Bankruptcy

First, I want to thank Bob Lawless and the other authors of Credit Slips for inviting me to guest blog this week. I am honored to share this space with you, and I look forward to a robust dialogue.

Second, I have to say that guest blogging at Credit Slips feels like coming home to me. Before changing careers, I had the privilege of serving as a law clerk to the Honorable William T. Bodoh, and I practiced as an associate and then a partner in Jones Day?s corporate restructuring practice group for over ten years. I welcome this opportunity to share my passion for everything bankruptcy with others interested in the field.

As you might suspect from my days in practice, I am a strong proponent of the utility of chapter 11 of the U.S. Bankruptcy Code as a restructuring tool. I want to emphasize that I view chapter 11 as a "tool"?not a "fix"?in the context of financial distress. The effectiveness of this tool depends largely on who is using it and how it is being used. Companies do not fail because of chapter 11; rather, companies fail because, among other things, they wait too long to invoke the chapter 11 tool (see here), they do not understand how best to use that tool (see here), or perhaps they simply have outlived their economic utility (see here).

The effectiveness, however, also depends on the construction of the tool itself. So how do we assess its construction? Although there are a number of very useful studies on the topic, I suggest we look back at the origins of chapter 11 and three of its important features: its dual goals of rehabilitation and value maximization (referenced recently here in Congressional testimony); its design to mitigate the collective action problem (see here at pp. 95-98 for an interesting discussion); and its ability to promote negotiation and consensual resolution.

The dual goals of rehabilitation and value maximization require transparency and information sharing to all, and by all, key constituents. The collective action problem merits strong rules maintaining the status quo while constituencies gather around the negotiating table. And negotiation needs a flexible framework and a neutral third party with the discretion and power to adapt the rules to the particular needs of the case. Does chapter 11 currently measure up?

Over the years, chapter 11 has increasingly moved away from its original objectives and, in many respects, been captured by special interest groups. This shift has created weaker rules and less flexibility. It also has limited the contributions of our specialized and very talented bankruptcy bench.

During my time at Credit Slips, I hope to explore the strengths and weaknesses of chapter 11 in its current state, including its role in facilitating obsolescence (see here), creating value and exploiting information asymmetries (see generally here and here). Chapter 11 has changed and perhaps not all for the best. I suggest that we might best move it forward by looking backward.