important new book by Christopher Bruner. Focusing on the U.S., the U.K., Canada and Australia, Bruner argues that the robustness of the country’s social welfare system is the key determinant of the extent to which its corporate governance is shareholder-centered. This explains why corporate governance is so shareholder-oriented in the United Kingdom, which has universal healthcare and generous unemployment benefits, while shareholders’ powers are more attenuated in the United States, with its much weaker social welfare protections. Canada and Australia fall in between but closer to the U.K. After describing Bruner’s theory and evidence in the first part of this Essay, I poke at it from several angles in the three parts that follow. In Part II, I consider whether there is a mechanism that adequately explains the connection between social welfare and shareholder orientation; interestingly, despite the book’s title, Bruner does not suggest that the common law plays any particular role. In Part III, I consider whether shareholders in the United States may have more power than their limited formal rights suggest, and in Part IV I ask whether the United States (rather than the United Kingdom, as is conventionally assumed) may simply be an outlier, due to federalism and other factors and as reflected in the U.S.’s weak social welfare system. I then conclude

Bankruptcy for Banks: A Tribute (and Little Plea) to Jay Westbrook

In this brief essay, to be included in a book celebrating the work of Jay Westbrook, I begin by surveying Jay’s wide-ranging contributions to bankruptcy scholarship. Jay’s functional analysis has had a profound effect on scholars’ understanding of key issues in domestic bankruptcy law, and Jay has been the leading scholarly figure on cross-border insolvency. After surveying Jay’s influence, I turn to the topic at hand: a proposed reform that would facilitate the use of bankruptcy to resolve the financial distress of large financial institutions. Jay has been a strong critic of this legislation, arguing that financial institutions need to be resolved by regulators and an administrative process, not bankruptcy. As an advocate of bankruptcy-for-banks, I ask Jay if he might reconsider his opposition if the legislation were amended to respond to several of his primary concerns

Distorted Choice in Corporate Bankruptcy

We ordinarily assume that a central objective of every voting process is ensuring an undistorted vote. Recent developments in corporate bankruptcy, which culminates with an elaborate vote, are quite puzzling from this perspective. Two strategies now routinely used in big cases are intended to distort, and clearly do distort, the voting process. Restructuring support agreements (RSAs) and “deathtrap” provisions remove creditors’ ability to vote for or against a proposed reorganization simply on the merits. This Article offers the first comprehensive analysis of these new distortive techniques. One possible solution is simply to ban distortive techniques, as several scholars advocate with RSAs that offer joinder bonuses. Although an antidistortion rule would be straightforward to implement, I argue this would be a mistake. The distortive techniques respond to developments that have made reorganization difficult, such as claims trading and a greater need for speed. Further, Chapter 11’s baseline was never intended to be neutral: it nudges the parties toward confirming a reorganization plan. There also are independent justifications for some distortive techniques, and the alternative to using them might be even worse—possibly leading to more fire sales of debtors’ assets. How can legitimate use of the new distortive techniques be distinguished from more pernicious practices? To answer this question, I outline four rules of thumb to assist the scrutiny. Courts should consider whether holdouts are a serious threat, the magnitude of the coercion, the significance of any independent justifications, and whether the holdout threat is an intentional feature of the parties’ contracts. I then apply the rules of thumb to a few prominent recent cases. I conclude by considering two obvious extensions of the analysis, so-called “gifting” transactions in Chapter 11 and bond-exchange offers outside of bankruptcy

Creditors\u27 Ball: The New New Corporate Governance in Chapter 11

In the 1980s and early 1990s, many observers believed that the American corporate bankruptcy laws were desperately inefficient. The managers of the debtor stayed in control as debtor in possession after filing for bankruptcy, and they had the exclusive right to propose a reorganization plan for at least the first four months of the case, and often far longer. The result was lengthy cases, deteriorating value and numerous academic proposals to replace Chapter 11 with an alternative regime. In the early years of the new millennium, bankruptcy could not look more different. Cases proceed much more quickly, and they are much more likely to result in auctions or other sales of assets than in previous decades. This transformation is due in part to a change in the major corporations that file for bankruptcy. Rather than industrial, bricks-and-mortar firms, many of the new debtors are knowledge-based firms with transient assets. Much more important, however, has been the adjustments creditors have made in an effort to reassert control in bankruptcy. In this Article, I focus on the two most important contractual developments: lenders\u27 use of debtor-in-possession financing agreements as a governance lever; and the so-called pay-to-stay arrangements which give key managers bonuses for meeting specified performance goals (such as quick emergence from bankruptcy or the sale of important assets). Both of these developments can be seen as adjustments by creditors to counteract bankruptcy\u27s interference with the shift in control rights that would ordinarily occur at the time of financial distress. As I have discussed elsewhere, chapter 11 functioned somewhat like an antitakeover device in the 1980s. Creditors have now neutralized its effects. Of the two new contractual approaches, pay-to-stay agreements have proven much more controversial, prompting heated complaints about excessive managerial pay in cases like Enron, Polaroid and Kmart. The controversy is similar in obvious respects to the recent complaints about performance-based pay outside of bankruptcy. I argue that pay-to-stay agreements are more defensible, but also argue that bankruptcy compensation should be constrained in several ways. Although the use of DIP financing agreements to shape bankruptcy cases has not received nearly so much attention, the effect is even more profound. I argue that the use of these agreements to control Chapter 11 cases is, on the whole, a beneficial development. But I also argue that some of their terms - such as provisions protecting pre-petition loans by the DIP lenders and the use of DIP agreements to lock up control - should be subject to careful judicial scrutiny