In Bankruptcy Hardball, Professor Jared Ellias teams up with attorney Robert Stark to expose increasingly aggressive tactics by corporate managers in bankruptcy proceedings. The article, which draws on detailed case studies, is a methodological departure from Professor Ellias’s usual empirical quantitative work. But the insights are incisive as usual.
The article details maneuvers by corporate managers that impair rights of secured creditors in the zone of insolvency. For example, management teams can “thwart contracts” by concocting elaborate transactions that circumvent negotiated creditor protections, such as change-of-control provisions, without any apparent commercial purpose. The article demonstrates that these maneuvers are increasingly brazen and commonplace, marking a shift in the norms that have historically governed debtor-creditor relations.
The article argues that this swash-buckling behavior can be traced largely to weakening Delaware caselaw. Gheewalla and its progeny (which limits the ability of creditors to bring claims against corporate managers for breach of fiduciary duty) emboldened corporate managers to align with equity holders (often private-equity sponsors). And corporate theory—exhibiting too much confidence in creditors’ ability to protect themselves through contractual provisions—appears to have played an important part in creating the current environment.
The normative valence of the analysis is clear: opportunism and litigation costs pose a meaningful threat to credit markets in the long run, and courts should take notice. The article concludes by offering a variety of incremental proposals for reinvigorating creditor protections. The core suggestion is for courts to apply existing doctrines with more skepticism and to signal to corporate boards that even doctrines characterized by judicial deference have some meaningful content.