Tag: Bankruptcy Law

Governance in the Breach: Controlling Creditor Opportunism – Article by Jonathan C. Lipson

From Volume 84, Number 5 (July 2011)
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Firms rarely go from solvency to Chapter 11 in an instant. Instead, the slide into bankruptcy will be marked by a period (the “zone of distress”) that begins with the breach of a lending contract and ends, perhaps months or even years later, with either a formal bankruptcy case or some other resolution, such as a nonbankruptcy restructuring or liquidation. In this period, the firm’s governance will be up for grabs. Doctrinally, state corporate law gives directors the power and responsibility to manage the firm for the benefit of shareholders, subject to fiduciary review. In fact, however, real control shifts away from directors and shareholders to creditors. Yet, the law offers little to check this control. Creditors are not generally viewed as fiduciaries, and so they owe their borrowers neither duties of care nor loyalty. In theory, regulation or contract could channel creditor conduct in the zone of distress, but three fundamental changes in the dynamics among distressed firms and their investors have weakened these constraints.

 

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Postpetition Interest on Unsecured Claims in the Case of a Solvent Debtor: Toward a More Consistent Statutory Regime – Note by Alexander F. Porter

From Volume 81, Number 6 (September 2008)
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One important rule of the Bankruptcy Code is that a creditor generally is not entitled to receive interest on a claim that accrues after the date when the bankruptcy petition is filed. As with most general rules, however, there are several exceptions to this ban on postpetition interest, one of which is that postpetition interest may be allowed in certain cases when the debtor is solvent. This exception is expressly codified in § 726(a)(5) of the Code, which evinces a policy in favor of requiring debtors to pay postpetition interest on creditors’ claims when the debtor can afford to do so.

 

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When Churches Fail: The Diocesan Debtor Dilemmas – Article by Jonathan C. Lipson

From Volume 79, Number 2 (January 2006)
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The road from defendant to debtor is often short, and the cases of the Catholic dioceses would appear to be no exceptions. Facing hundreds of millions of dollars in liability for priests’ sexual misconduct, dioceses in Washington, Arizona, and Oregon recently filed cases under Chapter 11 of the U.S. Bankruptcy Code. Other dioceses may soon follow suit. Like the Dow Corning Corporation, the A.H. Robins Company, countless asbestos manufacturers, and other tortfeasors of recent memory, the dioceses seek to discharge – to reduce or eliminate – the claims against them.

As with most mass tort bankruptcies, these cases present a struggle between two sets of comparatively innocent parties: tort claimants (the victims of the sexual abuse) and other creditors, on the one hand, versus the parishioners, or church members, on the other. Unlike most bankruptcies, however, these cases present two dilemmas: one doctrinal and the other constitutional.

The doctrinal dilemma will force bankruptcy courts to choose between the bankruptcy rules that would ordinarily apply in a Chapter 11 case and exceptions imposed by religious liberty principles. The choice will be difficult, for at least three reasons. First, if a diocese were effectively shut down (because all assets were sold) over the objection of the diocese and parishioners, those parishioners, and perhaps the bishop, may credibly claim that this use of the Bankruptcy Code “substantially burdens” their exercise of religion under both the Religion Clauses of the First Amendment and statutory protections for religious actors. Second, for a variety of complex reasons, the internal rules of the churches themselves (that is, canon law) may displace or modify state law rules on property and governance that would ordinarily apply in bankruptcy. Third, use of some of the more intrusive powers ordinarily available in bankruptcy cases, such as appointment of a Chapter 11 trustee, might violate the Establishment Clause by “entangling” state actors in church affairs.

 

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