Copyright (c) 2010 All rights reserved. http://works.bepress.com/jonathan_lipson Recent documents in Jonathan C. Lipson en-us Fri, 20 Aug 2010 01:32:31 PDT 3600 http://works.bepress.com/jonathan_lipson/3 http://works.bepress.com/jonathan_lipson/3 Wed, 18 Aug 2010 13:56:28 PDT This paper addresses problems of creditor opportunism. “Distress investors” such as hedge funds, private equity funds, and investment banks are opportunistic when they use debt to obtain control of a financially troubled firm and extract improper gains at the expense of the firm and its other stakeholders. Examples include the mis-use of private information to short-sell a borrower’s securities and creditor self-dealing. Creditors can act opportunistically because legal doctrines that historically checked such behavior—e.g., “lender liability”—have not kept pace with fundamental changes in the market for control of distressed firms. The recent Dodd-Frank financial reform is not likely to change this. Thus, creditor opportunism will remain a problem for courts to solve. This article makes three basic contributions. First, it develops a tractable definition of creditor opportunism and offers examples of its destructive capacity; second, it explains why existing doctrine cannot adequately identify or remedy such behavior; third, it develops a new and more robust model of good faith review that will enable courts to manage problems of creditor opportunism. Jonathan C. Lipson Banking and Finance Bankruptcy Law Commercial Law Contracts Corporations http://works.bepress.com/jonathan_lipson/2 http://works.bepress.com/jonathan_lipson/2 Thu, 12 Mar 2009 13:40:41 PDT This article exposes and explores a puzzle at the heart of the current economic crisis: The surprising under-use, and increasing misuse, of Chapter 11 of the United States Bankruptcy Code, the principal legal system for salvaging troubled businesses. The answer offered here: The rise of the shadow bankruptcy system. “Shadow bankruptcy” describes the severely under-regulated non-bank financial institutions (e.g., hedge funds, private equity funds and investment banks) that increasingly dominate and manipulate Chapter 11 reorganizations. Like the “shadow banking” system for which it is named, shadow bankruptcy thrives on and promotes opacity and undisclosed, possibly perverse, incentives. Shadow bankruptcy players exploit regulatory gaps to conceal their identities and motives, and so increase the uncertainty, complexity—and thus the cost—of negotiations to restructure distressed firms; they burden judicial resources through internecine fights of little benefit to reorganizing debtors; they have complex, multi-faceted hedging strategies that may effectively short-sell the debtor’s reorganization effort, resulting in depressed asset values and the premature liquidation of otherwise viable firms. Shadow bankruptcy threatens Congress’ basic aspiration in creating Chapter 11: preserving going concerns and jobs through negotiated reorganizations. Shadow bankruptcy thus promises to do for corporate reorganization what shadow banking did for the global financial system: Privatize gains and socialize losses. This article explores the contours and costs of the shadow bankruptcy system. It also suggests some cures. Jonathan C. Lipson Contracts Commercial Law Bankruptcy Law Securities Law Legislation Economics Banking and Finance http://works.bepress.com/jonathan_lipson/1 http://works.bepress.com/jonathan_lipson/1 Sun, 10 Aug 2008 07:32:04 PDT 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 ability to arbitrage information will have profound effects on business failure. Externally, growing transactional complexity, and a reluctance to subject very large failed businesses—e.g., Bear Stearns—to bankruptcy, threaten to undermine bankruptcy’s ability to expose complex and questionable financial practices. Third, these threats to bankruptcy’s information-forcing functions will have systemic costs. The Article concludes with several recommendations about how to approach information policy in business failure. Jonathan C. Lipson Bankruptcy Law Commercial Law Contracts Corporations Securities Law