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Unpublished Paper
Controlling Creditor Opportunism
ExpressO (2010)
  • Jonathan C. Lipson
Abstract

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.

Keywords
  • Bankruptcy reorganization,
  • financial reform,
  • shadow bankruptcy,
  • hedge funds,
  • private equity funds,
  • opportunism,
  • good faith
Disciplines
Publication Date
August 18, 2010
Citation Information
Jonathan C. Lipson. "Controlling Creditor Opportunism" ExpressO (2010)
Available at: http://works.bepress.com/jonathan_lipson/3/