Claims In Bankruptcy Research Articles

The Status of Maintenance Arrears in Bankruptcy

A marriage breakdown usually results in significant financial adversity for spouses, sometimes including bankruptcy proceedings together with allowances for adjustments to income and assets between the spouses. With respect to support, one spouse may obtain monies from the other by way of alimony, maintenance ancillary to divorce, in a separation agreement, or in an action under summary maintenance legislation. All of these create a liability for the paying spouse, but this type of liability is not discharged within a bankruptcy proceeding. Conversely these liabilities are typically not seen as capable of being provable in a bankruptcy which would negate the ability of the spouse who is owed funds to petition the other spouse into said bankruptcy. This paper addresses the eligibility of maintenance or alimony arrears as claims in bankruptcy; the possibility of a spouse petitioning the other spouse into bankruptcy on account of such arrears; whether a spouse would logically want to prove the arrears or institute bankruptcy proceedings; together with a view to policy considerations with a view to law reform.

Das Verbraucherinsolvenzverfahren: Integration zeigt alte und neue Muster sozialer Ungleichheit in der Risikogesellschaft / The consumer insolvency process: integration highlights old and new patterns of social inequality in risk society

Summary With the implementation of the German Insolvency Statute in 1999, private households were given the legal right to file for bankruptcy. Prior to this, financially destitute households were trapped on the edge of socioeconomic marginality for life. Most published reports about insolvency in Germany have regarded overindebtedness as the particular problem of the underclass and caused by a persistent lack of resources. With the cultural change of the 1980s, the scientific analysis of social inequality in Germany emphasized the existence of horizontal social inequality “beyond classes” (Beck) due to the process of individualization. Given that “unemployment”, “divorce/separation” and “loss of direction” are cited as the main reasons for overindebtedness, the German Insolvency Statute would appear to provide a solution for a societal problem that extends beyond class boundaries, particularly if the underclass were adequately represented in the number of successful bankruptcy claims. However, the well-known phenomenon of differential “access to the law” arises here. Middle-class children, who previously failed to complete higher education or even maintain the status of their fathers are highly overrepresented in bankruptcy cases. In providing a cure for middle-class problems, the private bankruptcy process demonstrates the persistence of class structure in today’s Germany.

Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K.

ABSTRACTUsing a sample of small firms that defaulted on their bank debt in France, Germany, and the United Kingdom, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate costly aspects of bankruptcy law. In particular, French banks respond to a creditor‐unfriendly code by requiring more collateral than lenders elsewhere, and by relying on collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting very different levels of creditor protection.

Empty Manipulation: Bankruptcy Procedure Rule 2019 and Ownership Disclosure in Chapter 11 Cases

Debtors, creditors, and equity holders in Chapter 11 proceedings are waging war with one another over the application of Federal Rule of Bankruptcy Procedure 2019 (“Rule 2019”). Rule 2019 is the latest weapon in the arsenals of debtors facing increasingly aggressive distressed investors and traders who speculate in the debt and equity of bankrupt companies. Bankruptcy judges and scholars have begun to recognize the ability of distressed investors to greatly influence the reorganization process while reducing or eliminating their economic risk. All parties risk confusion, delay, and waste if a consistent and rule-based disclosure scheme is not developed. In a decision that rattled the distressed investor community, the bankruptcy in the Northwest Airlines case mandated, under Rule 2019, that an ad hoc committee of hedge funds disclose the specific prices paid for their claims and interests, as well as the dates on which they were acquired. The Court in Northwest recognized the broader issue: hedge funds and distressed investors have the potential to manipulate and frustrate the Chapter 11 process through hedging and arbitrage strategies that reduce or eliminate economic risk. However, an adequate solution providing for ownership disclosure in bankruptcy has not been developed or proposed. This Note explores the issue of investor disclosure of bankruptcy claims and interests (“ownership disclosure”). It concludes that potential conflicts of interest resulting from the separation of control rights and economic rights in bankruptcy warrants a new, broad ownership disclosure rule for Chapter 11 cases. This Note proposes that the Bankruptcy Code adopt a mandatory ownership disclosure rule that would require investors to reveal economic incentives that may frustrate a debtor’s reorganization.

Finding Nemo: Rediscovering the Virtues of Negotiability in the Wake of Enron

Creditors have long understood that any claims they submit for repayment in a bankruptcy might be valid, but subject to subordination in the order of payment of the bankruptcy estate’s limited funds if the creditor behaved inequitably as the debtor failed. A groundbreaking opinion in Enron’s bankruptcy has expanded the practice of equitable subordination far beyond its traditional reach and subjected buyers of bankruptcy claims to subordination, not just for their own conduct, but also for the conduct of previous owners of the claims, regardless of whether the conduct related to the claims. Enron provides a striking example of what happens when markets outrun the law. Bankruptcy claims trading is a new market that has emerged since the enactment of the Bankruptcy Code of 1978. Claims trading undermines many of the Code’s assumptions about risks and relationships. Although the net costs and benefits of claims trading to the reorganization process are not clear, Enron illustrates how the courts are struggling to bring the law and markets in sync and the problems that arise when courts attempt to saddle new markets with outdated legal structures. In a world of active bankruptcy claims trading, Enron raises powerful policy questions about the legal rules governing property transfers that affect the doctrinal development of bankruptcy law and the survival of a secondary market that provides important liquidity to other capital markets. This article shows how Enron was erroneous from both doctrinal and policy perspectives and examines the problems Enron has created for several distinct markets. The solution to the disconnect between markets and law is to look to the essential underpinnings of core legal concepts and consider how they might be used to bring order to new transactional situations, rather than shoehorn markets into old paradigms. This article argues that hoary commercial law concepts like negotiability can and should be revitalized, revised, and expanded to account for new types of markets. Indeed, Enron is a reminder of the continuing value of negotiability in commercial contexts, for if the claims involved had been negotiable, they could not have been subordinated. Thus, this article considers what factors have traditionally determined when the law adopts a negotiability regime for property transfers and whether these factors make sense in today’s financial markets. The article argues that in the bankruptcy claims context, the liquidity benefits of negotiability outweigh its costs. Accordingly, the article proposes a federal law of negotiability for bankruptcy claims to protect the liquidity of this vital market.

Finding Nemo: Rediscovering the Virtues of Negotiability in the Wake of Enron

Creditors have long understood that any claims they submit for repayment in a bankruptcy might be valid, but subject to subordination in the order of payment of the bankruptcy estate's limited funds if the creditor behaved inequitably as the debtor failed. A groundbreaking opinion in Enron's on-going bankruptcy has expanded the practice of equitable subordination far beyond its traditional reach. According to the court, buyers of bankruptcy claims are now subject to subordination, not just for their own conduct, but also for conduct of previous owners of the claims, regardless of whether the conduct related to the claims. In a world of active bankruptcy claims trading, Enron raises powerful policy questions about the legal rules governing property transfers that affect the doctrinal development of bankruptcy law and the survival of a secondary market that provides important liquidity to other capital markets. This article shows how Enron was erroneous from both doctrinal and policy perspectives and examines the problems Enron has created for several distinct markets. Enron is a reminder of the continuing value of negotiability in commercial contexts, for if the claims involved had been negotiable, they could not have been subordinated. Thus, this article considers what factors have traditionally determined when the law adopts a negotiability regime for property transfers and whether these factors make sense in today's financial markets. The article argues that in the bankruptcy claims context, the liquidity benefits of negotiability outweigh its costs. Accordingly, the article proposes a federal law of negotiability for bankruptcy claims to protect the liquidity of this vital market.

Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the UK

Using a large sample of small-to-medium size firms that defaulted on their bank debt in France, Germany, and the UK, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate the expected creditor-unfriendly aspects of the bankruptcy law. In particular, French banks respond to a creditor-unfriendly code by requiring more collateral than lenders elsewhere, and by relying on particular collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting different levels of creditor protection. Notwithstanding the high level of creditor protection and low expected losses from default, pre-distress loan spreads in the UK are not lower than elsewhere. We conclude that, despite significant adjustments in lending practices, bankruptcy codes still sharply affect default outcomes.

The Uneasy Case for the Priority of Secured Claims in Bankruptcy

This paper reexamines a longstanding principle of bankruptcy law: that secured claims are entitled to be paid in full before unsecured claims receive any payment. There is a widespread consensus among legal scholars and economists that according full priority to secured claims is desirable because it promotes economic efficiency. Our analysis, however, demonstrates that full priority actually distorts the arrangements negotiated between commercial borrowers and their creditors, producing various efficiency costs. We show that according only partial priority to secured claims could eliminate or reduce these efficiency costs - and that such an approach might well be superior to the rule of full priority. The analysis also suggests that a mandatory rule of partial priority could be effectively implemented within the framework of existing bankruptcy law, and that such an approach would be consistent with fairness and freedom of contract considerations. We therefore present two different rules of partial priority that should be considered as alternatives to full priority.

Switching Priorities: Elevating the Status of Tort Claims in Bankruptcy in Pursuit of Optimal Deterrence

Switching Priorities: Elevating the Status of Tort Claims in Bankruptcy in Pursuit of Optimal Deterrence

Comments on the FASB's Proposals on Consolidating Special-Purpose Entities and Related Standard-Setting Issues

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Twitter LinkedIn Tools Icon Tools Get Permissions Cite Icon Cite Search Site Citation Laureen A. Maines, Eli Bartov, Anne L. Beatty, Christine A. Botosan, Patricia M. Fairfield, D. Eric Hirst, Teresa E. Iannaconi, Russell Mallett, Mohan Venkatachalam, Linda Vincent; Comments on the FASB's Proposals on Consolidating Special‐Purpose Entities and Related Standard‐Setting Issues. Accounting Horizons 1 June 2003; 17 (2): 161–173. doi: https://doi.org/10.2308/acch.2003.17.2.161 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest Search

Information Aggregation, Security Design, and Currency Swaps

A security design model shows that multinational firms needing to finance their operations should issue different securities to investors in different countries in order to aggregate their disparate information about domestic and foreign cash flows. However, if the firm becomes bankrupt, investors may face uncertain costs of reorganizing assets in a foreign country and thus may value foreign assets at their average value. This penalizes superior firms with low reorganization costs. Such firms minimize the adverse selection penalty by designing securities that allocate all the cash flow in bankruptcy to investors for which the adverse selection costs are the smallest given the exchange rate. We show that this sharing rule can be implemented with currency swaps because these instruments allow the priorities of claims in bankruptcy to switch depending on the exchange rate.

Information Aggregation, Security Design, and Currency Swaps

A security design model shows that multinational firms needing to finance their operations should issue different securities to investors in different countries in order to aggregate their disparate information about domestic and foreign cash flows. However, if the firm becomes bankrupt, investors may face uncertain costs of reorganizing assets in a foreign country and thus may value foreign assets at their average value. This penalizes superior firms with low reorganization costs. Such firms minimize the adverse selection penalty by designing securities that allocate all the cash flow in bankruptcy to investors for which the adverse selection costs are the smallest given the exchange rate. We show that this sharing rule can be implemented with currency swaps because these instruments allow the priorities of claims in bankruptcy to switch depending on the exchange rate.

A New Approach to Valuing Secured Claims in Bankruptcy

A New Approach to Valuing Secured Claims in Bankruptcy

A New Approach to Valuing Secured Claims in Bankruptcy

In many business bankruptcies in which the firm is to be preserved as a going concern, one of the most difficult and important problems is that of valuing the assets that serve as collateral for secured creditors. Valuing a secured creditor's collateral is needed to determine the amount of the creditor's secured claim, which in turn affects the payout that must be made to the creditor. Such valuation has generally been believed to require either litigation or bargaining among the parties, which in turn give rise to uncertainty, delay, and deviations from parties' entitlements. This paper puts forward a new approach to valuing collateral that involves neither bargaining nor litigation. Under this approach, a market-based mechanism would determine the value of collateral in such a way that no participant in the bankruptcy would have a basis for complaining that secured creditors are either over- or under-compensated. Our approach would considerably improve the performance of business bankruptcy and could constitute an important element of any proposal for bankruptcy reform.

Lender Liability and Large Investors

We explore the optimal financial contract for a large investor with potential control over a firm's investment decisions. An optimal menu of claims resembles a U.S. version of lender liability doctrine—equitable subordination. This doctrine permits the court to subordinate a controlling investor's claim in bankruptcy, but only under well-specified conditions. It allows a firm to strike an efficient balance between: (i) inducing the large investor to monitor, and (ii) limiting the influence costs that arise when claimants can challenge existing contracts. We provide a partial rationale for a financial system in which powerful creditors do not hold blended debt and equity claims. Journal of Economic Literature Classification Numbers: G20, G33, K22.

Asset Securitization and Optimal Asset Structure of the Firm

The process of asset securitization is a new and innovative financing method used for funding and risk management purposes. Evolved over the last few decades, securitization represents a substantial and established part of US and global capital markets. In addition to its importance as a financial and asset restructuring tool, securitization originated various streams of academic research. Different models have been developed in order to analyze the theoretical aspects of the process. But some important questions have remained unexplained. The established models don't address why the firm should securitize its assets. They don't investigate if securitization can be a viable alternative for the firm when it chooses its optimal corporate structure. We develop a model of the multi-asset firm which provides an answer to these questions. The model analyzes various corporate structures and validates asset securitization as one of the value maximizing options which can accomplish the optimal incorporation of the assets in the firm. In the framework of the model, the multi-asset firm can optimally choose between aggregating all the assets in one firm, securitizing a part of them through a securitization vehicle, or spinning them off into single-asset firms. For each structure, the debtholders and the equityholders choose the firm's optimal leverage ratio. The optimal asset and capital structure have an effect on the value of tax and non-debt bankruptcy claims. That phenomena leads to a potential increase in the overall value of the firm. For a specific set of the assets, securitization can be a preferred choice, because it avoids the costs associated with the standard bankruptcy procedure for the firm. The model provides a set of testable implications related to the optimal corporate and financial structure of the multi-asset firm and to the subsequent role of securitization.

Taking Future Claims Seriously: Future Claims and Successor Liability in Bankruptcy

Treatment of contingent tort liabilities when a business is sold presents a particular challenge for corporate and bankruptcy law. In this article, I focus on the precarious position of future tort claimants-those who may be harmed by a manufacturer's defective product after the manufacturer has sold its business and disappeared. By the time the future claimant's injury occurs, she may be left with no means of recovery. While the article focuses primarily on the bankruptcy sale context, a discussion of the nonbankruptcy context provides important background. With respect to the nonbankruptcy context, I discuss the doctrine of successor liability and the controversy concerning its various proffered rationales. I conclude tentatively that a cost internalization approach is the most plausible. One consequence of a cost internalization approach is that its applicability in the insolvency context is questionable. If the manufacturer is insolvent at the time of sale, then any acquirer should take free of successor liability risk. Insolvency means that the manufacturer's equity capital has already been exhausted at the time of sale. Therefore, any costs shifted by virtue of the acquirer's discounted bid price would simply be shifted from one set of the manufacturer's creditors to another. While there is good reason to prefer future claimants over the manufacturer's shareholders-which under a cost internalization theory is the effect of successor liability if he manufacturer is solvent-there may not be good reason to prefer future claimants over other creditors of the manufacturer. This observation, coupled with the transaction costs that successor liability creates, suggests that the doctrine should not apply in the insolvency context. In the bankruptcy sale context, proper treatment of future claims and any attendant successor liability rights is also an unsettled question.I argue (1) that future claims should always be accounted for in the bankruptcy proceeding in which a business is transferred, and (2) that once that is accomplished, attendant successor liability rights may properly be eliminated. Inclusion of future claimants in bankruptcy's common pool is necessary in order to provide complete relief to the debtor and assure survival of the going concern. It also vindicates bankruptcy's norm of equal treatment. Provided future claims are included in the bankruptcy distribution, that should be their exclusive remedy. They do not deserve a second recovery that post-bankruptcy successor liability would provide. Neither of these prescriptions, however, is a given under current law.In the mass tort context, future claims are included in bankruptcy because they must be in order for the business to survive, but otherwise they are ignored. Recent reform proposals seem to condone such inconsistent, result-oriented treatment of future claims in bankruptcy, as theorists call for a approach. I argue that in the bankruptcy sale context, a flexible approach merely enables exploitation of future claimants. Much like the situation outside of bankruptcy, a flexible approach enables other parties to leave losses with future claimants if that strategy will maximize returns to those other parties. With respect to disposition of successor liability claims following bankruptcy, the courts are in disarray. That future claims are ordinarily ignored in bankruptcy has caused certain courts to proclaim that future claimants' successor liability rights may never be affected by bankruptcy. I suggest that this view stems from a misapprehension concerning the proper rationale for successor liability. From a cost internalization perspective, it becomes clear that as long as future claims are accounted for in bankruptcy, successor liability rights should not survive. Finally, I discuss implementation of mandatory inclusion of future claims in the bankruptcy sale context. I propose a low cost alternative to the mass tort model, which I refer to as Commensurate Discounted Assumption.

The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and A Reply to Critics

In an earlier article, The Uneasy Case for the Priority of Secured Claims in Bankruptcy,' 105 Yale Law Journal 857 (1996), we suggested that the case for a full priority of secured claims in bankruptcy is an uneasy one. In this paper, we address various reactions and objections to our analysis that have been offered by subsequent work. We also further develop some of the main elements of the analysis in our earlier article with respect to both our analysis of the comparative merits of full and partial priority and our analysis of how a partial priority regime could be implemented. The analysis confirms our earlier conclusion that the case for a full priority of secured claims in bankruptcy is an uneasy one.

The Easy Case for the Priority of Secured Claims in Bankruptcy

For years, scholars have questioned the efficiency of secured debt, many suggesting that it transfers uncompensated risk to unsecured creditors. However, prior writing on the value of secured debt ignores the distinction between the use and the availability of secured credit. As a result, previous models of secured debt erroneously assume that a debtor that can borrow on an unsecured basis will nevertheless borrow on a secured basis to reduce interest cost. This Article combines theory, experience, and empirical tests to show that earlier models do not reflect the expected behavior of an economically rational debtor. These models fail to recognize that the most important form of secured debt, new money credit secured by collateral, tends to create value for unsecured creditors as well as for the debtor. A debtor that can borrow unsecured has an economic incentive not to prematurely encumber its assets because doing so gives away value in an amount—which the Article calls Theta—that exceeds

The Canadian Keiretsu

This article describes the Canadian keiretsu, in which a main Chartered Bank dominates an interlocking group of corporate clients, investment dealers, trust companies, and professional advisors. Such a network facilitates information‐sharing and monitoring among group members, while also reducing the agency costs of banker misbehavior. Most major Canadian firms are members of a keiretsu, and stock ownership of Canadian corporations is far more concentrated than ownership of U.S. companies.Given their many similarities of history, law, and geography, Canada and the United States should have ended up with similar corporate ownership and governance structures. But they did not, and the difference was Canada's less restrictive banking and bankruptcy laws, which in turn can be traced to Canada's distinctly non‐populist historical experience.The Canadian keiretsu arose primarily for two reasons: (1) the larger concentration of commercial banking (the six largest Canadian banks today account for 98% of the industry's assets) allowed by Canadian law; and (2) the greater powers of Canadian secured lenders in the event of default. Unlike a U.S. Chapter 11 filing, in a Canadian bankruptcy the lender's right to assume control of the assets was not stayed until quite recently. And, even with the recent change in Canadian bankruptcy law, Canadian secured lenders have much stronger protection of their claims in bankruptcy than their U.S. counterparts in Chapter 11.