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What Skews the Public-Private Balance in Corporate Bankruptcy Cases?

posted by Melissa Jacoby

In a prior Credit Slips post, I shared a paper, Corporate Bankruptcy Hybridity, positing that bankruptcy should be conceptualized as a public-private partnership. The second section of Corporate Bankruptcy Hybridity identifies factors that have skewed the Bankruptcy Code's ideal balance between public and private interests and values. Preemptively I'll note it is not new to observe the increased privatization of bankruptcy and the qualitatively different nature of the oversight and ethics (see, e.g., Mechele Dickerson). More novel, I hope, is the articulation of a broader set of factors contributing to the skew. The list is illustrative, not exhaustive.

  • Barriers to appellate review (including equitable mootness) + case concentration at the trial court level: Seemingly unrelated procedural developments can create the conditions to ensure or upset the bankruptcy law's balance. Part II.B of Corporate Bankruptcy Hybridity addresses how the difficulty of appealing important developments in corporate bankruptcy cases combines with extensive concentration of larger chapter 11 cases to reduce, through several pathways, the fulfillment of public values in the bankruptcy system. This is not a venue reform paper. It is, however, a paper, that articulates structural effects of case concentration when that concentration is not the product of intentional system design. As for equitable mootness, one some days I think its days may be numbered, as circuit judges try to square it with other Supreme Court guidance, and yet it is only one of many barriers to appellate review of bankruptcy matters.
  • Shuffling DIP responsibilities: Parts II.C and D of Corporate Bankruptcy Hybridity mix another set of known chapter 11 ingredients - the rise of Chief Restructuring Officers, routine granting of derivative standing to committees, arm-in-arm posturing of DIPs/stalking horse buyer/dominant lender early in cases - into a a different cocktail. Is a DIP still the vigilant defender of the estate, or has that been parcelled out to other parties with inferior information and unaligned incentives? Has the unpopularity of trustees in chapter 11 essentially eliminated a disciplining backstop in chapter 11? In the paper, I worry that "offloading estate responsiblity while benefitting from debtor-in-possession status, largely free of fear of trustee appointment, again distorts the system's balance and ability to honor public values."

Again, you can find the paper here and your thoughts are welcome as always. I learn a lot from Credit Slips readers.

 

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