What’s fairness got to do with it? When the “it” is chapter 11, a l...

For those of you who are not familiar with my scholarship, I am fairly conservative in my approach, and I strive to remain objective in my analysis and balanced in my proposals. I believe that most companies try to get it right, I respect markets, and I do not think that financial institutions and private funds are evil. In fact, some of my scholarship suggests that private funds may actually add value to matters (see example here). I mention these things only to help you understand the lens through which I analyze corporate governance and restructuring issues, including the chapter 11 reform topics that will be the focus of my posts over the next several days.

Based on my research and my ten-plus years in private practice, chapter 11 is not just a value maximization and distribution scheme. It is much more. I was in Judge Bodoh’s courtroom during the LTV Steel cases when hundreds of steelworks packed the courthouse during hearings. I was in Judge Wedoff’s courtroom during the United Airlines cases when pilots and flight attendants would often be on hand. And I worked on several asbestos cases (see, e.g., here and here), which affected not only the livelihoods of thousands of people, but also the health and well-being of several thousand more. In each of these cases, and many others I worked on, the people—not the continuation of some fictitious legal entity or a particular creditor group’s return on its investment—were at the heart of the process.  (For another example of this principle, see here.)

Because the process is concerned with something more than the level of stakeholder returns, fairness does matter. Importantly, a fair process does not mean one that is unfair to senior creditors. Rather, it generally means a process that facilitates participation by all parties and, through that participation, maximizes and appropriately allocates value. A process that rushes or forecloses a thorough analysis of a company’s restructuring options and resources, or that deters the company from invoking the process in the first instance, is not fair. And call me a dreamer, but I firmly believe that we can have a restructuring scheme that is both fair and value-maximizing. 

Now you can call me a dreamer or a hopeless romantic, but do not call me an old-timer. I do not long for the “glory days” of chapter 11, and I do not want to see the Code revert to its 1978 form. Rather, I want to see us move the Code forward; to make it more nimble, more dynamic, and better equipped to create value and facilitate fair distributions in the current economic environment. Accelerated chapter 11 cases or debtor in possession financing facilities that preclude reorganization plans or discourage robust bidding for going concern sales benefit only a few, at great cost to the many. (For the Commission’s recommendations on these particular issues, see Part IV.B-C of the Report.)

We can and must do better. So even if you do not necessarily agree with my perspectives on chapter 11 reform, I hope that you keep an open mind and become part of a meaningful dialogue concerning how we can do better—not for the benefit of one or another constituency, but collectively.