Research

Major Working Papers

The Credit Markets Go Dark (2024), 134 Yale Law Journal ___ (2024) 

Over the past generation, conflicting trends have reshaped the ownership of corporate equity on the one hand and corporate debt on the other. In equity, the two great trends have been the shift from public markets to private ownership and the consolidation of American companies' stock in the hands of powerful investment funds. In debt, by contrast, the great trends have been a shift from private loans to quasi-public markets, democratization and dispersed ownership. In this Article, we chronicle the recent and dramatic reversal of these trends in the debt markets. Private investment funds executing a "private credit" strategy have become increasingly important corporate lenders, bringing into corporate debt the same forces of de-democratization and consolidation that have been reshaping the equity markets. We offer new data that illustrates the meteoric rise of the now $1.5 trillion private credit industry and explore the allure and implications of private credit. The transition from bank-intermediated finance to private credit will transform not only corporate finance, but also firm behavior and economic activity more generally. First, as the corporate debt markets go dark, we move to a world in which information about many firms and even entire industries will be lost to the investing public. For better or worse, these firms will act with unprecedented discretion-having been shielded from the discipline and scrutiny of regulators, the trading markets, and the general public. Second, corporate debt-like corporate equity-is poised to become the dominion of investment funds, some of which are almost unimaginably large. These funds will influence everything from firm operations and strategy to corporate distress, with uncertain consequences for social welfare.

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Summaries: Twitter Thread

Media Coverage:  Pitchbook

Employee Bankruptcy Trauma (2024) (revise and resubmit, Journal of Legal Studies)

Bankruptcy filings are thought to be traumatic events that demoralize workers and spark employee flight. Using social media data, I present evidence suggesting that this belief is both accurate and, to a large extent, overstated. Online employee reviews show that employees of distressed firms are much more likely to complain about corporate culture and the firm’s financial struggles after their employer files for Chapter 11. This may translate into real action, as I also observe a sharp increase in employee departures immediately following the bankruptcy filing. However, viewed in fuller context, these departures are best described as a continuation of a steady rise in employee attrition that began, on average, a year prior to bankruptcy, suggesting that workforce response to Chapter 11 filings is more a story of continued flight from a distressed employer than an abrupt shift following a federal bankruptcy filing.

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Law and Courts in an Age of Debt, forthcoming 171 U. Pa. L. Rev. ___ (2023)

Judges perform very different analyses when investors ask for protection.  When the petitioning party is a shareholder, the court will deploy broad equitable doctrines with an eye towards reaching a fair result.  On the other hand, creditors typically find a much less sympathetic ear, as courts typically march through technical analyses such as examining whether the offending party violated a contract term, with far less concern for whether the outcome is fair.  In an era where many firms are highly leveraged, the end result is that the role of the courts in regulating investor opportunism and creating boundaries for “market” conduct has been greatly diminished, with consequences for both real-world corporate behavior and the development of the law.

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Summaries: Harvard Law School Corporate Governance Blog

News Coverage: Money Stuff

Bankruptcy Law's Knowns and Unknowns, forthcoming  19 Annual Review of Law & Social Science ___ (2023)

In 1978, Congress created a new federal bankruptcy law that has since become a key part of the American capital markets.  In this Article, I examine what how large companies and their investors contract to make bankruptcy more or less likely, how distressed firms negotiate with creditors outside of bankruptcy and how companies plan for a Chapter 11 filing and navigate the bankruptcy system.  I also survey the strategic moves, ranging from litigation to financing, that activist investors deploy to improve their bargaining power and to earn higher returns.  The American bankruptcy system is constantly evolving and prevailing accounts of bankruptcy law quickly become stale, creating a constant need for new empirical research to establish a foundation for policy-making.

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Major Publications

The Administrative State in Bankruptcy (with George Triantis), 72 De Paul Law Review 323 (2023)

In this Essay, we study the approach of governmental entities to the bankruptcy filings of large, regulated companies.  Regulated firms regularly enter Chapter 11 and seek to take actions that governmental entities might block outside of bankruptcy, undermining regulatory enforcement and oversight.  As a result, governmental entities often react defensively to a bankruptcy filing, asserting that bankruptcy law does not displace their power over the regulated firm.  We use case studies to demonstrate that regulators usually fare poorly when they make legalistic and defensive arguments but can advance policy goals when they embrace the opportunities that bankruptcy law creates, such as by hiring bankruptcy lawyers and participating in the bankruptcy process with the sophistication of activist investors.  We show that regulators rarely do this: we hand-collect a new dataset of interactions between Chapter 11 debtors and regulators from large bankruptcy cases from 2004 to 2019, and we find evidence that regulators leverage the special powers of bankruptcy to promote their policy goals (in contrast to collecting debts) in only 3.5% of observed regulator-Chapter 11 debtor interactions.

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Summaries: Twitter Thread

The Rise of Bankruptcy Directors (with Ehud Kamar and Kobi Kastiel),  95 Southern California Law Review 1083 (2022)  (named a "Top 10 Corporate and Securities Article of 2022" by the Corporate Practice Commentator). 

In this Article, we use hand-collected data to shed light on a troubling innovation in bankruptcy practice. We show that distressed companies, especially those controlled by private-equity sponsors, often now prepare for a Chapter 11 filing by appointing bankruptcy experts to their boards of directors and giving them the board’s power to make key bankruptcy decisions. These directors often seek to wrest control of self-dealing claims against shareholders from creditors. We refer to these directors as “bankruptcy directors” and conduct the first empirical study of their rise as key players in the world of corporate bankruptcy. While these directors claim to be neutral experts that act to maximize value for the benefit of creditors, we argue that they suffer from a structural bias because they are part of a small community of repeat private-equity sponsors and law firms. Securing future directorships may require pleasing this clientele at the expense of creditors. Consistent with this prediction, we find that unsecured creditors recover on average 21% less when the company appoints a bankruptcy director. While other explanations are possible, this finding at least shifts the burden of proof to those claiming that bankruptcy directors improve the governance of distressed companies. Our policy recommendation, however, does not require a resolution of this controversy. We propose that the court regard bankruptcy directors as independent only if all creditors support their appointment, making them accountable to all sides of bankruptcy disputes.

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Summaries:  Twitter Thread • Reorg (subscription required) • Boardroom Governance Podcast  • TheDeal Fresh Start Podcast • Reorg Podcast • Harvard Law School Forum on Corporate Governance

News Coverage: Bloomberg Law • LevFin Insights • Loan Syndication & Trading Association  ("LSTA") I •  LSTA II • Financial Times • PETITION [Subscription Required] • Wall Street Journal

Practitioner Commentary:  Ken Rosen (Lowenstein Sandler), Howard Brownstein (Brownstein Corporation) and Philip Gross (Lowenstein Sandler) [Law 360, subscription required] [Non-Paywalled Version Link] •  LSTA III •Justin Ellis and Ryan Yeh (MoloLamken LLP) • Creditor Rights Coalition

Congressional Action: Senator Warren introduces bill with "bankruptcy director fix." • Bill Text •  Twitter Thread

Judicial Citation: Goldstein v. Denner (Del. Ch. 2022, Vice Chancellor Laster)

Bankruptcy Process for Sale (with Kenneth Ayotte), 39 Yale Journal on Regulation 1 (2022).

The lenders that fund Chapter 11 reorganizations exert significant influence over the bankruptcy process through the contract associated with the debtor-in-possession (“DIP”) loan.  In this Article, we study a large sample of DIP loan contracts and document a trend: over the past three decades, DIP lenders have steadily increased their contractual control of Chapter 11.  In fact, today’s DIP loan agreements routinely go so far as to dictate the very outcome of the restructuring process.  When managers sell control over the bankruptcy case to a subset of the creditors in exchange for compensation, we call this transaction a “bankruptcy process sale.”  We model two situations where process sales raise bankruptcy policy concerns: (1) when a senior creditor leverages the debtor’s need for financing to lock in a preferred outcome at the outset of the case (“plan protection”); and (2) when a senior creditor steers the case to protect its claim against litigation (“entitlement protection”).  We show that both scenarios can lead to bankruptcy outcomes that fail to maximize the value of the firm for creditors as a whole.  We study a new dataset that uses the text of 1.5 million court documents to identify creditor conflict over process sales, and our analysis offers evidence consistent with the predictions of the model. 

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Media Coverage:  Bloomberg Distressed Daily Newsletter • Bloomberg  • Reorg (subscription required) • Forbes • Bloomberg Law

Summaries: Twitter Thread • Singapore Global Restructuring Initiative Blog • Harvard Law School Bankruptcy Roundtable

Government Activism in Bankruptcy (with George Triantis), 37 Emory Bankruptcy Developments Journal 509  (2021)  (invited symposium issue)

It is widely recognized that bankruptcy law can stymie regulatory enforcement and present challenges for governments when regulated businesses file for Chapter 11.  It is less-widely understood that bankruptcy law can present governments with opportunities to advance policy goals if they are willing to adopt tactics traditionally associated with activist investors, a strategy we call “government bankruptcy activism.”  The bankruptcy filings by Chrysler and General Motors in 2009 are a famous example: the Federal government used activist tactics to help both auto manufacturers resolve their financial distress while promoting the policy objectives of protecting union workers and addressing climate change.  A decade later, the government of California used its bargaining power in the Pacific Gas & Electric Company’s Chapter 11 case to protect climate policies and the victims of wildfires.  These examples illustrate that, by tapping into the bankruptcy system, governments can gain access to the exceptional powers that a debtor enjoys under bankruptcy law, which can complement the traditional tools of appropriations and regulation to facilitate and accelerate policy outcomes.  This strategy is especially useful in times of urgency and policy paralysis, when government bankruptcy activism can provide a pathway past veto players in the political system.  However, making policy through the bankruptcy system presents potential downsides as well, as it may also allow governments to evade democratic accountability and obscure the real losses that stakeholders are forced to absorb.   

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Summaries:  Twitter thread • Harvard Law School Bankruptcy Roundtable

Bankruptcy Hardball (with Robert J. Stark), 108 California Law Review 745 (June 2020) (named a "Top 10 Corporate and Securities Article of 2020" by the Corporate Practice Commentator)

On the eve of the financial crisis, a series of Delaware court decisions added up to a radical change in law: Creditors would no longer have the kind of common law protections from opportunism that helped protect their bargain for the better part of two centuries.  In this Article, we argue that Delaware's shift materially altered the way large firms approach financial distress, which is now characterized by a level of chaos and rent-seeking unchecked by norms that formerly restrained managerial opportunism.  We refer to the new status quo as “bankruptcy hardball.”  It is now routine for distressed firms to engage in tactics that harm some creditors for the benefit of other stakeholders, often in violation of contractual promises and basic principles of corporate finance. The fundamental problem is that Delaware's change in law was predicated on the faulty assumption that creditors are fully capable of protecting their bargain during periods of distress with contracts and bankruptcy law.  We show through a series of case studies how the creditor's bargain is, contrary to that undergirding assumption, often an easy target for opportunistic repudiation and, in turn, dashed expectations once distress sets in. We further argue that the Delaware courts paved the way for scorched earth distressed governance, but also that judges can help fix the problem. 

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Summaries: Columbia Law School Blue Sky Blog • Harvard Law School Bankruptcy Roundtable • Oxford Business Law Blog

Media Coverage: Financial Times

Practitioner Coverage: Loan Syndication & Trading Association

Discussion in Congress:  House Committee on the Judiciary, Subcommittee on Antitrust, Commercial and Administrative Law (July 28, 2021) 

Regulating Bankruptcy Bonuses, 92 Southern California Law Review 653 (2019)

In 2005, the perception that wealthy executives were being rewarded for failure led Congress to ban Chapter 11 firms from paying retention bonuses to senior managers.  Under the new law, debtors could still pay bonuses to executives – but only “incentive” bonuses triggered by accomplishing challenging performance goals that go beyond merely remaining employed.  In this Article, I use newly collected data to examine how the reform changed bankruptcy practice.  While relatively fewer firms use court-approved bonus plans after the reform, the overall level of executive compensation appears to be similar, perhaps because the new regime left large gaps that make it easy for firms to by-pass the 2005 law and pay managers without the judge’s permission. I argue the new law was undermined by institutional weaknesses in Chapter 11, as bankruptcy judges are poorly situated to analyze bonus plans and creditors have limited incentives to police executive compensation themselves.

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Summaries: Harvard Law School Bankruptcy Roundtable • Oxford Business Law Blog • ABI Journal

Media Coverage: Wall Street Journal • The Deal (subscribers only) • New York Times • Crain's New York

Related Op-Ed: The Hill

Cited in Court: In re Purdue Pharma (Judge Robert D. Drain, US Bankruptcy Court for the Southern District of New York) (mention is on page 143) (September 30, 2020)

Congressional Action: Government Accountability Office Report on Executive Compensation in Bankruptcy and the 2005 Reform (September 2021) • Wall Street Journal Coverage of Report

Bankruptcy Claims Trading, 15 Journal of Empirical Legal Studies 772-99 (2018)

A robust secondary market has emerged over the past twenty years in the debt of Chapter 11 firms.  Critics worry that the trading associated with this market has undermined bankruptcy governance, by forcing managers to negotiate with shifting groups of activist investors in the Chapter 11 bargaining process. This paper investigates whether this is a common problem and concludes that it is not.  Although trading of bond debt is pervasive, the activist groups that tend to participate in negotiations usually enter cases early and rarely change significantly. Trading in general, therefore, does not appear to have the impact on governance that many claims trading critics fear, at least insofar as the average case is concerned.

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Summaries: Harvard Law School Bankruptcy Roundtable • Oxford Business Law Blog • ABI Journal

Reviewed and Discussed: Cayman Financial Review

What Drives Bankruptcy Forum Shopping?  Evidence from Market Data,  47 Journal of Legal Studies 119-149 (2018)

Over the past thirty years, the majority of large firms that filed for bankruptcy did so in the Federal Bankruptcy Courts of the Southern District of New York and Delaware. Some believe these experienced courts attract firms because their expertise make bankruptcy more predictable. Critics dispute this explanation, arguing instead that “predictability” is a cloak for the true, self-interested motivation of the managers, lawyers and senior creditors that influence the debtor’s venue decision. In this paper, I look for evidence supporting the views of the proponents and detractors of bankruptcy forum shopping in a large sample of market data. My results suggest that the market is better at predicting the outcomes of bankruptcy cases in the two destination venues, consistent with the hypothesis that the law there is more predictable. I do not find evidence supporting the view that those courts are biased in favor of managers or senior creditors.

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Summary: Oxford Business Law Blog

Media Coverage: Bloomberg

Shorter Projects and Working Papers

Delaware Corporate Law and the “End of History” in Creditor Protection (with Robert J. Stark), in Fiduciary Obligations in Business (Russell & Laby, Eds., forthcoming 2021)

In this Chapter, we briefly survey the common law’s adventures with creditor protection over the course of American history with a special focus on Delaware, the most important jurisdiction for corporate law.  We examine the evolution of the equitable doctrines that judges have used to answer a question that arises time and again: What help, if any, should the common law be to creditors that suffer losses due to the purported carelessness or disloyalty of corporate directors and officers?  Judges have struggled to answer that question, first deploying Judge Story’s “trust fund doctrine” and then molding fiduciary duty law to fashion a remedy for creditors.  In Delaware, the appetite of corporate law judges to protect creditors reached a high point in the early 2000s as judges flirted with recognizing a “deepening insolvency” tort cause of action.  Suddenly, though, a new course was set, and Delaware’s judges effectively abandoned this project in a series of important decisions around the time of the financial crisis.  In this “third generation” of jurisprudence, Delaware’s corporate law judges told creditors to look to other areas of law to protect themselves from opportunistic misconduct, such as bankruptcy law, fraudulent transfer law, and their loan contracts.  However, as this Chapter illustrates, the same question of whether the common law ought to protect creditors has arisen time and again and today’s “settled” law is unlikely to represent the end of history in creditor protection.  

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Estimating the Need for Additional Bankruptcy Judges in Light of the COVID-19 Pandemic (with Ben Iverson and Mark Roe), 11 Harv. Bus. L. Rev. (Online Issue) 1 (2021). 

In this Article, we present the first effort to use an empirical approach to bolster the capacity of the bankruptcy system during a national crisis—here, the COVID-19 crisis. We provide two analyses, one using data from May 2020, very early on in the crisis, and another using data from September 2020, closer to the publication of this Article. Our analysis is based on an empirical observation: Historically, an increase in the unemployment rate has been a leading indicator of a rise in bankruptcy filings. If this historical trend continues to hold, the May 2020 unemployment rate of 13.3% would have predicted a substantial increase in bankruptcy filings and the lower September 2020 level would still predict noticeably increased filings. Clearly, governmental assistance, the unique features of the COVID-19 pandemic, the possibility of a quick economic recovery, and judicial triage are likely to reduce the volume of bankruptcies and increase the courts’ capacity to handle those that occur. It is also plausible that the recent unemployment spike will be short-lived—indeed, by September 2020, the rate had declined to 7.9%. Further, medical solutions to the underlying pandemic—such as the recent initial distribution of an effective vaccine—would further reduce the pressure on the bankruptcy system. Yet, even assuming that the worst-case scenarios are averted, our analysis suggests that a substantial investment in the bankruptcy system resources should be considered, even if only on a standby basis. 

Our model assumes that Congress would like to have enough bankruptcy judges so that the average judge would not work more than the last bankruptcy peak in 2010, when the bankruptcy system was pressured and judges worked 50 hour weeks on cases on average. Because the bankruptcy system before the pandemic was not stretched as severely as it was prior to the 2010 financial crisis, it has some extra capacity to handle extra cases. 

To keep judicial workload at 2010 levels, the bankruptcy system would need at least 50 additional temporary judges based on the number of unemployed in May 2020 who did not see themselves as temporarily unemployed. In the worst-case scenario, in which none of the May 2020 unemployed returned to work quickly, the bankruptcy system would have needed as many as 243 temporary judges—which would have represented a considerable expansion, even if only temporary, of the bankruptcy judiciary. The lower September 2020 unemployment rate points to a need for 20 temporary judges. Because of this model’s sensitivity to unemployment data, it reports a wide range of estimations for additional bankruptcy judgeships. 

We discovered a considerable administrative lag of about a year or more for appointing additional bankruptcy judges. Therefore, given that economic crises can unfurl much faster, embedding extra capacity in the bankruptcy judicial system in normal economic times is a prudent precaution to prepare for unexpected stress of additional bankruptcy petitions. 

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Media Coverage: Marketplace

The Law and Economics of Investing in Bankruptcy in the United States (2020) (presented as a Report at the 2019 Annual Meeting of the Nederlandse Vereniging voor Rechtsvergelijkend en Internationaal Insolventierecht, the Netherlands Association for Comparative and International Insolvency Law [NACIIL] in Amsterdam)

Claims trading has become a significant and controversial feature of American bankruptcy practice over the past thirty years. This Report chronicles the rise of claims trading in the second decade of the Bankruptcy Reform Act of 1978 and analyzes the various policy concerns it raises. Most importantly, claims trade has led to, and been accelerated by, the development of an industry of specialized distressed investor who raise billions of dollars of capital to buy and sell the claims of Chapter 11 debtors. Despite attracting periodic concerns from policy-makers, the legal institutions of Chapter 11 appear to have mostly proven capable of handling the concerns raised by claims trading. In sum, the best interpretation of the available empirical evidence is that claims trading and activist investing has, at the very least, not harmed Chapter 11 or distressed corporations and may have actually improved the capacity of the American bankruptcy system to reorganize distressed assets.

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Summaries: Harvard Law School Bankruptcy Roundtable • Singapore Global Restructuring Initiative Blog

The Shadowy Contours of Bankruptcy Resistant Investments, 114 Columbia Law Review Sidebar 123 (2015)

Baird and Casey recently argued in favor of contractual innovations that allow lenders to contract around bankruptcy law. These innovations, which they call withdrawal rights, are said to increase the efficiency of financing in many cases, and Baird and Casey urge judges to enforce them. This brief Essay uses a case study of a Chapter 11 bankruptcy where withdrawal rights were enforced by operation of foreign law to challenge Baird and Casey’s assumptions. The case study suggests that managers may lack a full understanding of how their actions ex ante affect bankruptcy outcomes. Substantial changes for managerial behavior and corporate regulation may be needed to allow managers and investors to utilize withdrawal rights when doing so would enhance the efficiency of financing.

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